2 0 1 3 A N N U A L R E P O R T
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 offices in Austin, Dallas, Fort
Worth, Houston and San Antonio.
IN VESTMENT H IGH LI GH TS
(cid:115)
Exceptional growth in loans, deposits and net revenue in 2013
(cid:115)
Capital raising consistent with market opportunity for growth
(cid:115) Continued improvement in credit quality in 2013
(cid:115)
2013 non-interest expense includes hiring foundation of market leading talent
2013 FIN ANCIA L SUMMA RY
Dollars in the thousands
Dec 2013
Dec 2012
% Change
Total Assets
Total Deposits
Loans Held for Investment
Loans Held for investment,
mortgage finance loans
Total Loans
Net Income
Net Income Available to
Common Shareholders
Diluted Earnings Per Share
Return on Assets
Return on Equity
$11,714,397
$ 9,257,379
$ 8,486,309
$ 2,784,265
$11,270,574
$ 121,046
$ 113,652
$
2.72
1.17%
12.82%
$10,540,542
$ 7,440,804
$ 6,785,535
$ 3,175,272
$ 9,960,807
$
120,709
11%
24%
25%
(12%)
13%
0%
$ 120,709
$
3.01
(6%)
(10%)
1.35%
—
16.93%
—
Deposit and Loan Growth
Loans Held for Investment CAGR: 16%
($ in millions)
Total Deposit CAGR: 23%
Total Assets CAGR: 18%
$12,000
$11,000
$10,000
$9,000
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
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2005
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2013
Loans HFI* Deposits Total Assets^
* Excludes Mortgage Finance loans.
^ From continuing operations.
Dear Shareholder:
2013 was yet again a record-setting year for Texas Capital Bancshares, Inc. Our organic-growth business
model delivered strong earnings as well as loan and deposit growth. For the year, we achieved a return on
assets of 1.17% and return on equity of 12.82%. Importantly, we achieved these financial results during a
year in which we invested in record-setting new talent. The success in hiring positions us well for future
growth and profitability.
Despite a growing economy in Texas, our clients remain skeptical about the national economic recovery.
The financial health of our clients is quite good but they are hesitant to undertake major new investment in
growing their businesses. They hesitate to invest due to much uncertainty in federal government policy
and the ultimate cost they must bear.
Texas Capital remains focused on maintaining high quality standards in selection of our clients and
employees. Our low credit costs reflect this quality focus.
Although most competitors experienced significant declines in mortgage finance, our Mortgage Finance
business remained strong in 2013. While headwinds continue in 2014, we again expect to outperform peer
competitors in mortgage finance due to the strong commitment we have shown to the industry and our
outstanding clients for many years.
Across the nearly 100 industry sectors we serve, our commercial and industrial business continues to deliver
strong growth, diversification of risk and excellent profitability. The Houston region again delivered the
strongest percentage growth of our five Texas regional markets. While we remain primarily focused on
Texas businesses and entrepreneurs, our reputation as a premier commercial bank continues to spread
beyond the Texas borders. A few of our businesses have evolved into nationwide businesses as our clients
tell “the Texas Capital story” to other business owners attending national industry conferences and trade
shows.
On behalf of our Board and Management Team, I extend our gratitude to our shareholders, clients and
employees for your support in building “The Best Business Bank in Texas”…and beyond!
Respectfully yours,
C. Keith Cargill
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, 2013
‘ 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)
6.50% Non-Cumulative Perpetual Preferred Stock Series A, par value $0.01 per share
(Title of class)
6.50% Subordinated Notes due 2042
(Title of class)
Warrants to Purchase Common Stock (expiring January 16, 2019), par value $0.01 per share
(Title of class)
The Nasdaq Stock Market LLC
(Name of Exchange on Which Registered)
Securities registered under Section 12(g) of the Exchange Act: NONE
Indicate by check mark if the issuer is a well-known seasoned issuer pursuant to Section 13 or Section 15(d) of the Securities
Act. Yes È
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.
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 ‘
Accelerated Filer ‘
Yes È
No ‘
No È
No ‘
‘ No
Non-Accelerated Filer ‘
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ‘
As of June 30, 2013, 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 $1,758,352,000. There were 42,755,496 shares of the registrant’s common stock outstanding
on February 20, 2014.
No È
Documents Incorporated by Reference
Portions of the registrant’s Proxy Statement relating to the 2014 Annual Meeting of Stockholders, which will be filed no later than April 10,
2014, 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
Mine Safety Disclosures
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
11
22
23
24
24
24
26
29
57
60
104
104
106
106
106
106
106
106
107
ITEM 1. BUSINESS
Background
The disclosures set forth in this item are qualified by Item 1A. Risk Factors and the section captioned “Forward-
Looking Statements” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations of this report and other cautionary statements set forth elsewhere in this report.
Texas Capital Bancshares, Inc. (“we”, “us” or the “Company”), a Delaware corporation organized in 1996,
is the parent of Texas Capital Bank, National Association (the “Bank”). The Company is a registered bank
holding company and a financial holding company.
The Bank is headquartered in Dallas, with primary banking offices in Austin, Dallas, Fort Worth, Houston,
and San Antonio, the five largest metropolitan areas of Texas. All of our business activities are conducted
through the Bank. We have focused on organic growth, maintenance of credit quality and recruiting and
retaining experienced bankers with strong personal and professional relationships in their communities.
We serve the needs of commercial businesses and successful professionals and entrepreneurs located in
Texas as well as operate several lines of business serving a regional or national clientele of commercial
borrowers. We are primarily a secured lender, with our greatest concentration of loans in Texas. We have
benefitted from the Texas economy since our inception, producing strong loan growth and favorable loss
experience amidst the challenging environment for banking nationally.
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 2009 through 2013 (in thousands):
Total loans(1)
Assets(1)
Demand deposits
Total deposits
Stockholders’ equity
(1) From continuing operations.
2013
2012
December 31
2011
2010
2009
11,270,574
11,714,397
3,347,567
9,257,379
1,096,350
9,960,807
10,540,542
2,535,375
7,440,804
836,242
7,652,452
8,137,225
1,751,944
5,556,257
616,331
5,905,539
6,445,679
1,451,307
5,455,401
528,319
5,150,797
5,698,318
899,492
4,120,725
481,360
The following table provides information about the growth of our loan portfolio by type of loan from
December 2009 to December 2013 (in thousands):
Commercial loans
Total real estate loans
Construction loans
Real estate term loans
Mortgage finance loans
Loans held for sale from
discontinued operations
Equipment leases
Consumer loans
The Texas Market
2013
2012
$5,020,565
3,409,133
1,262,905
2,146,228
2,784,265
$4,106,419
2,630,088
737,637
1,892,451
3,175,272
December 31
2011
$3,275,150
2,241,277
422,026
1,819,251
2,080,081
2010
2009
$2,592,924
2,029,766
270,008
1,759,758
1,194,209
$2,457,533
1,903,127
669,426
1,233,701
693,504
294
93,160
15,350
302
69,470
19,493
393
61,792
24,822
490
95,607
21,470
586
99,129
25,065
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
1
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
Drawing on the business and community ties of our management and their banking experience, our
strategy is to continue 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:
• Targeting middle market business and successful professionals and entrepreneurs;
• Growing our loan and deposit base in our existing markets by hiring additional experienced Texas
bankers;
• Continuing our emphasis on credit policy to maintain credit quality consistent with long-term
objectives;
• Leveraging our existing infrastructure to support a larger volume of business;
• Maintaining stringent internal approval processes for capital and operating expenses;
• Continuing our extensive use of outsourcing to provide cost-effective operational support with
service levels consistent with large-bank operations; and
• Extending 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;
• mortgage finance lending;
• equipment leasing;
• treasury management services;
• wealth management and trust services; and
• letters of credit.
Individual Customers. We also provide complete banking services for our individual customers, including:
• personal wealth management and trust services;
• certificates of deposit;
• interest bearing and non-interest bearing checking accounts with optional features such as Visa®
debit/ATM cards and overdraft protection;
2
• 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 and President, our Texas 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, including historical and projected financial information, strength of
management, acceptable collateral and associated advance rates, and market conditions and trends in the
industry
borrower’s industry. In addition, prospective loans are also analyzed based on current
concentrations in our loan portfolio to prevent an unacceptable concentration of loans in any particular
industry. We believe our credit standards are consistent with achieving business objectives in the markets
we serve and will generally mitigate risks. We believe that we differentiate our bank from its competitors
by focusing on and aggressively marketing to our core customers and accommodating, to the extent
permitted by our credit standards, their individual needs.
We generally extend variable rate loans in which the interest rate fluctuates with a predetermined indicator
such as the United States prime rate or the London Interbank Offered Rate (LIBOR). Our use of variable
rate loans is designed to protect us from risks associated with interest rate fluctuations since the rates of
interest earned will automatically reflect such fluctuations.
Deposit Products
We offer a variety of deposit products to our core customers at interest rates that are competitive with other
banks. Our business deposit products include commercial checking accounts, lockbox accounts, cash
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.
Wealth Management and Trust
Our wealth management and trust 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.
Cayman Islands Branch
We established a branch of our bank in the Cayman Islands in 2003. We believe that a Cayman Islands
branch enables us to offer more competitive cash management and deposit products to our customers. All
deposits in the Cayman Branch come from U.S. based customers of our bank. Deposits, all of which are in
U.S dollars, do not originate from foreign sources, funds transfers neither come from nor go to facilities
3
outside of the U.S. and there are no federal or state income tax benefits to our bank or our customers as a
result of these operations. Foreign deposits maintained at our Cayman Islands branch at December 31,
2013 and 2012 were $330.3 million and $329.3 million, respectively.
Employees
As of December 31, 2013, we had 1,016 full-time employees. 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
General. We and our bank are subject to extensive federal and state laws and regulations that impose
specific requirements on us and provide regulatory oversight of virtually all aspects of our operations.
These laws and regulations generally are intended for the protection of depositors, the deposit insurance
fund of the Federal Deposit Insurance Corporation (“FDIC”) and the stability of the U.S. banking system
as a whole, rather than for the protection of our stockholders and creditors.
The following discussion summarizes certain laws and regulations to which we and our bank are subject. It
does not address all applicable laws and regulations that affect us currently or might affect us in the future.
This discussion is qualified in its entirety by reference to the full texts of the laws, regulations and policies
described.
The Company’s activities are governed by the Bank Holding Company Act of 1956 (“BHCA”), as amended
by the Financial Services Modernization Act of 1999 (“Gramm-Leach-Bliley Act”), and is subject to regular
inspection, examination and supervision by the Board of Governors of the Federal Reserve System (the
“Federal Reserve”). We file quarterly reports and other information with the Federal Reserve. We file
reports with the Securities and Exchange Commission (“SEC”) and are subject to its regulation with
including matters submitted for
respect to our securities, reporting and certain governance matters,
stockholder approval. Our securities are listed on the Nasdaq Global Select Market, and we are subject to
Nasdaq rules for listed companies.
Our bank is organized as a national banking association under the National Bank Act, and is subject to
regulation, supervision and examination by the Office of the Comptroller of the Currency (the “OCC”), the
FDIC, the Federal Reserve, the Consumer Financial Protection Bureau (“CFPB”) and other federal and
state regulatory agencies. The OCC has primary supervisory responsibility for our bank and performs
periodic examinations concerning safety and soundness, the quality of management and directors,
information technology and compliance with applicable regulations. Our bank files quarterly Call Reports
and other information with the OCC.
Bank holding company regulation. The BHCA limits our business to banking, managing or controlling banks
and other activities that the Federal Reserve has determined to be closely related to banking. We have
elected to register with the Federal Reserve as a financial holding company. This authorizes us to engage in
any activity that is either (i) financial in nature or incidental to such financial activity, as determined by the
Federal Reserve, or (ii) complementary to a financial activity, so long as the activity does not pose a
substantial risk to the safety and soundness of depository institutions or the financial system generally, as
determined by the Federal Reserve. Examples of non-banking activities that are financial in nature include
securities underwriting and dealing, insurance underwriting and making merchant banking investments.
We are not at this time exercising this authority at the parent company level and do not have any plans to
do so. We and our bank engage in traditional banking activities that are deemed financial in nature. In
order for us to undertake new activities permitted by the BHCA, we and our bank must be considered well
capitalized and well managed, our bank must have received a rating of at least satisfactory in its most recent
examination under the Community Reinvestment Act and we would be required to notify the Federal
Reserve within thirty days of engaging in the new activity.
Under Federal Reserve policy, now codified by the Dodd-Frank Act, we are expected to act as a source of
financial and managerial strength to our bank and commit resources to its support. Such support may be
4
required at times when, absent this Federal Reserve policy, a holding company may not be inclined to
provide it. We could in certain circumstances be required to guarantee the capital plan of our bank if it
became undercapitalized.
It is the policy of the Federal Reserve that financial holding companies may 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 may not pay cash dividends in an amount that would undermine the holding company’s
ability to serve as a source of strength to its banking subsidiary.
With certain limited exceptions, the BHCA prohibits 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.
If, in the opinion of the applicable federal bank regulatory authorities, a depository institution or holding
company is engaged in or is about to engage in an unsafe or unsound practice (which could include the
payment of 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 or unsound banking practice. Moreover, the Federal Reserve and the FDIC
financial holding companies and insured depository
have issued policy statements providing that
institutions generally should only pay dividends out of current operating earnings.
Regulation of our bank. National banks such as our bank are subject to examination by the OCC and the
CFPB, and to a lesser extent by the FDIC. 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, accounting treatment and impact on capital determinations, loans, investments, borrowings,
deposits, liquidity, 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 their aggregate investment in real estate, bank premises
and furniture and fixtures. National banks are required by the OCC to file quarterly Call Reports of their
financial condition and results of operations and to conduct an annual audit of their financial statements in
compliance with minimum standards and procedures prescribed by the OCC.
Capital Adequacy Requirements. Federal banking regulators have adopted a system using risk-based capital
guidelines to evaluate the capital adequacy of banks and bank holding companies that is based upon the
1988 capital accord of the Bank for International Settlements’ Committee on Banking Supervision (the
“Basel Committee”), a committee of central banks and bank regulators from the major industrialized
countries that coordinates international standards for bank regulation. Under the guidelines, specific
categories of assets and off-balance-sheet activities such as letters of credit are assigned risk weights, based
generally on the perceived credit or other risks associated with the asset. Off-balance-sheet activities are
assigned a credit conversion factor based on the perceived likelihood that they will become on-balance-
sheet assets. These risk weights are multiplied by corresponding asset balances to determine a “risk
weighted” asset base which is then measured against various measures of capital to produce capital ratios.
An organization’s capital is classified in one of two tiers, Core Capital, or Tier 1, and Supplementary
Capital, or Tier 2. Tier 1 capital includes common stock, retained earnings, qualifying non-cumulative
perpetual preferred stock, minority interests in the equity of consolidated subsidiaries, a limited amount of
qualifying trust preferred securities and qualifying cumulative perpetual preferred stock at the holding
company level, less goodwill and most intangible assets. Tier 2 capital includes perpetual preferred stock
and trust preferred securities not meeting the Tier 1 definition, mandatory convertible debt securities,
subordinated debt, and allowances for loan and lease losses. Each category is subject to a number of
regulatory definitional and qualifying requirements.
5
We and our bank are currently required to maintain a minimum total risk-based capital ratio of 8% (of
which at least 4% is required to consist of Tier 1 capital elements). Tier 1 and total capital ratios must be at
least 6.0% and 10.0% on a risk-adjusted basis, respectively, for an institution to be considered well
capitalized. Our bank’s total risk-based capital ratio was 10.27% at December 31, 2013 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 the
prompt corrective action regulations. The regulatory capital category may not constitute an accurate
representation of the bank’s overall financial condition or prospects. Our regulatory capital status is
addressed in more detail under the heading “Liquidity and Capital Resources” within Management’s Discussion
and Analysis of Financial Condition and Results of Operations and in Note 13 to our financial statements—
Regulatory Restrictions.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) sets forth five capital
categories for insured depository institutions under the prompt corrective action regulations:
• Well capitalized—equals or exceeds a 10 percent total risk-based capital ratio, 6 percent tier 1 risk-
based capital ratio, and 5 percent leverage ratio and is not subject to any written agreement, order or
directive requiring it to maintain a specific level for any capital measure;
• Adequately capitalized—equals or exceeds an 8 percent total risk-based capital ratio, 4 percent tier 1
risk-based capital ratio, and 4 percent leverage ratio;
• Undercapitalized—total risk-based capital ratio of less than 8 percent, or a tier 1 risk-based ratio of
less than 4 percent, or a leverage ratio of less than 4 percent (3 percent for institutions with a
regulatory rating of 1 that do not evidence rapid growth or other heightened risk indicators);
• Significantly undercapitalized—total risk-based capital ratio of less than 6 percent, or a tier 1 risk-
based capital ratio of less than 3 percent, or a leverage ratio of less than 3 percent; and
• Critically undercapitalized—a ratio of tangible equity to total assets equal to or less than 2 percent.
Federal regulatory agencies are required to implement arrangements for “prompt corrective action” for
institutions failing to meet minimum requirements to be at least adequately capitalized. FDICIA imposes
an increasingly stringent array of restrictions, requirements and prohibitions as an organization’s capital
levels deteriorate. 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 is 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.
Under the Federal Deposit Insurance Act (“FDIA”), “critically undercapitalized” banks may not,
beginning 60 days after becoming critically undercapitalized, make any payment of principal or interest on
their subordinated debt (subject to certain limited exceptions). In addition, under Section 18(i) of the
FDIA, our bank is required to obtain the advance consent of the FDIC to retire any part of its subordinated
notes. “Critically undercapitalized” banks are also subject to the appointment of a conservator or receiver.
Under the FDIA, a bank may not pay interest on its subordinated notes if such interest is required to be
paid only out of net profits, or distribute any of its capital assets, while it remains in default on any
assessment due to the FDIC.
Federal bank regulators may set capital requirements for a particular banking organization that are higher
than the minimum ratios when circumstances warrant. Federal Reserve and OCC guidelines 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. Concentration of credit risks arising from non-traditional activities, as well as
an institution’s ability to manage these risks, are important factors taken into account by regulatory
agencies in assessing an organization’s overall capital adequacy.
The OCC and the Federal Reserve also 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
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total consolidated assets. A minimum leverage ratio of 3.0% is required for banks and bank holding
companies that either have the highest supervisory rating or have implemented the appropriate federal
regulatory authority’s risk-adjusted measure for market risk. All other banks and bank holding companies
are required to maintain a minimum leverage ratio of 4.0%, unless a different minimum is specified by an
appropriate regulatory authority. In order to be considered well capitalized the leverage ratio must be at
least 5.0%. Most organizations seek to maintain leverage ratios that are at least 100 to 200 basis points above
the minimum ratio. Our bank’s leverage ratio was 8.96% at December 31, 2013 and, as a result, it is
currently classified as “well capitalized” for purposes of the OCC’s prompt corrective action regulations.
The risk-based and leverage capital ratios established by federal banking regulators are minimum
supervisory ratios generally applicable to banking organizations that meet specified criteria, assuming that
they otherwise have received the highest regulatory ratings in their most recent examinations. Banking
organizations not meeting these criteria are expected to operate with capital positions in excess of the
minimum ratios. Regulators can, from time to time, change their policies or interpretations of banking
practices to require changes in risk weights, which may require the bank to obtain additional capital to
support future growth or reduce asset balances in order to meet minimum acceptable capital ratios.
recommendations for strengthening
Basel III. The Basel Committee in 2010 released a set of
international capital and liquidity regulation of banking organizations, known as Basel III. In June 2012,
U.S. bank regulatory agencies, including the OCC, issued three proposals to implement the capital,
liquidity and other requirements under Basel III, as well as certain other regulatory capital requirements
under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). In July
2013, the Federal Reserve published final rules for the adoption of the Basel III regulatory capital
framework (the “Basel III Capital Rules”).
The Basel III Capital Rules, among other things, (i) introduce a new capital measure called “Common
Equity Tier 1,” (ii) specify that Tier 1 capital consist of Common Equity Tier 1 and “Additional Tier 1
Capital” instruments meeting specified requirements, (iii) define Common Equity Tier 1 narrowly by
requiring that most deductions/adjustments to regulatory capital measures be made to Common Equity
Tier 1 and not to the other components of capital and (iv) establish a 7% threshold for the tier 1 common
equity ratio, consisting of a minimum level plus a capital conservation buffer, and (v) expand the scope of
the deductions/adjustments as compared to existing regulations. The rule also changes both the Tier 1 risk-
based capital requirements and the total risk-based requirements to a minimum of 6% and 8%,
respectively, plus a capital conservation buffer of 2.5% totaling 8.5% and 10.5%, respectively. The leverage
ratio requirement under the rule is 5%. In order to be well capitalized under the new rule, we must
maintain a common equity Tier 1 capital ratio, Tier 1 capital ratio, and total capital ratio of greater than or
equal to 6.5 percent, 8 percent and 10 percent, respectively.
Because we had less than $15 billion in total consolidated assets as of December 31, 2009, we are allowed to
continue to classify our trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1
capital.
The Basel III Capital Rules will be effective for us on January 1, 2015 with certain transition provisions
fully phased in on January 1 2019. Based on our initial assessment of the Basel III Capital Rules, we do not
believe they will have a material impact, and we believe we would meet the capital adequacy requirements
under the Basel III Capital Rules on a fully phased-in basis if such requirements were currently in effect.
Regulators may change capital and liquidity requirements including previous interpretations of practices
related to risk weights that could require an increase to the allocation of capital to assets held by the Bank,
and they could require banks to make retroactive adjustments to financial statements to reflect such
changes.
Proposed Liquidity Requirements. The Basel III proposal included a liquidity framework that would require
banks and bank holding companies to measure their liquidity against specific liquidity tests. U.S. bank
regulators did not include the liquidity framework in the proposed or adopted rules and have not
determined to what extent it will apply to banks that are not large, internationally active banks. One of the
liquidity tests proposed in Basel III, referred to as the liquidity coverage ratio (“LCR”), is designed to
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ensure that a banking entity maintains an adequate level of unencumbered high-quality liquid assets equal
to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total
cash outflow) under an acute liquidity stress scenario. The other test, referred to as the net stable funding
ratio (“NSFR”), is designed to promote more medium- and long-term funding of the assets and activities of
banking entities over a one-year time horizon. These requirements are predicted to encourage banking
entities to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of
assets, and also to increase the use of long-term debt as a funding source. Regulators may change capital
and liquidity requirements including previous interpretations of practices related to risk weights that could
require an increase to the allocation of capital to assets held by our bank, and they could require banks to
make retroactive adjustments to financial statements to reflect such changes.
Restrictions on Dividends and Repurchases. The sole source of funding of our parent company financial
obligations has consisted of proceeds of capital markets transactions and cash payments from our bank for
debt service. We may in the future seek to rely upon receipt of dividends paid by our bank to meet our
financial obligations. 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. The Basel III Capital Rules, effective for us on January 1, 2015, will further limit the amount of
dividends that be paid by our bank. In addition, under the FDICIA, our bank may not pay any dividend if
payment would cause it to become undercapitalized or if it is undercapitalized.
Stress Testing. Pursuant to the Dodd-Frank Act and regulations published by the Federal Reserve and
OCC in October 2012, institutions with average total consolidated assets greater than $10 billion are
required to conduct an annual “stress test” of capital and consolidated earnings and losses under a base case
and at least two stress scenarios provided by bank regulatory agencies. Institutions with total consolidated
assets between $10 billion and $50 billion are to use data as of September 30, 2013 to conduct the test,
using scenarios released by the agencies in November 2013. The results for those institutions must be
reported to the agencies in March 2014. Public disclosure of summary stress test results will begin in June
2014 for the stress tests commenced in 2013. Results of stress test calculations are anticipated to become an
important factor considered by banking regulators in evaluating a range of banking practices. Because we
only recently achieved more than $10 billion in assets for four consecutive quarters, we will not be subject
to stress test reporting until March 2015 with public disclosure of results in June 2015.
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 may be made by our bank. Extensions of credit to affiliates must be adequately collateralized
by specified amounts and types of collateral. Section 23A also limits the amount of loans or advances by our
bank to third party borrowers which are collateralized by our securities or obligations or those of our
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 are contained in the Federal Reserve Act and Federal
Reserve Regulation O and 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
loans can be made. There is also an aggregate limitation on all loans to insiders and their related interests,
which cannot exceed the institution’s total unimpaired capital and surplus, unless the FDIC determines
that a lesser amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting
loans in violation of applicable restrictions. Additional restrictions on transactions with affiliates and insiders
are discussed in the Dodd-Frank Act section.
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Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley 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;
• 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 Gramm-Leach-Bliley Act also modifies other current financial laws, including laws related to financial
privacy. The financial privacy provisions generally prohibit financial
including us, from
disclosing non-public personal financial information to non-affiliated third parties unless customers have
the opportunity to “opt out” of the disclosure.
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
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
BHCA, 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 U.S. government policy regarding financial institutions in recent years
has been combating money laundering, terrorist financing and other illegal payments. 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 of 1970, and expanded the extra-territorial
jurisdiction of the U.S.
government in this area. Regulations issued under these laws 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 Volcker Rule. The Dodd-Frank Act amended the BHCA to require the federal financial regulatory
agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading in
designated types of financial instruments and investing in and sponsoring certain unregistered investment
companies. This statutory provision, commonly known as the “Volcker Rule,” defines unregistered
investment companies as hedge funds and private equity funds. In December 2013, federal regulators
finalized rules to implement the Volcker Rule. The final rule is highly complex, and many aspects of its
application remain uncertain. We do not currently anticipate that the Volcker Rule will have a material
effect on our operations since we do not engage in the businesses prohibited by the Volcker Rule.
Unanticipated effect of the Volcker Rule’s provisions or future interpretations may have an adverse effect
on our business or services provided to our bank by other financial institutions.
Safe and Sound Banking Practices. Banks and bank holding companies are prohibited from engaging in unsafe
and unsound banking practices. Bank regulators have broad authority to prohibit activities of bank holding
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companies and their subsidiaries which represent unsafe and unsound banking practices or which constitute
violations of laws or regulations, and have considerable discretion in identifying what they deem to be unsafe
and unsound practices. Regulators can assess civil money penalties for certain activities based upon finding
unsafe and unsound conduct on a knowing and reckless basis, if those activities cause a substantial loss to a
depository institution. The penalties can be as high as $1.0 million for each day the activity continues.
Consumer Financial Protection Bureau. The Dodd-Frank Act established the CFPB, which has supervisory
authority over depository institutions with total assets of $10 billion or greater with respect to a long list of
statutes protecting the interests of consumers of financial services. The CFPB has to date focused its
supervision and regulatory efforts on (i) risks to consumers and compliance with the federal consumer
financial laws, when it evaluates the policies and practices of a financial institution; (ii) the markets in
which firms operate and risks to consumers posed by activities in those markets; and (iii) depository
institutions that offer a wide variety of consumer financial products and services.
Limits on Compensation. The Federal Reserve, OCC and FDIC in 2010 issued comprehensive final guidance
on incentive compensation policies for executive management of banks and bank holding companies. This
guidance was intended to ensure that the incentive compensation policies of banking organizations do not
undermine their safety and soundness by encouraging excessive risk-taking. The guidance implements seeks
to assure that incentive compensation arrangements (i) provide incentives that do not encourage excessive
risk-taking, (ii) are compatible with effective internal controls and risk management, and (iii) are supported by
strong corporate governance, including oversight by the board of directors.
The Dodd-Frank Act. The Dodd-Frank Act became law in 2010. It has already had a broad impact on the
financial services industry, imposing significant regulatory and compliance changes. A significant volume of
financial services regulations required by the Dodd-Frank Act have not yet been proposed, or if proposed,
have not yet been finalized by banking regulators, making it difficult to predict the ultimate effect of the
Dodd-Frank Act. The following discussion provides a brief summary 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 compliance obligations and
enforcement. This could, in turn, result in significant new regulatory requirements applicable to us and
certain of our lending activities, with potentially significant changes in our operations and increases in our
compliance costs.
The Dodd-Frank Act makes permanent the general $250,000 deposit insurance limit for insured deposits.
Amendments to the FDIC Act also revised the assessment base against which an insured depository
institution’s deposit insurance premiums paid to the FDIC’s deposit insurance fund (“DIF”) will be
calculated. The assessment base now consists of 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.
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.
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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 the Dodd-Frank Act.
(2) enhances
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;
for compensation committee members;
(3) requires companies listed on national securities exchanges to adopt incentive-based compensation claw-
back 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 disclosures regarding board leadership structure.
independence requirements
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.
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. Any amendments to, or waivers from, our code of ethics applicable
to our executive officers will be posted on our website within four days of such amendment or waiver. We
will provide a printed copy of any of the aforementioned documents to any requesting shareholder.
ITEM 1A. RISK FACTORS
Our business is subject to risk. The following discussion, along with management’s discussion and analysis
and our financial statements and footnotes, sets forth the most significant risks and uncertainties that we
believe could adversely affect our business, financial condition or results of operations. Additional risks
and uncertainties that management is not aware of or that management currently deems immaterial may
also have a material adverse effect on our business, financial condition or results of operations. There is
no assurance that this discussion covers all potential risks that we face. The occurrence of the described
risks could cause our results to differ materially from those described in our forward-looking statements
included elsewhere in this report, and could have a material adverse impact on our business or results of
operations.
Risk Factors Associated With Our Business
We must effectively manage our credit risk. The risk of non-payment of loans is inherent in commercial
banking. Increased credit risk may result from several factors, including adverse changes in economic and
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industry conditions, declines in the value of collateral and risks related to individual borrowers. We rely
heavily on information provided by third parties when originating and monitoring loans. If this information
is intentionally or negligently misrepresented and we do not detect such misrepresentations, the credit risk
associated with the transaction may be increased. Although we attempt to manage our credit risk by
carefully monitoring the concentration of our loans within specific loan categories and industries and
through prudent loan approval and monitoring practices in all categories of our lending, we cannot assure
you that our approval and monitoring procedures will
reduce these lending risks. If our credit
administration personnel, policies and procedures are not able to adequately adapt to changes in economic
or other conditions that affect customers and the quality of the loan portfolio, we may incur increased losses
that could adversely affect our financial results.
A significant portion of our assets consists of commercial loans. We generally invest a greater proportion of our
assets in commercial loans to business customers than other banking institutions of our size, and our
business plan calls for continued efforts to increase our assets invested in these loans. At December 31,
2013, approximately 44% of our loan portfolio was comprised of commercial loans. Commercial loans may
involve a higher degree of credit risk than other types of loans due, in part, to their larger average size, the
effects of changing economic conditions on the businesses of our commercial
loan customers, the
dependence of borrowers on operating cash flow to service debt and our reliance upon collateral which may
not be readily marketable. Due to the proportionate amount of these commercial loans in our portfolio,
losses incurred on a relatively small number of commercial loans could have a materially adverse impact on
our results of operations and financial condition.
A significant portion of our loans are secured by commercial and residential real estate. At December 31, 2013,
approximately 30% of our loan portfolio was comprised of loans with real estate as the primary component
of collateral. Our real estate lending activities, and our exposure to fluctuations in real estate collateral
values, are significant and expected to increase as our assets 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 real estate serving as collateral for our loans declines
materially, a significant part of our loan portfolio could become under-collateralized and losses incurred
upon borrower defaults would increase. 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 for our loans. The inability of purchasers of real estate, including residential real
estate, to obtain financing may weaken the financial condition of our borrowers who are dependent on the
sale or refinancing of property to repay their loans.
We must maintain an adequate allowance for loan losses. Our experience in the banking industry indicates
that some portion of our loans will become delinquent, and some may only be partially repaid or may never
be repaid at all. We maintain an allowance for loan losses, which is a reserve established through a provision
for loan losses charged to expense each quarter, that is consistent with management’s assessment of the
collectability of the loan portfolio in light of the amount of loans committed and outstanding and current
economic conditions and market trends. When specific loan losses are identified, the amount of the
expected loss is removed, or charged-off, from the allowance. Our methodology for establishing the
adequacy of the allowance for loan losses depends on our subjective application of risk grades as indicators
of each borrower’s ability to repay the loan.
If our assessment of future losses is inaccurate, or economic and market conditions or the borrower’s
financial performance experience material unanticipated changes, the allowance may become inadequate,
requiring larger provisions for loan losses that can materially decrease our earnings. Certain of our loans
individually represent a significant percentage of our total allowance for loan losses. Adverse collection
experience in a relatively small number of these loans could require an increase in the provision for loan
losses. Federal regulators periodically review our allowance for loan losses and, based on their judgments,
which may be different than ours, may require us to change classifications or grades of loans, increase the
allowance for loan losses and recognize further loan charge-offs. Any increase in the allowance for loan
losses or in the amount of loan charge-offs required by these regulatory agencies could have a negative
effect on our results of operations and financial condition.
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We must effectively manage our interest rate risk. Our profitability is dependent to a large extent on our net
interest income, which is the difference between the interest income paid to us on our loans and investments
and the interest we pay to third parties such as our depositors, lenders and debtholders. Changes in interest
rates can impact our profits and the fair values of certain of our assets and liabilities. Prolonged periods of
unusually low interest rates may have an adverse effect on our earnings by reducing yields on loans and other
earning assets. Increases in market interest rates may reduce our customers’ desire to borrow money from us
or adversely affect their ability to repay their outstanding loans by increasing their debt service obligations
through the periodic reset of adjustable interest rate loans. If our borrowers’ ability to pay their loans is
impaired by increasing interest payment obligations, our level of non-performing assets would increase,
producing an adverse effect on operating results. Increases in interest rates can have a material impact on the
volume of mortgage originations and refinancings, adversely affecting the profitability of our mortgage finance
business. Interest rate risk can also result from mismatches between the dollar amounts of repricing or
maturing assets and liabilities and from mismatches in the timing and rates at which our assets and liabilities
reprice. We actively monitor and manage the balances of our maturing and repricing assets and liabilities to
reduce the adverse impact of changes in interest rates, but there can be no assurance that we will be able to
avoid material adverse effects on our net interest margin in all market conditions.
Federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were
repealed in 2011 by the Dodd-Frank Act. This change has had limited impact to date due to the excess of
commercial liquidity and the very low rate environment in recent years. There can be no assurance that we
will not be materially adversely affected in the future if economic activity increases and interest rates rise,
which may result in our interest expense increasing, and our net interest margin decreasing, if we must
offer interest on demand deposits to attract or retain customer deposits.
We must effectively execute our business strategy in order to continue our asset and earnings growth. Our core
strategy is to develop our business principally through organic growth. Our prospects for continued growth
must be considered in light of the risks, expenses and difficulties frequently encountered by companies
seeking to realize significant growth. In order to execute our growth strategy successfully, we must, among
other things:
• continue to identify and expand into suitable markets and lines of business, in Texas, regionally and
nationally;
• develop new products and services and execute our full range of products and services more
efficiently and effectively;
• attract and retain qualified bankers in each of our targeted markets to build our customer base;
• expand our loan portfolio while maintaining credit quality;
• attract sufficient deposits and capital to fund our anticipated loan growth;
• control expenses; and
• maintain sufficient qualified staffing and infrastructure to support growth and compliance with
increasing regulatory requirements.
Failure to effectively execute our business strategy could have a material adverse effect on our business,
future prospects, financial condition or results of operations.
Our future profitability depends, to a significant extent, upon our middle market business customers. Our future
profitability depends, to a significant extent, upon revenue we receive from middle market business
customers, and their ability to continue to meet their loan obligations. Adverse economic conditions or
other factors affecting this market segment may have a greater adverse effect on us than on other financial
institutions that have a more diversified customer base.
Our business is concentrated in Texas. A substantial majority of our customers are located in Texas. As a
result, our financial condition and results of operations may be strongly affected by any prolonged period of
economic recession or other adverse business, economic or regulatory conditions affecting Texas businesses
and financial institutions.
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Our growth plans are dependent on the availability of capital and funding. Our historical ability to raise capital
through the sale of capital stock and debt securities may be affected by economic and market conditions or
regulatory changes that are beyond our control. Adverse changes in our operating performance or financial
condition could make raising additional capital difficult or more expensive or limit our access to customary
sources of funding, including inter-bank borrowings, repurchase agreements and borrowings from the
Federal Reserve Bank of Dallas or the Federal Home Loan Bank. We cannot offer assurance that capital
will be available to us in the future, upon acceptable terms or at all. Our efforts to raise capital could require
the issuance of securities at times and with maturities, conditions and rates that are disadvantageous, and
which could have a dilutive impact on our current stockholders. Factors that could adversely affect our
ability to raise additional capital include conditions in the capital markets, our financial performance,
regulatory actions and general economic conditions. Increases in our cost of capital, including increased
interest or dividend requirements, could have a direct adverse impact on our operating performance and
our ability to achieve our growth objectives. Trust preferred securities are no longer a viable source of new
long-term debt capital as a result of regulatory changes. The treatment of our existing trust preferred
securities as capital may be subject to further regulatory change prior to their maturity, which could require
the Company to seek additional capital.
We must effectively manage our liquidity risk. Our bank requires available funds (liquidity) to meet its
deposit, debt and other obligations as they come due as well as unexpected demands for cash payments.
Our bank’s principal source of funding consists of customer deposits. A substantial majority of our bank’s
liabilities consist of demand, savings, interest checking and money market deposits, which are payable on
demand or upon several days’ notice. By comparison, a substantial portion of our assets are loans, most of
which, excluding our mortgage finance loans, cannot be collected or sold in so short a time frame, creating
the potential for an imbalance in the availability of liquid assets to satisfy depositors and loan funding
requirements. We hold smaller balances of marketable securities than many of our competitors, limiting our
ability to increase our liquidity by completing market sales of these assets. An inability to raise funds
through deposits, borrowings, the sale of securities and loans and other sources, including our access to
capital market transactions, could have a substantial negative effect on our bank’s liquidity. We actively
manage our available sources of funds to meet our expected needs under normal and financially stressed
conditions, but there is no assurance that our bank will be able to meet funding commitments to borrowers
and replace maturing deposits and advances as necessary under all possible circumstances. Our bank’s
ability to obtain funding could be impaired by factors beyond its control, such as disruptions in financial
markets, negative expectations regarding the financial services industry generally or in our markets or
negative perceptions of our bank.
Our bank sources a significant volume of its demand deposits from financial services companies and other
commercial sources, resulting in a smaller number of larger deposits than would be typical of other banks in
our markets. In recent periods over half of our total deposits have been attributable to customers whose
balances exceed the $250,000 FDIC insurance limit. Many of these customers actively monitor our
financial condition and results of operations and could withdraw their deposits quickly upon the occurrence
of a material adverse development affecting our bank. One potential source of liquidity for our bank
consists of “brokered deposits” arranged by brokers acting as intermediaries, typically larger money-center
financial institutions. We have significant balances of other deposits defined for regulatory purposes to be
brokered deposits, including deposits provided by certain of our customers in connection with our delivery
of other financial services to them or their customers. If we do not maintain our regulatory capital above the
level required to be well capitalized FDIC consent would be required for us to continue to obtain deposits
classified as brokered deposits. Our non-traditional deposits are subject to greater operational and
reputational risk of unexpected withdrawal than traditional demand and time deposits, particularly those
provided by consumers. See Management’s Discussion and Analysis of Financial Condition and Results of
Operations below for further discussion of our liquidity.
We must be effective in developing and executing new lines of business and new products and services while managing
associated risks. Our business strategy requires that we develop and grow new lines of business and offer new
products and services within existing lines of business in order to compete successfully and realize our growth
objectives. Substantial costs, risks and uncertainties are associated with these efforts, particularly in instances
14
where the markets are not fully developed. Developing and marketing new activities requires that we invest
significant time and resources before revenues and profits can be realized. Timetables for the development
and launch of new activities 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 adversely impact the successful execution of new activities. New activities necessarily
entail additional risks and may present additional risks to the effectiveness of our system of internal controls.
All service offerings, including current offerings and new activities, may become more risky due to changes in
economic, competitive and market conditions beyond our control. 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.
We must continue to attract and retain key personnel. Our success depends to a significant extent upon our
ability to attract and retain experienced bankers in each of our markets. Competition for the best people in
our industry can be intense, and there is no assurance that we will continue to have the same level of
success in this effort that has supported our historical results. Factors that affect our ability to attract and
retain key employees include our compensation and benefits programs, our profitability and our reputation
for rewarding and promoting qualified employees. The cost of employee compensation is a significant
portion of our operating expenses and can materially impact our results of operations. The unanticipated
loss of the services of key personnel could have an adverse effect on our business. Although we have
entered into employment agreements with certain key employees, we cannot assure you that we will be
successful in retaining them.
Our business faces unpredictable economic and business conditions. Our business is directly impacted by general
economic and business conditions in the United States and abroad. 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 can be affected by other factors that are beyond our control,
including:
• national, regional and local economic conditions;
• 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;
• legislative and regulatory changes impacting our industry;
• the financial health of our customers and economic conditions affecting them and the value of our
collateral, including changes in the price of energy and other commodities;
• the incidence of fraud, illegal payments, security breaches and other illegal acts among or impacting
our bank and our customers;
• structural changes in the markets for origination, sale and servicing of residential mortgages;
• changes in governmental economic and regulatory policies generally, including the extent and
timing of intervention in credit markets by the Federal Reserve Board or withdrawal from that
intervention;
• changes in the availability of liquidity at a systemic level; and
• material inflation or deflation.
Substantial deterioration in any of the foregoing conditions, including continuation of weak economic
recovery and employment growth in recent years, can have a material adverse effect on our prospects and
our results of operations and financial condition. There is no assurance that we will be able to sustain our
historical rate of growth or our profitability. Our bank’s customer base is primarily commercial in nature,
and our bank does not have a significant retail branch network or retail consumer deposit base. In periods of
economic downturn, business and commercial deposits may be more volatile than traditional retail
consumer deposits. As a result, our financial condition and results of operations could be adversely affected
to a greater degree by these uncertainties than our competitors who have a larger retail customer base.
15
We compete with many larger banks and other financial service providers. Competition among providers of
financial services in our markets, in Texas, regionally and nationally, is intense. We compete with other
financial and bank holding companies, state and national commercial banks, savings and loan associations,
consumer finance companies, credit unions, securities brokerages, insurance companies, mortgage banking
funds, asset-based non-bank lenders, government sponsored or
companies, money market mutual
subsidized lenders and other financial services providers. 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, including systems and services that could protect
customers from cyber threats. We are increasingly faced with competition in many of our products and
services by non-bank providers who may have competitive advantages of size, access to potential customers
and fewer regulatory requirements. 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 or suffer adverse effects
on our financial condition and results of operations.
Our accounting estimates and risk management processes rely on management judgment, which may be supported by
analytical and forecasting models. The processes we use to estimate probable credit losses for purposes of
establishing the allowance for loan losses and to measure the fair value of financial instruments, as well as
the processes we use to estimate the effects of changing interest rates and other market measures on our
financial condition and results of operations, depend upon management’s judgment. Management’s
judgment and the data relied upon by management may be based on assumptions that prove to be
inaccurate, particularly in times of market stress or other unforeseen circumstances. Even if the relevant
factual assumptions are accurate, our decisions may prove to be inadequate or inaccurate because of other
flaws in the design or use of analytical tools used by management. Any such failures in our processes for
producing accounting estimates and managing risks could have a material adverse effect on our business,
financial condition and results of operations.
We are dependent on funds obtained from capital transactions or from our bank to fund our obligations. We are a
financial holding company engaged in the business of managing, controlling and operating our bank. We
conduct no material business or other activity at the parent company level other than activities incidental to
holding equity and debt investments in our bank. As a result, we rely on the proceeds of capital transactions
and payments of interest and principal on loans made to our bank to pay our operating expenses, to satisfy
our obligations to debtholders and to pay dividends on our preferred stock. We may in the future rely on
dividends from our bank to satisfy all or part of our parent company financial obligations. Our bank’s ability
to pay dividends may be limited. The profitability of our bank is subject to fluctuation based upon, among
other things, the cost and availability of funds, changes in interest rates and economic conditions in general.
Our bank’s ability to pay dividends to us is subject to regulatory limitations that can, under certain adverse
circumstances, prohibit the payment of dividends to us by our bank. Our right to participate in any
distribution from the sale or liquidation of our bank is subject to the prior claims of our bank’s creditors. If
we are unable to access funds from capital transactions or our bank we may be unable to satisfy our
obligations to creditors or debtholders or pay dividends on our preferred stock.
We must effectively manage our counterparty risk. Financial services institutions are interrelated as a result of
trading, clearing, counterparty and other relationships. Our bank has exposure to many different industries
and counterparties, and routinely executes transactions with counterparties in the financial services
industry, including commercial banks, brokers and dealers, investment banks, and other institutional
clients. Many of these transactions expose our bank to credit risk in the event of a default by a counterparty
or client. In addition, our bank’s credit risk may be increased when the collateral it is entitled to cannot be
realized upon or is liquidated at prices not sufficient to recover the full amount of its credit or derivative
exposure. Any such losses could have a material adverse effect on our business, financial condition and
results of operations.
We must effectively manage our information systems risk. We rely heavily on our communications and
information systems to conduct our business. The financial services industry is undergoing rapid
technological changes with frequent introductions of new technology-driven products and services. Our
ability to compete successfully depends in part upon our ability to use technology to provide products and
16
services that will satisfy customer demands. Many of the Company’s competitors invest substantially
greater resources in technological improvements than we do. 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, which may negatively affect our business, results of operations or financial condition.
Our communications and information systems remain vulnerable to unexpected disruptions and failures.
Any failure or interruption of these systems could impair our ability to serve our customers and to operate
our business and could damage our reputation, result in a loss of business, subject us to additional
regulatory scrutiny or enforcement or expose us to civil litigation and possible financial liability. While we
have developed extensive recovery plans, we cannot assure that those plans will be effective to prevent
adverse effects upon us and our customers resulting from system failures.
We collect and store sensitive data, including personally identifiable information of our customers and
employees. Computer break-ins of our systems or our customers’ systems, thefts of data and other breaches
and criminal activity may result in significant costs to respond, liability for customer losses if we are at fault,
damage to our customer relationships, regulatory scrutiny and enforcement and loss of future business
opportunities due to reputational damage. Although we, with the help of third-party service providers, will
continue to implement security technology and establish operational procedures to protect sensitive data,
there can be no assurance that these measures will be effective. We advise and provide training to our
customers regarding protection of their systems, but there is no assurance that our advice and training will
be appropriately acted upon by our customers or effective to prevent losses. In some cases we may elect to
contribute to the cost of responding to cybercrime against our customers, even when we are not at fault, in
order to maintain valuable customer relationships.
Our operations rely on external vendors. We rely on certain external vendors to provide products and services
necessary to maintain our day-to-day operations, particularly in the areas of operations,
treasury
management systems, information technology and security, exposing us to the risk that these vendors will
not perform as required by our agreements. An external vendor’s failure to perform in accordance with our
agreement could be disruptive to our operations, which could have a material adverse impact on our
business, financial condition and results of operations.
Our business is susceptible to fraud. Our business exposes us to fraud risk from our loan and deposit
customers and the parties they do business with. We rely on financial and other data which could turn out
to be fraudulent in accepting new customers, executing their financial transactions and making and
purchasing loans and other financial assets. In times of increased economic stress we are at increased risk of
fraud losses. We believe we have underwriting and operational controls in place to prevent or detect such
fraud, but we cannot provide assurance that these controls will be effective in detecting fraud or that we
will not suffer fraud costs or losses at levels that adversely affect our financial results or reputation. Our
lending customers may also experience fraud in their businesses which could adversely affect their ability
to repay their loans.
We are subject to extensive government regulation and supervision. We, as a bank holding company and financial
holding company, and our bank as a national bank, are subject to extensive federal and state regulation and
supervision that impacts our business on a daily basis. See the discussion above at Business—Regulation and
Supervision. These regulations affect our lending practices, permissible products and services and their
terms and conditions, customer relationships, capital structure, investment practices, accounting, financial
reporting, operations and our ability to grow, among other things. These regulations also impose obligations
to maintain appropriate policies, procedures and controls 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.
Recent material changes in regulation and requirements imposed on financial institutions, such as the
Dodd-Frank Act and the Basel III Accord, result in additional costs, impose more stringent capital, liquidity
and leverage requirements, limit the types of financial services and products we may offer and increase the
17
ability of non-bank financial services providers to offer competing financial services and products, among
other things. The Dodd-Frank Act has not yet been fully implemented and there are many additional
regulations that have not been proposed, or if proposed, have not been adopted. The full impact of the
Dodd-Frank Act on our business strategies is unknown at this time and cannot be predicted.
We receive inquiries from our regulators from time to time regarding, among other things, lending
practices, reserve methodology, interest rate and operational risk management, regulatory and financial
accounting practices and policies and related matters, which can divert management’s time and attention
from focusing on our business. Because our assets now exceed $10 billion we are subject to additional
regulatory requirements and have increased the amount of management time and expense devoted to
developing the infrastructure to support our compliance. Commencing in 2014 we are required to conduct
enhanced stress testing to evaluate the adequacy of our capital and liquidity planning. Uncertainties
regarding the conditions and risk factors that will be required to be included in stress tests and how the
financial models of our business will respond subject us to risk as this new activity is implemented. Any
change to our practices or policies requested or required by our regulators, or any changes in interpretation
of regulatory policy applicable to our businesses, may have a material adverse effect on our business, results
of operations or financial condition.
We expend substantial effort and incur costs to continually improve our systems, controls, accounting,
operations,
information security, compliance, audit effectiveness, analytical capabilities, staffing and
training in order to satisfy regulatory requirements. We cannot offer assurance that these efforts will satisfy
applicable legal and regulatory requirements. 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.
The FDIC has imposed higher general and special assessments on deposits or assets 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 and asset assessments in the future. Increases in FDIC
assessments, fees or taxes could affect our earnings. Reports from the Public Company Accounting
Oversight Board’s (“PCAOB”) inspections of public accounting firms continue to outline findings and
recommendations which could require these firms to perform additional work as part of their financial
statement audits, increasing our audit and internal audit costs to respond to these added requirements and
exposure to adverse findings by the PCAOB of the work performed. As a result, we have experienced, and
may continue to experience, greater internal and external compliance and audit costs to comply with these
changes that could adversely affect our results of operations.
We must maintain adequate regulatory capital to support our business objectives. Under regulatory capital
adequacy guidelines and other regulatory requirements, we must satisfy capital requirements based upon
quantitative measures of assets, liabilities and certain off-balance sheet items. Our satisfaction of these
requirements is subject
to qualitative judgments by regulators that may differ materially from
management’s and that are subject to being determined retroactively for prior periods. Our ability to
maintain our status as a financial holding company to continue to operate our bank as we have in recent
periods is dependent upon a number of factors, including our bank qualifying as “well capitalized” and
“well managed” under applicable prompt corrective action regulations and upon our company qualifying on
an ongoing basis as “well capitalized” and “well managed” under applicable Federal Reserve regulations.
Failure to meet regulatory capital standards could have a material adverse effect on our business, including
damaging the confidence of customers in us, adversely impacting our competitive position, limiting our
ability to use brokered deposits, limiting our access to capital markets transactions, limiting our ability to
pursue new activities and resulting in higher FDIC assessments on deposits or assets. Were we to fall
below guidelines for being deemed “adequately capitalized” the OCC or Federal Reserve could impose
to effect “prompt corrective action.” The capital
further
requirements applicable to us are in a process of continuous evaluation and revision in connection with
Basel III and the requirements of the Dodd-Frank Act. We cannot predict the final form, or the effects, of
restrictions and requirements in order
18
these regulations on our business, but among the possible effects are requirements that we slow our rate of
growth or obtain additional capital which could reduce our earnings or dilute our existing stockholders.
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. There is a risk that hazardous or toxic substances could be found
on these properties, and that 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 by limiting our ability to use or sell it. Although we have policies and
procedures requiring 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
regulations or more stringent
interpretations or enforcement policies with respect to existing laws and regulations may increase our
exposure to environmental liability.
financial condition and results of operations. Future laws or
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. Hurricanes have caused extensive flooding and destruction along the coastal areas of
Texas, including communities where we conduct business. Although management has established disaster
recovery policies and procedures, the occurrence of any such events could have a material adverse effect on
our business, financial condition and results of operations.
We are subject to claims and litigation in the ordinary course of our business, including claims that may not be covered
by our insurers. Customers and other parties we engage with assert claims and take legal action against us
on a regular basis and we regularly take legal action to collect unpaid borrower obligations, realize on
collateral and assert our rights in commercial and other contexts. These actions frequently result in counter-
claims against us. Litigation arises in a variety of contexts, including lending activities, employment
practices, commercial agreements, fiduciary responsibility related to our wealth management services,
intellectual property rights and other general business matters.
Claims and legal actions may result in significant legal costs to defend us or assert our rights and
reputational damage that adversely affects existing and future customer relationships. If claims and legal
actions are not resolved in a manner favorable to us we may suffer significant financial liability adverse
effects upon our reputation, which could have a material adverse effect on our business, financial condition
and results of operations. See Legal Proceedings below for additional disclosures regarding legal proceedings.
We purchase insurance coverage to mitigate a wide range of operating risks, including general liability,
errors and omissions, professional liability, business interruption, cyber-crime and property loss, for events
that may be materially detrimental to our bank or customers. There is no assurance that our insurance will
be adequate to protect us against material losses in excess of our coverage limits or that insurers will
perform their obligations under our policies without attempting to limit or exclude coverage. We could be
required to pursue legal actions against insurers to obtain payment of amounts we are owed, and there is no
assurance that such actions, if pursued, would be successful.
Our controls and procedures may fail or be circumvented. Management regularly reviews and updates our
internal controls over financial reporting, disclosure controls and procedures, and corporate governance
policies and procedures. Any system of controls, however well designed and operated, is based in part on
certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the
system are met. Any failure or circumvention of our controls and procedures or failure to comply with
regulations related to controls and procedures could have a material adverse effect on our business, results
of operations and financial condition.
19
Risks Relating to Our Securities
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
regulatory actions against other financial institutions;
• 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 interpretation of those regulations, changes in our practices
requested or required by regulators and changes in regulatory enforcement focus; 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. 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. Concentration of
ownership by institutional investors and inability to execute trades covering large numbers of shares can
increase volatility of stock price. Changes in general economic outlook or perspectives on our business or
prospects by our institutional investors, whether factual or speculative, can have a major impact on our
stock price.
Our preferred stock is thinly traded. There is only a limited trading volume in our preferred stock due to the
small size of the issue and its largely institutional holder base. Significant sales of our preferred stock, or the
expectation of these sales, could cause the price of the preferred stock to fall substantially.
An investment in our securities is not an insured deposit. Our common stock, preferred stock and indebtedness
are not bank deposits and, therefore, are 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 securities of any company. As a result, if you acquire our common
stock, preferred stock or indebtedness, you may lose some or all of your investment.
that are senior to those of our common
The holders of our indebtedness and preferred stock have rights
shareholders. As of December 31, 2013, we had $111.0 million in subordinated notes and $113.4 million in
junior subordinated notes outstanding that are held by statutory trusts which issued trust preferred
securities to investors. Our bank issued subordinated notes in an aggregate principal amount of $175.0
million on January 31, 2014. Payments of the principal and interest on the trust preferred securities are
conditionally guaranteed by us to the extent not paid by each trust, provided the trust has funds available
for such obligations.
20
Our subordinated notes and junior subordinated notes are senior to our shares of preferred stock and
common stock in right of payment of dividends and other distributions. We must be current on interest and
principal payments on our indebtedness before any dividends can be paid on our preferred stock or our
common stock. In the event of our bankruptcy, dissolution or liquidation, the holders of our indebtedness
must be satisfied before any distributions can be made to our preferred or common 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
preferred stock or common stock. Because our bank’s subordinated notes issued in January 2014 are
obligations of the bank, the would in any sale or liquidation of our bank receive payment before any
amounts would be payable to holders of our common stock, preferred stock or subordinated notes.
At December 31, 2013, we had issued and outstanding 6 million shares of our 6.50% Non-Cumulative
Perpetual Preferred Stock, Series, A, having an aggregate liquidation preference of $150.0 million. Our
preferred stock is senior to our shares of common stock in right of payment of dividends and other
distributions. We must be current on dividends payable to holders of preferred stock before any dividends
can be paid on our common stock. In the event of our bankruptcy, dissolution or liquidation, the holders of
our preferred stock must be satisfied before any distributions can be made to our common shareholders.
We do not currently pay dividends on our common stock. We have not paid dividends on our common stock
and we do not expect to do so for the foreseeable future. Our ability to pay dividends is limited by
regulatory restrictions and the need to maintain sufficient consolidated capital. The ability of our bank to
pay dividends to us is limited by its obligation to maintain sufficient capital and by other regulatory
restrictions as discussed above at We are dependent on funds obtained from capital transactions or from our bank
to fund our obligations.
Restrictions on Ownership. The ability of a third party to acquire us is limited under applicable U.S. banking
laws and regulations. The Bank Holding Company Act of 1956, as amended (the “BHCA”), requires any
bank holding company (as defined therein) to obtain the approval of the Board of Governors of the Federal
Reserve System (“Federal Reserve”) prior to acquiring, directly or indirectly, more than 5% of our
outstanding Common Stock. Any “company” (as defined in the BHCA) other than a bank holding company
would be required to obtain Federal Reserve approval before acquiring “control” of us. “Control” generally
means (i) the ownership or control of 25% or more of a class of voting securities, (ii) the ability to elect a
majority of the directors or (iii) the ability otherwise to exercise a controlling influence over management
and policies. A holder of 25% or more of our outstanding Common Stock, other than an individual, is
subject to regulation and supervision as a bank holding company under the BHCA. In addition, under the
Change in Bank Control Act of 1978, as amended, and the Federal Reserve’s regulations thereunder, any
person, either individually or acting through or in concert with one or more persons, is required to provide
notice to the Federal Reserve prior to acquiring, directly or indirectly, 10% or more of our outstanding
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.
Limitations on payment of subordinated notes. Under the Federal Deposit Insurance Act (“FDIA”), “critically
undercapitalized” banks may not, beginning 60 days after becoming critically undercapitalized, make any
payment of principal or interest on their subordinated debt (subject to certain limited exceptions). In
21
addition, under Section 18(i) of the FDIA, our bank is required to obtain the advance consent of the FDIC
to retire any part of its subordinated notes. Under the FDIA, a bank may not pay interest on its
subordinated notes if such interest is required to be paid only out of net profits, or distribute any of its
capital assets, while it remains in default on any assessment due to the FDIC.
Our bank’s subordinated indebtedness is unsecured and subordinate and junior in right of payment to the
bank’s obligations to its depositors, its obligations under banker’s acceptances and letters of credit, its
obligations to any Federal Reserve Bank, certain obligations to the FDIC, and its obligations to its other
creditors, whether now outstanding or hereafter incurred, except any obligations which expressly rank on a
parity with or junior to the notes, including subordinated notes payable to the Company.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
22
ITEM 2. PROPERTIES
As of December 31, 2013, we conducted business at thirteen full service banking locations and one operations
center. Our operations center houses our loan and deposit operations and the customer service call center. We
lease the space in which our banking centers and the operations call center are located. These leases expire
between July 2019 and September 2024, not including any renewal options that may be available.
The following table sets forth the location of our executive offices, operations center and each of our
banking centers.
Type of Location
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
Address
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
98 San Jacinto Boulevard
Banking center — Suite 150
Executive offices — Suite 200
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
23
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various claims and legal actions that may arise in the course of conducting its
business. Management does not expect the disposition of any of these matters to have a material adverse
impact on the Company’s financial statements or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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 20, 2014, there were approximately 238 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 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 2012 and 2013.
Quarter Ended
March 31, 2012
June 30, 2012
September 30, 2012
December 31, 2012
March 31, 2013
June 30, 2013
September 30, 2013
December 31, 2013
Price Per Share
High
Low
$36.61
42.08
49.96
52.17
$47.39
45.22
50.15
62.25
$30.57
32.55
39.50
41.50
$39.87
36.75
43.43
44.53
Equity Compensation Plan Information
The following table presents certain information regarding our equity compensation plans as of
December 31, 2013.
Plan category
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
Equity compensation plans approved
by security holders
Equity compensation plans not
approvedby security holders
Total
592,751
—
592,751
$28.69
—
$28.69
262,315
—
262,315
24
Stock Performance Graph
The following table and graph sets forth the cumulative total stockholder return for the Company’s
common stock for the five-year period ending on December 31, 2013, 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 December 31, 2008. The performance graph represents past
performance and should not be considered to be an indication of future performance.
Texas Capital
Bancshares, Inc.
Russell 2000
Index RTY
Nasdaq Bank
Index CBNK
12/31/08
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
$100.00
$104.49
$159.73
$229.12
$335.48
$465.57
100.00
124.38
155.54
147.52
169.17
231.17
100.00
80.70
89.71
78.82
91.45
126.15
TCBI Stock Performance Graph
500
460
420
380
340
300
260
220
180
140
100
60
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
A pr-12
A ug-12
D ec-12
A pr-13
A ug-13
D ec-13
TCBI
Russell 2000 Index
NASDAQ Bank Index
Source: Bloomberg
25
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.
At or For the Year Ended December 31
2013
2012
2011
2010
2009
(In thousands, except per share, average share and percentage data)
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
Income (loss) from discontinued operations
(after-tax)
Net income
Preferred stock dividends
Net income available to common
shareholders
Consolidated Balance Sheet Data(1)
Total assets(2)
Loans held for investment
Loans held for investment, mortgage finance
loans
Securities available-for-sale
Demand deposits
Total deposits
Federal funds purchased
Other borrowings
Subordinated notes
Trust preferred subordinated debentures
Stockholders’ equity
$
444,625 $
25,112
398,457 $ 321,600 $ 279,810 $ 243,153
46,462
21,578
38,136
18,663
419,513
19,000
376,879
11,500
302,937
28,500
241,674
53,500
196,691
43,500
400,513
44,024
256,734
365,379
43,040
219,844
274,437
32,232
188,201
188,174
32,263
163,488
153,191
29,260
145,542
187,803
66,757
188,575
67,866
118,468
42,366
121,046
120,709
76,102
56,949
19,626
37,323
36,909
12,522
24,387
5
(37)
(126)
(136)
(235)
121,051
7,394
120,672
—
75,976
—
37,187
—
24,152
5,383
$
113,657 $
120,672 $
75,976 $
37,187 $
18,769
$11,714,397 $10,540,542 $8,137,225 $6,445,679 $5,698,318
4,457,293
5,572,371
4,711,330
6,785,535
8,486,309
2,784,265
63,214
3,347,567
9,257,379
148,650
876,980
111,000
113,406
1,096,350
3,175,272
100,195
2,535,375
7,440,804
273,179
1,673,982
111,000
113,406
836,242
2,080,081
143,710
1,751,944
5,556,257
412,249
1,355,867
—
113,406
616,331
1,194,209
185,424
1,451,307
5,455,401
283,781
14,106
—
113,406
528,319
693,504
266,128
899,492
4,120,725
580,519
376,510
—
113,406
481,360
26
2013
At or For the Year Ended December 31
2011
(In thousands, except per share, average share and percentage data)
2012
2010
2009
Other Financial Data
Income per share
Basic
Income from continuing operations $
Net income
2.78 $
2.78
3.09 $
3.09
2.04 $
2.03
1.02 $
1.02
Diluted
Income from continuing operations $
Net income
Tangible book value per share(3)
Book value per share(3)
Weighted average shares
Basic
Diluted
Selected Financial Ratios
Performance Ratios
Net interest margin
Return on average assets
Return on average equity
Efficiency ratio
Non-interest expense to average earning
assets
Asset Quality Ratios
Net charge-offs (recoveries) to average
loans
Net charge-offs (recoveries) to average
loans excluding mortgage finance
loans(5)
Reserve for loan losses to loans
Reserve for loan losses to loans excluding
mortgage finance loans(5)
Reserve for loan losses to non-accrual
loans
Non-accrual loans to loans
Non-accrual loans to loans excluding
mortgage finance loans(5)
Total NPAs to loans plus OREO
Total NPAs to loans excluding mortgage
finance loans plus OREO(5)
Capital and Liquidity Ratios
Total capital ratio(4)
Tier 1 capital ratio(4)
Tier 1 leverage ratio
Average equity/average assets
Tangible common equity/total tangible
assets(3)
Average net loans/average deposits
0.56
0.55
0.56
0.55
12.96
13.23
2.72 $
2.72
22.50
23.02
3.01 $
3.00
19.96
20.45
1.99 $
1.98
15.69
16.24
1.00 $
1.00
13.89
14.15
40,864,225
41,779,881
39,046,340
40,165,847
37,334,743
38,333,077
36,627,329
37,346,028
34,113,285
34,410,454
4.22%
1.17%
12.82%
55.39%
4.41%
1.35%
16.93%
52.35%
4.68%
1.12%
13.39%
56.15%
4.28%
0.63%
7.23%
59.68%
3.89%
0.46%
5.15%
64.41%
2.58%
2.57%
2.90%
2.88%
2.87%
0.05%
0.07%
0.47%
0.95%
0.41%
0.07%
0.78%
0.10%
0.75%
0.58%
0.92%
1.14%
1.21%
0.46%
1.32%
1.03%
1.10%
1.26%
1.52%
1.52%
2.7x
0.29%
0.38%
0.33%
1.3x
0.56%
0.82%
0.72%
1.3x
0.71%
0.98%
1.17%
.6x
1.90%
2.38%
2.60%
.7x
1.86%
2.15%
2.38%
0.44%
1.06%
1.61%
3.26%
2.74%
10.73%
9.15%
10.87%
9.68%
9.97%
8.27%
9.41%
7.95%
9.25%
8.38%
8.78%
8.33%
11.83%
10.58%
9.36%
8.67%
11.98%
10.73%
10.54%
8.91%
7.87%
116.25%
7.73%
129.97%
7.29%
115.68%
7.98%
105.50%
8.18%
128.43%
27
(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) From continuing operations.
(3) Excludes unrealized gains/losses on securities.
(4)
In response to FFIEC Call Report instructions issued in early April 2013, we began using a 100% risk
weight for the mortgage finance loans with our March 31, 2013 Form 10-Q. We were required to
amend our 2012 and 2011 Call Reports for this change in risk weighting, as well as the previously
reported risk-weighted capital ratios for December 31, 2012 and 2011. We were not required to amend
the ratios for December 31, 2010 or 2009.
(5) Mortgage finance loans were previously classified as loans held for sale but have been reclassified as
loans held for investment as described in Note 1 – Operations and Summary of Significant Accounting
Policies. The indicated ratios are presented excluding the mortgage finance loans because the risk
profile of our mortgage finance loans is different than our other loans held for investment. No
provision is allocated to these loans based on the internal risk grade assigned.
28
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
Forward-looking statements are subject to various risks and uncertainties, which change over time, are
based on management’s expectations and assumptions at the time the statements are made and are not
guarantees of future results. Important factors that could cause actual results to differ materially from the
forward-looking statements include, but are not limited to, the following:
• Deterioration of the credit quality of our loan portfolio, increased default rates and loan losses or
adverse changes in the industry concentrations of our loan portfolio.
• Developments adversely affecting our commercial, entrepreneur and professional customers.
• Changes in the value of commercial and residential real estate securing our loans or in the demand
for credit to support the purchase and ownership of such assets.
• The failure of assumptions supporting our allowance for loan losses causing it to become inadequate
as loan quality decreases and losses and charge-offs increase.
• A failure to effectively manage our interest rate risk resulting from unexpectedly large or sudden
changes in interest rates or rate or maturity imbalances in our assets and liabilities.
• Failure to execute our business strategy, including any inability to expand into new markets and
lines of business in Texas, regionally and nationally.
• Loss of access to capital market transactions and other sources of funding, or a failure to effectively
balance our funding sources with cash demands by depositors and borrowers.
• Failure to successfully develop and launch new lines of business and new products and services
within the expected time frames and budgets, or failure to anticipate and appropriately manage the
associated risks.
• The failure to attract and retain key personnel or the loss of key individuals or groups of employees.
• Changes in the U.S. economy in general or the Texas economy specifically resulting in deterioration
of credit quality or reduced demand for credit or other financial services we offer.
• Legislative and regulatory changes imposing further restrictions and costs on our business, a failure
to remain well capitalized or regulatory enforcement actions against us.
• An increase in the incidence or severity of fraud, illegal payments, security breaches and other illegal
acts impacting our bank and our customers.
• Structural changes in the markets for origination, sale and servicing of residential mortgages.
• Increased or more effective competition from banks and other financial service providers in our
markets.
• Material failures of our accounting estimates and risk management processes based on management
judgment, or the supporting analytical and forecasting models.
• Unavailability of funds obtained from capital transactions or from our bank to fund our obligations.
• Failures of counterparties or third party vendors to perform their obligations.
• Failures or breaches of our information systems that are not effectively managed.
• Severe weather, natural disasters, acts of war or terrorism and other external events.
• Incurrence of material costs and liabilities associated with claims and litigation.
• Failure of our risk management strategies and procedures, including failure or circumvention of our
controls.
29
Actual outcomes and results may differ materially from what is expressed in our forward-looking statements
and from our historical financial results due to the factors discussed elsewhere in this report or disclosed in
our other SEC filings. Forward-looking statements included herein should not be relied upon as
representing our expectations or beliefs as of any date subsequent to the date of this prospectus
supplement. Except as required by law, we undertake no obligation to revise any forward-looking
statements contained in this report, whether as a result of new information, future events or otherwise. The
factors discussed herein are not intended to be a complete summary of all risks and uncertainties that may
affect our businesses. Though we strive to monitor and mitigate risk, we cannot anticipate all potential
economic, operational and financial developments that may adversely impact our operations and our
financial results. Forward-looking statements should not be viewed as predictions and should not be the
primary basis upon which investors evaluate an investment in our securities.
Overview of Our Business Operations
We commenced our banking operations in December 1998. An important aspect of our growth strategy has
been our ability to service and effectively manage a large number of loans and deposit accounts in multiple
markets in Texas. Accordingly, we have created an operations infrastructure sufficient to support state-wide
lending and banking operations that we continue to build out as needed to serve a larger customer base and
specialized industries.
The following discussion and analysis presents the significant factors affecting our financial condition as of
December 31, 2013 and 2012 and results of operations for each of the three years in the periods ended
December 31, 2013, 2012 and 2011. This discussion should be read in conjunction with our consolidated
financial statements and notes to the financial statements appearing later in this report.
Except as otherwise noted, all amounts and disclosures throughout this document reflect continuing
operations. See Part I, Item 1 herein for a discussion of discontinued operations and at Note 19 –
Discontinued Operations.
Year ended December 31, 2013 compared to year ended December 31, 2012
We reported net income of $121.0 million and net income available to common shareholders of $113.7
million, or $2.72 per diluted common share, for the year ended December 31, 2013, compared to net
income and net income available to common shareholders of $120.7 million, or $3.01 per diluted common
share, for the same period in 2012. Return on average equity was 12.82% and return on average assets was
1.17% for the year ended December 31, 2013, compared to 16.93% and 1.35%, respectively, for the same
period in 2012.
Net income increased $337,000 for the year ended December 31, 2013 compared to 2012. The $337,000
increase was primarily the result of a $42.6 million increase in net interest income, a $984,000 increase in
non-interest income and a $1.1 million decrease in income tax expense, offset by a $7.5 million increase in
the provision for credit losses and a $36.9 million increase in non-interest expense.
Details of the changes in the various components of net income are further discussed below.
Year ended December 31, 2012 compared to year ended December 31, 2011
We reported net income of $120.7 million, or $3.01 per diluted common share, for the year ended
December 31, 2012, compared to $76.1 million, or $1.99 per diluted common share, for the same period of
2011. Return on average equity was 16.93% and return on average assets was 1.35% for the year ended
December 31, 2012, compared to 13.39% and 1.12%, respectively, for the same period of 2011.
Net income increased $44.6 million, or 59%, for the year ended December 31, 2012 compared to the same
period of 2011. The $44.6 million increase was primarily the result of a $73.9 million increase in net interest
income, a $17 million decrease in the provision for credit losses and a $10.8 million increase in non-interest
income, offset by a $31.6 million increase in non-interest expense and a $25.5 million increase in income
tax expense.
Details of the changes in the various components of net income are further discussed below.
30
Net Interest Income
Net interest income was $419.5 million for the year ended December 31, 2013 compared to $376.9 million
for the same period of 2012. The increase in net interest income was primarily due to an increase of $1.4
billion in average earning assets as compared to the same period of 2012. The increase in average earning
assets from 2012 included a $1.4 billion increase in average net loans offset by a $40.2 million decrease in
average securities. For the year ended December 31, 2013, average net loans and securities represented
98% and 1%, respectively, of average earning assets compared to 98% and 1%, respectively, in 2012.
Average interest bearing liabilities for the year ended December 31, 2013 increased $95.6 million from the
year ended December 31, 2012, which included a $947.9 million increase in interest bearing deposits, a
$932.4 million decrease in other borrowings and an $80.1 million increase in subordinated notes. For the
same periods, the average balance of demand deposits increased to $3.0 billion from $2.0 billion. The
average cost of interest bearing liabilities increased from 0.35% for the year ended December 31, 2012 to
0.40% in 2013 related to the subordinated notes issued in the third quarter of 2012.
Net interest income was $376.8 million for the year ended December 31, 2012 compared to $302.9 million
for the same period of 2011. The increase in net interest income was primarily due to an increase of $2.1
billion in average earning assets as compared to the same period of 2011. The increase in average earning
assets from 2011 included a $2.2 billion increase in average net loans offset by a $39.7 million decrease in
average securities. For the year ended December 31, 2012, average net loans and securities represented
98% and 1%, respectively, of average earning assets compared to 96% and 2%, respectively, in 2011.
Average interest bearing liabilities for the year ended December 31, 2012 increased $1.5 billion from the
year ended December 31, 2011, which included a $613.4 million increase in interest bearing deposits, an
$862.6 million increase in other borrowings and a $30.9 million increase in subordinated notes. For the
same periods, the average balance of demand deposits increased to $2.0 billion from $1.5 billion. The
average cost of interest bearing liabilities decreased from 0.40% for the year ended December 31, 2011 to
0.35% in 2012, reflecting the continued low market interest rates, and our focus on reducing deposit rates.
Volume/Rate Analysis
(in thousands)
Interest income:
Securities(2)
Loans held for investment,
mortgage finance loans
Loans held for investment
Federal funds sold
Deposits in other banks
Total
Interest expense:
Transaction deposits
Savings deposits
Time deposits
Deposits in foreign branches
Other borrowings
Long-term debt
Years Ended December 31,
2013/2012
Change Due To(1)
Volume
Yield/Rate
Net
Change
2012/2011
Change Due To(1)
Volume
Yield/Rate
Net
Change
$ (1,845)
$ (1,780)
$
(65)
$ (1,912)
$ (1,788)
$
(124)
(5,411)
53,177
52
23
45,996
(165)
1,857
(1,146)
(160)
(1,922)
5,070
1,765
64,598
49
96
64,728
172
3,110
(698)
(220)
(1,847)
5,272
(7,176)
(11,421)
3
(73)
39,335
39,460
(24)
(144)
48,450
56,178
(18)
(152)
(18,732)
76,715
102,670
(337)
(1,253)
(448)
60
(75)
(202)
(2,255)
634
877
(2,456)
(361)
2,001
2,220
2,915
180
1,178
(296)
(277)
1,360
—
2,145
(9,115)
(16,718)
(6)
8
(25,955)
454
(301)
(2,160)
(84)
641
2,220
770
Total
3,534
5,789
Net interest income
$42,462
$58,939
$(16,477)
$73,800
$100,525
$(26,725)
31
(1) Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an
equal basis.
(2) Taxable equivalent rates used where applicable assuming a 35% tax rate.
Net interest margin from continuing operations, the ratio of net interest income to average earning assets,
decreased from 4.41% in 2012 to 4.22% in 2013. This 19 basis point decrease was a result of a decrease in
interest income as a percent of earning assets offset by a reduction in funding costs. Funding cost including
demand deposits and borrowed funds decreased from .21% for 2012 to .17% for 2013. The cost of
subordinated debt issued in September 2012 and the trust preferred as a percent of total earning assets was
.10% for 2013 compared to .06% for 2012. Total cost of funding, including all deposits and stockholders’
equity remained consistent at .24% for 2013.
Net interest margin from continuing operations decreased from 4.68% in 2011 to 4.41% in 2012. This 27
basis point decrease was a result of a decrease in interest income as a percent of earning assets offset by a
reduction in funding costs. Total cost of funding decreased from .27% for 2011 to .24% for 2012.
Consolidated Daily Average Balances, Average Yields and Rates
2013
Year ended December 31
2012
Average
Balance
Revenue /
Expense(1)
Yield /
Rate
Average
Balance
Revenue /
Expense(1)
Yield /
Rate
Average
Balance
2011
Revenue /
Expense(1)
Yield /
Rate
$
59,031
$
2,325
3.94%
$
90,796
$
3,681
4.05%
$ 123,124
$
5,186
18,147
54,547
89,503
2,342,149
7,471,676
78,282
9,735,543
9,956,771
391,633
1,061
65
231
87,864
353,450
—
441,314
444,996
5.85%
0.12%
0.26%
3.75%
4.73%
—
4.53%
4.47%
26,579
11,497
61,192
2,298,651
6,148,860
72,087
8,375,424
8,565,488
400,472
$8,965,960
$
908,415
3,756,560
397,329
$
664
10,531
1,629
0.07%
0.28%
0.41%
$ 752,040
2,765,089
530,816
$
345,506
1,206
0.35%
411,891
5,407,810
653,318
111,000
14,030
1,219
7,327
0.26%
0.19%
6.60%
4,459,836
1,585,723
30,934
1,550
13
208
93,275
300,273
—
393,548
399,000
829
8,674
2,775
1,366
13,644
3,141
2,037
5.83%
0.11%
0.34%
4.06%
4.88%
—
4.70%
4.66%
0.11%
0.31%
0.52%
0.33%
0.31%
0.20%
6.58%
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
3,846,454
723,172
—
1,957
37
352
53,940
260,813
—
314,753
322,285
$
195
7,797
5,231
1,727
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%
—
Total assets
$10,348,404
Liabilities and stockholders’
Assets
Securities—Taxable
Securities—
Non-taxable(2)
Federal funds sold
Deposits in other banks
Loans held for investment,
mortgage finance loans
Loans held for investment
Less reserve for loan
losses
Loans, net
Total earning assets
Cash and other assets
equity
Transaction deposits
Savings deposits
Time deposits
Deposits in foreign
branches
Total interest bearing
deposits
Other borrowings
Subordinated notes
Trust preferred
subordinated
debentures
Total interest bearing
liabilities
Demand deposits
Other liabilities
Stockholders’ equity
Total liabilities and
113,406
2,536
2.24%
113,406
2,756
2.43%
113,406
2,573
2.27%
25,112
0.40%
6,285,534
2,967,063
94,592
1,001,215
6,189,899
1,984,171
78,700
713,190
$8,965,960
21,578
0.35%
4,683,032
1,515,021
52,888
568,147
$6,819,088
18,663
0.40%
$419,884
$377,422
$303,622
4.22%
4.07%
4.41%
4.31%
4.68%
4.57%
stockholders’ equity
$10,348,404
equity
Net interest income
Net interest margin
Net interest spread
(1) The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income.
Loan interest income includes loan fees totaling $33.8 million, $33.7 million and $27.5 million for the years ended December 31,
2013, 2012 and 2011, respectively.
(2) Taxable equivalent rates used where applicable assuming a 35% tax rate.
32
Non-interest Income
Service charges on deposit accounts
Trust fee income
Bank owned life insurance (BOLI) income
Brokered loan fees
Swap fees
Other(1)
2013
2011
Year ended December 31
2012
(in thousands)
$ 6,605
4,822
2,168
17,596
4,909
6,940
$ 6,783
5,023
1,917
16,980
5,520
7,801
$ 6,480
4,219
2,095
11,335
1,935
6,168
Total non-interest income
$44,024
$43,040
$32,232
(1) Other income includes such items as letter of credit fees and other general operating income, none of
which account for 1% or more of total interest income and non-interest income.
Non-interest income increased by $1.0 million during the year ended December 31, 2013 to $44.0 million,
compared to $43.0 million during the same period in 2012. The increase was primarily due to an $861,000
increase in other non-interest income.
Non-interest income increased by $10.8 million during the year ended December 31, 2012 to $43.0 million,
compared to $32.2 million during the same period in 2011. The increase was primarily due to a $6.3 million
increase in brokered loan fees due to an increase in our mortgage finance lending volume. Swap fee income
increased $3.0 million during the year ended December 31, 2012 due to an increase in swap transactions
during 2012. Swap fees are fees related to customer swap transactions and are received from the institution
that is our counterparty on the transactions. See Note 20 – Derivative Financial Instruments for further
discussion.
While management expects continued growth in non-interest income, the future rate of growth could be
affected by increased competition from nationwide and regional financial institutions and by decreased
demand in mortgage finance lending volume. In order to achieve continued growth in non-interest income,
we may need to introduce new products or enter into new markets. Any new product introduction or new
market entry could place additional demands on capital and managerial resources.
Non-interest Expense
Salaries and employee benefits
Net occupancy expense
Marketing
Legal and professional
Communications and technology
FDIC insurance assessment
Allowance and other carrying costs for OREO
Litigation settlement expense
Other(1)
2013
2011
Year ended December 31
2012
(in thousands)
$121,456
14,852
13,449
17,557
11,158
5,568
9,075
4,000
22,729
$157,752
16,821
16,203
18,104
13,762
8,057
1,788
(908)
25,155
$100,535
13,657
11,109
14,996
9,608
7,543
9,586
—
21,167
Total non-interest expense
$256,734
$219,844
$188,201
(1) Other expense includes such items as courier expenses, regulatory assessments other than FDIC
insurance, due from bank charges and other general operating expenses, none of which account for 1%
or more of total interest income and non-interest income.
33
Non-interest expense for the year ended December 31, 2013 increased $36.9 million compared to the same
period of 2012 primarily related to increases in salaries and employee benefits, marketing expense,
communications and data processing and FDIC insurance assessment, offset by decreases in allowance and
other carrying costs for OREO and litigation settlement expense.
Salaries and employee benefits expense increased $36.3 million to $157.8 million during the year ended
December 31, 2013. Of the $36.3 million increase during 2013, approximately $7.7 million related to a
charge taken to reflect the financial effect of the planned organization change announced during the second
quarter of 2013 related to the retirement and transition of our CEO and includes assumptions about future
payouts that may or may not occur. These payouts, when and if realized, will be directly linked to our
performance and stock price, but are required to be estimated at the time of the event. Additionally, there
was another $2.2 million of charges recorded in the second quarter of 2013 related to the increased
probability that certain company financial performance targets for executive cash-based incentives will be
met. Additionally, these cash-based and performance units are expensed based on current stock prices,
which has increased significantly during 2013 resulting in a $3.7 million increase in expense as compared to
2012. The remaining $23.3 million increase was primarily due to general business growth and build-out.
Marketing expense for the year ended December 31, 2013 increased $2.8 million compared to the same
period in 2012. Marketing expense for the year ended December 31, 2013 included $1.0 million of direct
marketing and advertising expense and $4.0 million in business development expense compared to
$850,000 and $3.1 million, respectively, in 2012. Marketing expense for the year ended December 31, 2013
also included $11.2 million for the purchase of miles related to the American Airlines AAdvantage® program
and treasury management deposit programs compared to $9.5 million during 2012. Marketing expense may
increase as we seek to further develop our brand, reach more of our target customers and expand in our
target markets.
Legal and professional expense increased $547,000, or 3%, for the year ended December 31, 2013
compared to the same period in 2012. Our legal and professional expense will continue to fluctuate from
year to year and could increase in the future with growth and as we respond to continued regulatory
changes and strategic initiatives. We expect to see a decrease in the cost of resolving problem assets under
improving economic conditions.
Communications and technology expense increased $2.6 million to $13.8 million during the year ended
December 31, 2013 as a result of general business and customer growth and continued build-out needed to
support that growth.
FDIC insurance assessment expense increased $2.5 million from $5.6 million in 2012 to $8.1 million
primarily as a result of a $3.0 million assessment by the FDIC that was paid during the third quarter of
2013. The assessment related to the year-end call reports for 2011 and 2012, which were amended for the
change in the risk weight applicable to our mortgage finance loan portfolio as described in Note 13 –
Regulatory Restrictions. As previously disclosed, the amendment caused one capital ratio to retroactively
fall below “well-capitalized” for December 31, 2012 and 2011.
For the year ended December 31, 2013, allowance and other carrying costs for OREO decreased $7.3
million to $1.8 million, $920,000 of which related to deteriorating values of assets held in OREO. The
decrease is consistent with the decrease in our OREO balances during 2013.
Non-interest expense for the year ended December 31, 2012 increased $31.6 million compared to the same
period of 2011 primarily related to increases in salaries and employee benefits, marketing expense, legal
and professional expenses and litigation settlement expense.
Salaries and employee benefits expense increased $20.9 million to $121.5 million during the year ended
December 31, 2012. This increase resulted primarily from general business growth and costs of
performance-based incentives resulting from the increase in stock price.
Marketing expense for the year ended December 31, 2012 increased $2.3 million compared to the same
period in 2011. Marketing expense for the year ended December 31, 2012 included $850,000 of direct
marketing and advertising expense and $3.1 million in business development expense compared to
34
$669,000 and $2.6 million, respectively, in 2011. Marketing expense for the year ended December 31, 2012
also included $9.5 million for the purchase of miles related to the American Airlines AAdvantage® program
and treasury management deposit programs compared to $7.8 million during 2011. Marketing expense may
increase as we seek to further develop our brand, reach more of our target customers and expand in our
target markets.
Legal and professional expense increased $2.6 million, or 17%, for the year ended December 31, 2012
compared to the same period in 2011. 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.
During the fourth quarter of 2012 we recorded a pre-tax charge of $4.0 million for settlement of the
judgment of $65.5 million against us in Oklahoma district court. In the settlement, all litigation against us
in the Oklahoma courts and actions by us against the plaintiff in the Texas courts will be dismissed with
prejudice. Because the settlement was within policy limits of insurance coverage maintained by us, we have
claims against our insurance carrier for more than the charge. In the third quarter of 2013, we settled one
claim with our insurance company and recorded a recovery in the amount of $908,000. We intend to pursue
the remaining claims aggressively.
Communications and technology expense increased $1.6 million to $11.6 million during the year ended
December 31, 2012 as a result of general business and customer growth.
FDIC insurance assessment expense decreased by $1.9 million from $7.5 million in 2011 to $5.6 million as
a result of changes to the FDIC assessment method.
Analysis of Financial Condition
Loans
Our total loans have grown at an annual rate of 13%, 30% and 30% in 2013, 2012 and 2011, respectively,
reflecting the continued 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 63% of total loans at December 31, 2013. Construction loans represent 11% of the portfolio at
December 31, 2013. Consumer loans generally have represented 1% or less of the portfolio from
December 31, 2009 to December 31, 2013. Mortgage finance loans relate to our mortgage warehouse
lending operations where we invest in mortgage loan ownership interests 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 loans, as well as overall market interest rates.
We originate the substantial majority of our loans. We also participate in syndicated loan relationships, both
as a participant and as an agent. As of December 31, 2013, we have $1.4 billion in syndicated loans, $399.8
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,
2013, none of our syndicated loans were on non-accrual.
35
The following summarizes our loans on a gross basis by major category as of the dates indicated (in
thousands):
Commercial
Mortgage finance
Construction
Real estate
Consumer
Equipment leases
2013
2012
$ 5,020,565
2,784,265
1,262,905
2,146,228
15,350
93,160
$ 4,106,419
3,175,272
737,637
1,892,451
19,493
69,470
December 31
2011
$3,275,150
2,080,081
422,026
1,819,251
24,822
61,792
2010
2009
$2,592,924
1,194,209
270,008
1,759,758
21,470
95,607
$2,457,533
693,504
669,426
1,233,701
25,065
99,129
Total
$11,322,473
$10,000,742
$7,683,122
$5,933,976
$5,178,358
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, 2013, funded commercial loans and leases totaled approximately $5.0 billion, approximately
44% of our total funded loans.
Mortgage Finance Loans. Our mortgage finance loans consist of ownership interests 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 purchase legal
ownership interests in individual
loans are underwritten consistent with
established programs for permanent financing with financially sound investors. Substantially all loans are
conforming loans or loans eligible for sale to federal agencies or government sponsored entities. However,
for accounting purposes, these loans are deemed to be loans to the originator and, as such, are classified as
loans held for investment. At December 31, 2013, mortgage finance loans totaled approximately $2.8
billion, approximately 25% of our total funded loans. Mortgage finance loans as of December 31, 2013 are
net of $33.1 million of participations sold.
loans they originate. All
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, non-performing status, reserve allocation and actual credit loss and foreclosure.
These loans typically have floating rates and commitment fees. At December 31, 2013, funded construction
real estate loans totaled approximately $1.3 billion, approximately 11% of our total funded loans.
Real Estate Loans. Approximately 24% 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
36
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, 2013, real estate term loans totaled approximately $2.1
billion, or 19% 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, 2013, our commitments under letters of
credit totaled approximately $145.0 million.
Portfolio Geographic and Industry Concentrations
We continue to lend primarily in Texas. As of December 31, 2013, a substantial majority of the principal
amount of the loans held for investment, excluding mortgage finance, 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, 2013. The risks created by these concentrations 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.
(in thousands except percentage data)
Amount
Percent of
Total Loans
Services
Mortgage finance loans
Contracting—construction and real estate development
Investors and investment management companies
Petrochemical and mining
Manufacturing
Personal/household
Wholesale
Retail
Contracting—trades
Government
Agriculture
Total
$ 4,077,881
2,784,265
1,173,233
1,164,685
995,263
389,857
207,337
201,220
207,607
79,326
28,421
13,378
$11,322,473
36.0%
24.6%
10.4%
10.3%
8.8%
3.4%
1.8%
1.8%
1.8%
0.7%
0.3%
0.1%
100.0%
Excluding our mortgage finance business, 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. 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. Personal/
household loans include loans to certain successful professionals and entrepreneurs for commercial
purposes, in addition to consumer loans.
37
We make loans that are appropriately collateralized under our credit standards. Approximately 98% 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, 2013 (in thousands except percentage data):
Collateral type:
Business assets
Real property
Mortgage finance loans
Energy
Unsecured
Other assets
Highly liquid assets
Rolling stock
U. S. Government guaranty
Total
Amount
Percent of
Total Loans
$ 3,472,108
3,409,133
2,784,265
854,046
261,621
264,686
184,139
50,754
41,721
30.7%
30.1%
24.7%
7.5%
2.3%
2.3%
1.6%
0.4%
0.4%
$11,322,473
100.0%
As noted in the table above, 30% 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, 2013 (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
23.1%
3.9%
10.4%
8.7%
15.2%
9.0%
4.1%
9.5%
8.5%
2.8%
4.8%
Amount
$ 787,244
133,259
353,734
298,090
517,549
306,491
140,317
323,306
289,795
95,207
164,141
Total real estate loans
$3,409,133
100.0%
38
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
$1,018,719
753,156
347,286
274,873
251,014
214,942
35.7%
26.3%
12.1%
9.6%
8.8%
7.5%
Total market risk real estate loans
$2,859,990
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
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 periods of
economic uncertainty where real estate values can fluctuate rapidly as in recent years, 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
form an opinion as to the
challenge whether or not the data used is appropriate and relevant,
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 may be conducted by our credit officers, as well as by the Bank’s
managed asset committee as conditions warrant. 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 can be difficult during and following periods of economic
weakness with the lack of comparable sales which is partially a result of the lack of available financing
which can lead to overall depressed real estate values.
Large Credit Relationships
The primary market areas we serve include the five major metropolitan markets of Texas, including Austin,
Dallas, Fort Worth, Houston and San Antonio. As a result, we originate and maintain large credit
relationships with numerous customers in the ordinary course of business. The legal limit of our bank is
39
approximately $199 million and our house limit is generally $25 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):
2013
2012
Period-End Balances
Period-End Balances
Number of
Relationships
Committed
Outstanding
Number of
Relationships
Committed
Outstanding
$20.0 million and
greater
$10.0 million to
$19.9 million
141
215
$3,694,305
$2,213,744
2,977,111
1,979,001
86
178
$2,123,328
$1,339,070
2,467,089
1,715,180
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):
$20.0 million and greater
$10.0 million to $19.9 million
2013 Average Balance
2012 Average Balance
Committed
Outstanding
Committed
Outstanding
$26,201
13,847
$15,700
9,205
$24,690
13,860
$15,571
9,636
Loan Maturity and Interest Rate Sensitivity on December 31, 2013
(in thousands)
Total
Within 1 Year
1-5 Years
After 5 Years
Remaining Maturities of Selected Loans
Loan maturity:
Commercial
Mortgage finance
Construction
Real estate
Consumer
Equipment leases
$ 5,020,565
2,784,265
1,262,905
2,146,228
15,350
93,160
$2,048,407
2,784,265
300,615
368,286
10,316
10,227
$2,762,786
—
910,004
1,153,417
4,319
82,440
$209,372
—
52,286
624,525
715
493
Total loans held for investment
$11,322,473
$5,522,116
$4,912,966
$887,391
Interest rate sensitivity for selected
loans with:
Predetermined interest rates
Floating or adjustable interest rates
$ 1,426,574
9,895,899
$ 886,367
4,635,749
$ 407,544
4,505,422
$132,663
754,728
Total loans held for investment
$11,322,473
$5,522,116
$4,912,966
$887,391
Interest Reserve Loans
As of December 31, 2013, we had $407.9 million in loans with interest reserves, which represents
approximately 32% 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 condition precedents are met to draw loan funds to pay interest charges on the outstanding
40
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 the borrower has received lease or purchase
commitments which will meet cash flow coverage requirements, and/or our analysis of market conditions and
project feasibility indicate to management’s satisfaction that such lease or purchase commitments are
forthcoming and/or other sources of repayment have been identified to repay the loan. 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, 2013, none of our loans with interest reserves were on nonaccrual.
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)(4)
Commercial
Construction
Real estate
Consumer
Equipment 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
2012
2013
2011
$12,896
705
18,670
54
50
$15,373
17,217
23,066
57
120
$12,913
21,119
19,803
313
432
32,375
55,833
54,580
5,110
15,991
34,077
—
42
1,516
5,110
16,033
35,593
$37,485
$71,866
$90,173
$ 1,935
$ 9,325
$10,407
$ 3,674
$25,104
$ 5,467
(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 $2.5 million, $2.4
million and $5.9 million for the years ended December 31, 2013, 2012 and 2011, respectively.
(2) At December 31, 2013, 2012 and 2011, loans past due 90 days and still accruing includes premium
finance loans of $3.8 million, $2.8 million and $2.5 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.
41
(3) At December 31, 2013, there is no valuation allowance recorded against the OREO balance. At
December 31, 2012 and 2011, the OREO balance is net of $5.6 million and $10.7 million valuation
allowance, respectively.
(4) As of December 31, 2013, 2012 and 2011, non-accrual loans included $17.8 million, $19.6 million and
13.8 million, respectively, in loans that met the criteria for restructured.
Total nonperforming assets at December 31, 2013 decreased $34.4 million from December 31, 2012,
compared to a $18.3 million increase from December 31, 2011 to December 31, 2012. We experienced a
decrease in levels of nonperforming assets in 2013 and 2012 and an overall improvement in credit quality.
Despite the improvement in credit quality during 2013, our provision for credit losses increased as a result
of the significant growth in the loans held for investment, excluding mortgage finance loans. This growth
coupled with the improved credit quality resulted in a decrease in the reserve for loan losses as a percent of
loans excluding mortgage finance loans for 2013 as compared to 2012.
The table below summarizes the non-accrual loans as segregated by loan type and type of property securing
the credit as of December 31, 2013 (in thousands):
Non-accrual loans:
Commercial
Lines of credit secured by the following:
Oil and gas properties
Assets of the borrowers
Other
Total commercial
Real estate
Secured by:
Commercial property
Unimproved land and/or developed residential lots
Single family residences
Other
Total real estate
Construction
Secured by:
Other
Consumer
Equipment leases (commercial leases primarily secured by assets of the lessor)
Total non-accrual loans
$ 1,614
9,819
1,463
12,896
9,606
4,819
888
3,357
18,670
705
54
50
$32,375
Reserves on impaired loans were $3.2 million at December 31, 2013, compared to $3.9 million at
December 31, 2012 and $5.3 million at December 31, 2011. We recognized $2.4 million in interest income
on non-accrual loans during 2013 compared to $2.6 million in 2012 and $2.2 million in 2011. Additional
interest income that would have been recorded if the loans had been current during the years ended
December 31, 2013, 2012 and 2011 totaled $2.5 million, $2.4 million and $5.9 million, respectively. Average
impaired loans outstanding during the years ended December 31, 2013, 2012 and 2011 totaled $40.0
million, $66.4 million and $71.0 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
42
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, 2013, none 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, 2013, we had $9.3 million in loans past due 90 days and still accruing interest. Of this
total, $3.8 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.
Restructured loans are loans on which, due to the borrower’s financial difficulties, we have granted a
concession that we would not otherwise consider for borrowers of similar credit. This may include a transfer
of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two.
Modifications of terms that could potentially qualify as a restructuring include reduction of contractual
interest rate, extension of the maturity date at a contractual interest rate lower than the current rate for new
debt with similar risk, or a reduction of the face amount of debt, either forgiveness of principal or accrued
interest. As of December 31, 2013 we have $1.9 million in loans considered restructured that are not on
nonaccrual. These loans do not have unfunded commitments at December 31, 2013. Of the nonaccrual
loans at December 31, 2013, $17.8 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, 2013 and 2012, we had $47.9 million and $10.9 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
2012
2011
2013
Beginning balance
Additions
Sales
Valuation allowance for OREO
Direct write-downs
Ending balance
$ 15,991
1,331
(11,292)
958
(1,878)
$ 34,077
3,434
(14,637)
(4,488)
(2,395)
$ 42,261
22,180
(23,566)
(3,922)
(2,876)
$ 5,110
$ 15,991
$ 34,077
43
The following table summarizes the assets held in OREO at December 31, 2013 (in thousands):
OREO:
Commercial buildings
Undeveloped land and residential lots
Other
Total OREO
1,170
3,223
717
$5,110
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 the property is retained, reductions in appraised
values will result in valuation adjustments taken as non-interest expense. In addition, if the decline in
value is believed to be permanent and not just driven by market conditions, a direct write-down to the
OREO balance may be taken. We generally pursue sales of OREO when conditions warrant, but we may
choose to hold certain properties for a longer term, which can result in additional exposure related to the
appraised values during that holding period. During the year ended December 31, 2013, we recorded
$920,000 in valuation expense. Of the $920,000, $1.9 million related to direct write-downs, offset by a
reduction in the valuation allowance of $958,000.
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 $19.0 million for the
year ended December 31, 2013, $11.5 million for the year ended December 31, 2012, and $28.5 million for
the year ended December 31, 2011. In 2013 and 2012 we experienced improvements in credit quality,
which resulted in decreases in the levels of reserves and provision as compared to 2009 through 2011. The
increase in provision recorded during 2013 is directly related to the significant growth in loans excluding
mortgage finance loans. We experienced improvements in all credit quality ratios during 2013, 2012 and
2011.
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
44
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. 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 $92.3
million at December 31, 2013, $78.2 million at December 31, 2012 and $72.8 million at December 31, 2011.
The total reserve percentage decreased to 1.09% at year-end 2013 from 1.15% and 1.31% of loans excluding
mortgage finance loans at December 31, 2012 and 2011, respectively. The combined reserve has trended
down during 2011, 2012 and 2013 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, 2013, 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.
45
The table below presents a summary of our loan loss experience for the past five years (in thousands except
percentage and multiple data):
Reserve for loan losses:
Beginning balance
Loans charged-off:
Commercial
Construction
Real estate
Consumer
Equipment leases
Total charge-offs
Recoveries:
Commercial
Construction
Real estate
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
Reserve for loan losses to loans excluding
mortgage finance loans(5)
Net charge-offs to average loans
Net charge-offs to average loans excluding
mortgage finance loans(5)
Total provision for credit losses to average
loans
Total provision for credit losses to average
loans excluding mortgage finance
loans(5)
Recoveries to total 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
Combined reserves for credit losses to loans
excluding mortgage finance loans(5)
Non-performing assets:
Non-accrual loans(1)(4)
OREO(3)
Other repossessed assets
Total
Restructured loans
Loans past due 90 days and still accruing(2)
Reserve as a percent of non-performing
loans
2013
2012
2011
2010
2009
Year Ended December 31
$74,337
$70,295
$71,510
$ 67,931
$ 45,365
6,575
—
144
45
2
6,766
1,203
—
270
73
322
1,868
4,898
18,165
$87,604
6,708
—
899
49
204
7,860
832
10
812
33
108
1,795
6,065
10,107
$74,337
8,518
—
21,275
317
1,218
31,328
1,188
248
350
9
383
2,178
29,150
27,935
$70,295
27,723
12,438
9,517
216
1,555
51,449
176
1
138
4
158
477
50,972
54,551
$ 71,510
4,000
6,508
4,696
502
4,022
19,728
124
13
53
28
54
272
19,456
42,022
$ 67,931
$ 3,855
$ 2,462
$ 1,897
$
2,948
$
1,470
835
1,393
565
(1,051)
1,478
$ 4,690
$ 3,855
$ 2,462
$
1,897
$
2,948
$92,294
$19,000
$78,192
$11,500
$72,757
$28,500
$ 73,407
$ 53,500
$ 70,879
$ 43,500
0.78%
0.75%
0.92%
1.03%
0.05%
1.10%
0.07%
1.26%
0.47%
0.07%
0.10%
0.58%
0.19%
0.14%
0.45%
0.25%
27.61%
0.19%
22.84%
0.56%
6.95%
0.12%
0.14%
0.14%
0.82%
0.78%
0.95%
1.09%
1.15%
1.31%
1.21%
1.52%
0.95%
1.14%
1.00%
1.20%
0.93%
0.14%
1.24%
1.56%
1.32%
1.52%
0.41%
0.46%
0.91%
1.04%
1.38%
0.24%
1.38%
1.59%
$32,375
5,110
—
$37,485
$ 1,935
$ 9,325
$55,833
15,991
42
$71,866
$10,407
$ 3,674
$54,580
34,077
1,516
$90,173
$25,104
$ 5,467
$112,090
42,261
451
$154,802
$
$
4,319
6,706
$ 95,625
27,264
162
$123,051
$
$
—
6,081
2.7x
1.3x
1.3x
.6x
.7x
46
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 $2.5 million, $2.4
million and $5.9 million for the years ended December 31, 2013, 2012 and 2011, respectively.
2) At December 31, 2013, 2012 and 2011, loans past due 90 days and still accruing includes premium
finance loans of $3.8 million, $2.8 million and $2.5 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, 2013, we did not have a valuation allowance recorded against the OREO balance. At
December 31, 2012 and 2011, OREO balance is net of $5.6 million and $10.7 million valuation
allowance, respectively.
4) As of December 31, 2013, 2012 and 2011, non-accrual loans included $17.8 million, $19.6 million and
$13.8 million, respectively, in loans that met the criteria for restructured.
5) Mortgage finance loans were previously classified as loans held for sale but have been reclassified as
loans held for investment as described in Note 1 – Operations and Summary of Significant Accounting
Policies. The indicated ratios are presented excluding the mortgage finance loans because the risk
profile of our mortgage finance loans is different than our other loans held for investment. No
provision is allocated to these loans based on the internal risk grade assigned.
Loan Loss Reserve Allocation
(in thousands except
percentage data)
Loan category:
Commercial
Mortgage finance
loans(1)
Construction
Real estate
Consumer
Equipment leases
Unallocated
2013
2012
December 31
2011
2010
2009
Reserve
% of
Loans Reserve
% of
Loans Reserve
% of
Loans Reserve
% of
Loans Reserve
% of
Loans
$39,868
44% $21,547
41%
$17,337
43% $15,918
43%
$33,269
—
14,553
24,210
149
3,105
5,719
25%
11%
19%
—
1%
—
—
12,097
30,893
226
2,460
7,114
32%
7%
19%
—
1%
—
—
7,845
33,721
223
2,356
8,813
27%
5%
24%
—
1%
—
—
7,336
38,049
306
5,405
4,496
20%
5%
30%
—
2%
—
—
10,974
14,874
1,258
2,960
4,596
48%
13%
13%
24%
—
2%
—
Total
$87,604
100% $74,337
100%
$70,295
100% $71,510
100%
$67,931
100%
1) No provision is allocated to these loans based on the internal risk grade assigned.
As our credit quality has improved during 2013, increases in the reserve allocated to loan categories are due
primarily to the significant growth in the overall loan 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 decreased since
December 31, 2012. We believe the level of unallocated reserves at December 31, 2013 continues to be
warranted due to the continued uncertain 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.
Securities Portfolio
Securities are identified as either held-to-maturity or available-for-sale based upon various factors,
liquidity and profitability objectives, and regulatory
including asset/liability management strategies,
47
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, 2013, we maintained an average securities portfolio of $77.2 million
compared to an average portfolio of $117.4 million for the same period in 2012 and $157.1 million for the
same period in 2011. At December 31, 2013 and 2012, 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 2013 and 2012.
Our net unrealized gain on the securities portfolio value decreased due to the reduction in balances held
from a net gain of $5.0 million, which represented 5.29% of the amortized cost, at December 31, 2012, to a
net gain of $2.5 million, which represented 4.13% of the amortized cost, at December 31, 2013. During
2012, the unrealized gain on the securities portfolio value decreased, also as a result of the reduced balances
held, from a net gain of $7.3 million, which represented 5.32% of the amortized cost, at December 31, 2011,
to a net gain of $5.0 million, which represented 5.29% of the amortized cost, at December 31, 2012.
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 1.4 years at December 31, 2013 and 1.6
years at December 31, 2012. 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, 2013,
2012 and 2011 (in thousands):
2013
At December 31
2012
2011
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$38,786
—
14,401
7,522
—
$41,462
—
14,505
7,247
—
$57,342
5,000
25,300
7,519
—
$ 61,581
5,080
25,894
7,640
—
$ 84,363
5,000
29,577
7,506
10,000
$ 90,083
5,225
30,742
7,660
10,000
$60,709
$63,214
$95,161
$100,195
$136,446
$143,710
Available-for-sale:
Mortgage-backed
securities
Corporate securities
Municipals
Equity securities(1)
Other
Total available-for-sale
securities
(1) Equity securities consist of Community Reinvestment Act funds.
48
The amortized cost and estimated fair value of securities are presented below by contractual maturity (in
thousands except percentage data):
Available-for-sale:
Mortgage-backed securities:(1)
Amortized cost
Estimated fair value
Weighted average yield(3)
Municipals:(2)
Amortized cost
Estimated fair value
Weighted average yield(3)
Equity securities:(4)
Amortized cost
Estimated fair value
Total available-for-sale securities:
Amortized cost
Estimated fair value
Available-for-sale:
Mortgage-backed securities:(1)
Amortized cost
Estimated fair value
Weighted average yield(3)
Corporate securities:
Amortized cost
Estimated fair value
Weighted average yield(3)
Municipals:(2)
Amortized cost
Estimated fair value
Weighted average yield(3)
Equity securities:(4)
Amortized cost
Estimated fair value
Total available-for-sale securities:
Amortized cost
Estimated fair value
At December 31, 2013
Less Than
One Year
After One
Through Five
Years
After Five
Through Ten
Years
After Ten
Years
Total
$ 238
252
4.32%
$14,720
15,641
4.78%
$7,718
8,456
5.56%
$16,110
17,113
$38,786
41,462
2.40%
3.94%
7,749
7,818
5.76%
7,522
7,247
6,652
6,687
5.71%
—
—
—
—
0.00%
—
—
— 14,401
— 14,505
—
5.73%
—
—
7,522
7,247
$60,709
$63,214
At December 31, 2012
Less Than
One Year
After One
Through Five
Years
After Five
Through Ten
Years
After Ten
Years
Total
$ 656
690
4.20%
$ 5,698
6,113
5.29%
$23,111
24,948
$27,877 $ 57,342
61,581
29,830
4.86%
3.41%
4.19%
—
—
—
6,575
6,646
5.75%
7,519
7,640
5,000
5,080
7.38%
16,448
16,895
5.66%
—
—
—
2,277
2,353
6.01%
—
—
—
5,000
5,080
7.38%
— 25,300
— 25,894
—
5.72%
—
—
—
—
—
—
7,519
7,640
$ 95,161
$100,195
(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 1.4 years at December 31, 2013 and 1.6 years at December 31,
2012.
(2) Yields have been adjusted to a tax equivalent basis assuming a 35% federal tax rate.
49
(3) Yields are calculated based on amortized cost.
(4) These equity securities do not have a stated maturity.
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.
The following table discloses, as of December 31, 2013, 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
Equity securities
$7,247
$(275)
$—
$—
$7,247
$(275)
At December 31, 2013, there was one investment position in an unrealized loss position. This security is a
publicly traded equity fund and is subject to market pricing volatility. We do not believe that these
unrealized losses are “other than temporary”. We have evaluated the near-term prospects of the investment
in relation to the severity and duration of the impairment and based on that evaluation have the ability and
intent to hold the investment until recovery of fair value. We have not identified any issues related to the
ultimate repayment of principal as a result of credit concerns on this security.
At December 31, 2012, we did not have any investment securities in an unrealized loss position.
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 thirteen 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, 2013 increased $1.9 billion compared to the same period
of 2012. Average demand deposits, interest bearing transaction deposits and savings deposits increased by
$982.9 million, $156.4 million and $991.5 million, respectively, while time deposits (including deposits in
foreign branches) decreased $199.9 million during the year ended December 31, 2013 as compared to the
same period of 2012. The average cost of deposits decreased in 2013 mainly due to our focused effort to
reduce rates paid on deposits and the significant increase in non-interest bearing deposits during 2013.
Average deposits for the year ended December 31, 2012 increased $1.1 billion compared to the same period
of 2011. Average demand deposits, interest bearing transaction deposits and savings deposits increased by
$469.2 million, $360.9 million and $363.1 million, respectively, while time deposits (including deposits in
foreign branches) decreased $110.7 million during the year ended December 31, 2012 as compared to the
same period of 2011. The average cost of deposits decreased in 2012 mainly due to our focused effort to
reduce rates paid on deposits.
50
The following table discloses our average deposits for the years ended December 31, 2013, 2012 and 2011
(in thousands):
Non-interest bearing
Interest bearing transaction
Savings
Time deposits
Deposits in foreign branches
Total average deposits
Average Balances
2013
2012
2011
$2,967,063
908,415
3,756,560
397,329
345,506
$1,984,171
752,040
2,765,089
530,816
411,891
$1,515,021
391,100
2,401,997
562,654
490,703
$8,374,873
$6,444,007
$5,361,475
As with our loan portfolio, most of our deposits are from businesses and individuals in Texas. As of
December 31, 2013, approximately 82% of our deposits originated out of our Dallas metropolitan banking
centers. Uninsured deposits at December 31, 2013 were 67% of total deposits, compared to 50% of total
deposits at December 31, 2012 and 43% of total deposits at December 31, 2011. The presentation for 2013,
2012 and 2011 does reflect combined ownership, but does not reflect all of the account styling that would
determine insurance based on FDIC regulations.
At December 31, 2013, we had $328.4 million in interest bearing time deposits of $100,000 or more in
foreign branches related to our Cayman Islands branch. 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.
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
2013
December 31
2012
2011
$130,180
82,435
89,910
21,426
$147,840
77,770
96,219
70,909
$302,319
95,474
118,649
34,887
$323,951
$392,738
$551,329
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 demonstrated 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, 2013 and 2012,
our principal source of funding has been our customer deposits, supplemented by our short-term and long-
term borrowings, primarily from Federal Funds purchased and Federal Home Loan Bank (“FHLB”)
borrowings.
Our liquidity needs for support of growth in loans have been fulfilled through growth in our core customer
deposits. Our goal is to obtain as much of our funding for loans and other earning assets as possible from
51
deposits of these core customers. These deposits are generated principally through development of long-
term relationships with customers and stockholders, with a significant focus on treasury management
products. In addition to deposits from our core customers, we also have access to deposits through brokered
customer relationships. For regulatory purposes, these relationship brokered deposits are now categorized
as brokered deposits in our Call Reports; however, since these deposits arise from a customer relationship,
we consider these deposits to be core deposits for financial reporting purposes. We also have access to
incremental deposits through brokered retail certificates of deposit, or CDs. These traditional brokered
deposits are generally of short maturities, 30 to 90 days, and are used to support temporary differences in
the growth in loans, including growth in specific categories of loans, compared to customer deposits. The
following table summarizes our core customer deposits and brokered deposits (in millions):
Deposits from core customers
Deposits from core customers as a percent of total deposits
Relationship brokered deposits
Relationship brokered deposits as a percent of average total deposits
Traditional brokered deposits
Traditional 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 relationship brokered deposits
Average relationship brokered deposits as a percent of average total deposits
Average traditional brokered deposits
Average traditional brokered deposits as a percent of average total deposits
December 31
2013
2012
$7,840.1
$6,448.8
84.7%
86.7%
$1,417.3
$ 992.0
$
15.3%
— $
0.0%
13.3%
—
0.0%
$7,040.4
$5,483.3
84.1%
85.1%
$1,334.5
$ 852.7
$
15.9%
13.2%
— $ 108.0
0.0%
1.7%
We have access to sources of brokered deposits of not less than an additional $3.5 billion. Customer
deposits (total deposits, including relationship brokered deposits, minus brokered CDs) at December 31,
2013 increased $1.8 billion from December 31, 2012.
Additionally, we have borrowing sources available to supplement deposits and meet our funding needs.
Such borrowings are generally used to fund our mortgage finance loans, 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):
2013
2011
2011
Maximum
Outstanding
at Any
Maximum
Outstanding
at Any
Month End Balance Rate(3)
$ 273,179 0.26%
23,936 0.04%
1,650,046 0.09%
Month End Balance Rate(3)
$ 412,249 0.27%
23,801 0.06%
1,200,066 0.14%
Maximum
Outstanding
at Any
Month End
— —
— —
111,000 6.50%
— —
132,000 0.75%
— —
Balance Rate(3)
$ 148,650 0.22%
21,954 0.31%
840,026 0.12%
15,000 2.65%
— —
111,000 6.50%
113,406 2.17%
113,406 2.24%
113,406 2.48%
$1,250,036
$1,859,036 $2,171,567
$2,432,945 $1,881,522
$1,986,324
Federal funds purchased(4)
Customer repurchase agreements(1)
FHLB borrowings (2)
Line of credit
Fed borrowings
Subordinated notes
Trust preferred subordinated
debentures
Total borrowings
(1) Securities pledged for customer repurchase agreements were $37.7 million, $23.9 million and $28.3
million at December 31, 2013, 2012 and 2011, respectively.
52
(2) FHLB borrowings are collateralized by a blanket floating lien on certain real estate secured loans and
also certain pledged securities. The weighted-average interest rate for the years ended December 31,
2013, 2012 and 2011 was 0.14%, 0.16% and 0.11%, respectively. The average balance of FHLB
borrowings for the years ended December 31, 2013, 2012 and 2011 was $370.0 million, $1.2 billion and
$462.5 million, respectively.
Interest rate as of period end.
(3)
(4) The weighted-average interest rate on federal funds purchased for the years ended December 31,
2013, 2012 and 2011 was 0.27%, 0.28% and 0.25%, respectively. The average balance of federal funds
purchased for the years ended December 31, 2013, 2012 and 2011 was $254.3 million, $350.8 million
and $238.5 million, 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
2013
2012
2011
$693,302
8,482
$267,542
33,204
$
4,524
15,909
$701,784
$300,746
$ 20,433
Unused federal funds lines available from commercial banks
$890,000
$706,000
$390,720
From time to time, we borrow funds on an overnight basis from the Federal Reserve. During 2013, we did
so on one such occasion when mortgage finance loan balances surged at the end of a month before the
expansion of availability from the FHLB. At December 31, 2013, no borrowings from the Fed were
outstanding. Fed borrowings for the year ended December 31, 2013 averaged $55,000.
At December 31, 2012, we had an existing non-revolving amortizing line of credit with $35.0 million of
unused capacity. During 2013, we modified the line of credit to increase the capacity to $100.0 million that
matures on December 15, 2014. The loan proceeds may be used for general corporate purposes including
funding regulatory capital infusions into the Bank. The loan agreement contains customary financial
covenants and restrictions. As of December 31, 2013, $15.0 million in borrowings were outstanding.
From November 2002 to September 2006 various Texas Capital Statutory Trusts were created and
subsequently issued floating rate trust preferred securities in various private offerings totaling $113.4
million. As of December 31, 2013, the details of the trust preferred subordinated debentures are
summarized below (in thousands):
Texas Capital
Bancshares
Statutory
Trust I
Texas Capital
Bancshares
Statutory
Trust II
Texas Capital
Bancshares
Statutory
Trust III
Texas Capital
Bancshares
Statutory
Trust IV
Texas Capital
Bancshares
Statutory
Trust V
Date issued
Trust preferred securities issued
Floating or fixed rate
securities
Interest rate on subordinated
debentures
Maturity date
November 19, 2002
$10,310
Floating
April 10, 2003
$10,310
Floating
October 6, 2005
$25,774
Floating
April 28, 2006
$25,774
Floating
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
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 trust preferred subordinated debentures are
deductible for federal income tax purposes. As of December 31, 2013, the weighted average quarterly rate
on the trust preferred subordinated debentures was 2.21%, compared to 2.24% average for all of 2013, and
2.43% for all of 2012.
Because our bank had less than $15.0 billion in total consolidated assets as of December 31, 2009, we are
allowed to continue to classify our trust preferred securities, all of which were issued prior to May 19, 2010,
as Tier 1 capital.
53
Our equity capital averaged $1.0 billion for the year ended December 31, 2013 as compared to $713.2
million in 2012 and $568.1 million in 2011. 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 August 1, 2012 we completed a sale of 2.3 million shares of our common stock in a public offering. Net
proceeds from the sale totaled $87.0 million. The additional equity was used for general corporate purposes
and additional capital to support continued loan growth at our bank.
On September 21, 2012, we issued $111.0 million of subordinated notes in a public offering. Net proceeds
from the transaction were $108.4 million. The notes mature in September 2042 and bear interest at a rate of
6.50% per annum, payable quarterly. The proceeds were used for general corporate purposes including
funding regulatory capital infusions into the Bank. The indenture contains customary financial covenants
and restrictions.
On March 28, 2013, we completed a sale of 6.0 million shares of our 6.50% Non-Cumulative Preferred
Stock in a public offering. Net proceeds from the sale totaled $145.0 million. The proceeds were used for
general corporate purposes, including funding regulatory capital infusions into the Bank.
On January 29, 2014, we completed a sale of 1.7 million shares of our common stock in a public offering.
Net proceeds from the sale totaled $96.6 million. On January 31, 2014, the Bank issued $175.0 million of
subordinated notes in an offering to institutional investors exempt from registration under Section 3(a)(2) of
the Securities Act of 1933 and 12 C.F.R. Part 16. Net proceeds from the transaction were $172.1 million.
The notes mature in January 2026 and bear interest at a rate of 5.25% per annum, payable semi-annually.
The notes are unsecured and are subordinate to the Bank’s obligations to its deposits, its obligations under
banker’s acceptances and letters of credit, certain obligations to Federal Reserve Banks and the FDIC and
the Bank’s obligations to its other creditors, except any obligations which expressly rank on a parity with or
junior to the notes. The notes are expected to qualify as Tier 2 capital for regulatory capital purposes,
subject to applicable limitations. The net proceeds of both offerings were available to the Company for
general corporate purposes, including retirement of $15.0 million of short-term debt, and additional capital
to support continued loan growth.
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 1 capital (as
defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2013, 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 1 risk-based and Tier 1 leverage ratios as set forth in the tables below. As shown in the
table below, the Company’s capital ratios exceed the regulatory definition of adequately capitalized as of
December 31, 2013 and 2012. Based upon the information in its most recently filed call report, the Bank
meets the capital ratios necessary to be well capitalized. The regulatory authorities can apply changes in
classification of assets and such change may retroactively subject the Company to change in capital ratios.
Any such change could result in reducing one or more capital ratios below well-capitalized status. In
addition, a change may result in imposition of additional assessments by the FDIC or could result in
regulatory actions that could have a material effect on condition and results of operations.
In response to supplemental FFIEC Call Report instructions issued in early April 2013, we began using a
100% risk weight for the mortgage finance loans with our March 31, 2013 Call Report and Form 10-Q. In
previous filings, we applied a 50% risk weight (or 20% risk weight for government-guaranteed loans) to
these assets for purposes of calculating the Bank’s risk-based capital ratios. Having now determined that
the 100% risk weight must be applied under our current program we were required to amend our year-end
Call Reports as of December 31, 2012 and 2011. This change required application of the 100% risk weight
to our mortgage finance loans in these earlier periods, which is consistent with our 2013 Call Reports. The
amendment of Call Reports had no impact on our consolidated balance sheets or statements of operations,
stockholders’ equity and cash flows.
54
This retroactive change in risk weighting of our mortgage finance loans required that we amend the
previously reported values for our risk-weighted capital ratios for December 31, 2012 and 2011. See below
for amended December 31, 2012 risk-weighted capital ratios. These amended ratios exceed levels required
to be “adequately capitalized” on a consolidated basis and at the Bank. As amended, the Bank was “well
capitalized” in the Tier 1 measure of capital adequacy, but the total risk-based capital ratio was below that
required to be considered “well capitalized”. The adjustment had no impact on the ratio of tangible
common equity to total assets. We believe that we had the financial and operational capacity to maintain
well-capitalized status had we determined that the higher risk weighting was required to be applied to our
ownership interests in mortgage loans at year-end 2012 and 2011.
Incidental to the amended Call Reports described above, we were assessed $3.0 million by the FDIC that
was paid during the third quarter of 2013.
Our actual and minimum required capital amounts and actual ratios are as follows (in thousands, except
percentage data):
Total capital (to risk-weighted assets):
Company
Actual
Minimum required
Excess above minimum
Bank
Actual
To be well-capitalized
Minimum required
Excess above (amount below) 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
55
Regulatory Capital Adequacy
December 31, 2013
December 31, 2012
Amount
Ratio
Amount
Ratio
$1,387,312
1,034,721
352,591
10.73% $1,112,924
893,231
219,693
8.00%
2.73%
$1,328,227
1,293,007
1,034,406
35,222
293,822
10.27% $ 948,328
10.00% 1,116,008
8.00%
892,806
0.27% (167,679)
55,522
2.27%
$1,184,018
517,361
666,657
$ 975,933
775,804
517,203
200,127
458,729
9.15% $ 923,677
446,616
4.00%
477,062
5.15%
7.55% $ 800,081
669,605
6.00%
446,403
4.00%
130,477
1.55%
353,678
3.55%
$1,184,018
435,750
748,267
10.87% $ 923,677
392,649
4.00%
531,029
6.87%
$ 975,933
544,502
435,601
431,431
540,330
8.96% $ 800,081
490,541
5.00%
392,433
4.00%
309,540
3.96%
407,649
4.96%
9.97%
8.00%
1.97%
8.50%
10.00%
8.00%
-1.50%
0.50%
8.27%
4.00%
4.27%
7.17%
6.00%
4.00%
1.17%
3.17%
9.41%
4.00%
5.41%
8.16%
5.00%
4.00%
3.16%
4.16%
In July 2013, the Federal Reserve published final rules for the adoption of the Basel III regulatory capital
framework (the “Basel III Capital Rules”). The Basel III Capital Rules, among other things, (i) introduce a
new capital measure called “Common Equity Tier 1,” (ii) specify that Tier 1 capital consist of Common
Equity Tier 1 and “Additional Tier 1 Capital” instruments meeting specified requirements, (iii) define
Common Equity Tier 1 narrowly by requiring that most deductions/adjustments to regulatory capital
measures be made to Common Equity Tier 1 and not to the other components of capital and (iv) expand
the scope of the deductions/adjustments as compared to existing regulations. The Basel III Capital Rules
will be effective for us on January 1, 2015 with certain transition provisions fully phased in on January 1
2019. Based on our initial assessment of the Basel III Capital Rules, we do not believe they will have a
material impact, and we believe we would meet the capital adequacy requirements under the Basel III
Capital Rules on a fully phased-in basis if such requirements were currently in effect.
Commitments and Contractual Obligations
The following table presents, as of December 31, 2013, 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)
Line of credit(1)
Operating lease
obligations(1)(2)
Subordinated notes(1)
Trust preferred
subordinated
debentures(1)
Total contractual
obligations(1)
7
7
8
8
8
8
16
8
8,
9
(1) Excludes interest.
(2) Non-balance sheet item.
Off-Balance Sheet Arrangements
$ 8,554,433
673,961
148,650
$ —
26,704
—
$ — $
2,208
—
— $ 8,554,433
702,946
73
148,650
—
21,954
840,000
15,000
—
46
—
—
—
—
—
—
—
13,483
—
28,221
—
27,998
62,335
— 111,000
21,954
840,046
15,000
132,037
111,000
—
—
— 113,406
113,406
$10,267,481
$54,971
$30,206
$286,814
$10,639,472
The contractual amount of our financial instruments with off-balance sheet risk expiring by period at
December 31, 2013 is presented below (in thousands):
Commitments to extend credit
Standby and commercial letters of credit
Total financial instruments with off-balance
After One But
Within Three
Years
Within
One Year
$1,075,303 $1,865,971
27,106
114,408
After Three
But Within
Five Years
$693,399
3,523
Total
After Five
Years
$39,718 $3,674,391
145,662
625
sheet risk
$1,189,711 $1,893,077
$696,922
$40,343 $3,820,053
56
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
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 a critical accounting policy.
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 the 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
(“BSMC”), 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.
57
Interest Rate Risk Management
Our interest rate sensitivity is illustrated in the following table. The table reflects rate-sensitive positions as
of December 31, 2013, 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.
Interest Rate Sensitivity Gap Analysis
December 31, 2013
0-3 mo
Balance
4-12 mo
Balance
1-3 yr
Balance
3+ yr
Balance
Total
Balance
$
16,130
9,840,315
728,593
10,568,908
$
18,311
5,626
326,722
332,348
$
19,920
506
222,848
223,354
$
8,853
6,448
191,415
$
63,214
9,852,895
1,469,578
197,863
11,322,473
$10,585,038
$ 350,659
$ 243,274
$ 206,716
$11,385,687
$ 5,537,173
144,958
$
— $
— $
198,696
26,704
— $ 5,537,173
372,639
2,281
5,682,131
198,696
26,704
2,281
5,909,812
(in thousands)
Assets:
Securities(1)
Total variable loans
Total fixed loans
Total loans(2)
Total interest sensitive
assets
Liabilities
Interest bearing
customer deposits
CDs & IRAs
Total interest bearing
deposits
Repo, Federal Funds
purchased, FHLB
borrowings
Subordinated notes
Trust preferred
subordinated
debentures
1,025,604
—
—
—
—
—
—
26
—
—
26
—
111,000
1,025,630
111,000
113,406
113,406
224,406
1,250,036
Total borrowings
1,025,604
Total interest sensitive
liabilities
$ 6,707,735
$ 198,696
$
26,730
$ 226,687
$ 7,159,848
GAP
Cumulative GAP
$ 3,877,303
3,877,303
$ 151,963
4,029,266
$ 216,544
4,245,809
$ (19,971)
4,225,839
$
—
4,225,839
Demand deposits
Stockholders’ equity
Total
58
$ 3,347,567
1,096,350
$ 4,443,917
(1) Securities based on fair market value.
(2) Loans are stated at gross.
The table above sets forth the balances as of December 31, 2013 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
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 continue to remain low, we could not assume interest rate
changes of any amount as the results of the decreasing rates scenario would not be meaningful. We will
continue to evaluate these scenarios as interest rates change, until short-term rates rise above 3.0%.
Our interest rate risk exposure model incorporates assumptions regarding the level of interest rate or
balance changes on indeterminable maturity deposits (demand deposits,
interest bearing transaction
accounts and savings accounts) for a given level of market rate changes. These assumptions have been
developed through a combination of historical analysis and future expected pricing behavior. Changes in
prepayment behavior of mortgage-backed securities, residential and commercial mortgage loans in each
rate environment are 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, 2013
200 bp Increase
December 31, 2012
Change in net interest income
$103,950
$56,242
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.
59
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets — December 31, 2013 and December 31, 2012
Consolidated Statements of Income and Other Comprehensive Income — Years ended
December 31, 2013, 2012 and 2011
Consolidated Statements of Stockholders’ Equity — December 31, 2013, 2012 and 2011
Consolidated Statements of Cash Flows — December 31, 2013, 2012 and 2011
Notes to Consolidated Financial Statements
Page
Reference
61
62
63
64
65
66
60
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of Texas Capital Bancshares, Inc. as of
December 31, 2013 and 2012, and the related consolidated statements of comprehensive income,
stockholders’ equity, and cash flows for each of the three years in the period ended December 31,
2013. 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, 2013 and 2012, and the
consolidated results of their operations and their cash flows for each of the three years in the period ended
December 31, 2013, 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, 2013, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report
dated February 20, 2014 expressed an unqualified opinion thereon.
Dallas, Texas
February 20, 2014
61
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 from discontinued operations
Loans held for investment, mortgage finance
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 and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing
Interest bearing
Interest bearing in foreign branches
Total deposits
Accrued interest payable
Other liabilities
Federal funds purchased
Repurchase agreements
Other borrowings
Subordinated notes
Trust preferred subordinated debentures
Total liabilities
Stockholders’ equity:
Preferred stock, $.01 par value, $1,000 liquidation value:
Authorized shares—10,000,000
Issued shares—6,000,000 shares issued at December 31, 2013
Common stock, $.01 par value:
Authorized shares—100,000,000
Issued shares—41,036,787 and 40,727,996 at December 31, 2013 and 2012,
respectively
Additional paid-in capital
Retained earnings
Treasury stock (shares at cost: 417 at December 31, 2013 and 2012)
Accumulated other comprehensive income, net of taxes
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2013
December 31,
2012
$
92,484
61,337
90
63,214
294
2,784,265
8,486,309
87,604
11,182,970
11,482
281,534
21,286
$
111,938
94,410
—
100,195
302
3,175,272
6,785,535
74,337
9,886,470
11,445
316,201
19,883
$11,714,691
$10,540,844
$ 3,347,567
5,579,505
330,307
$ 2,535,375
4,576,120
329,309
9,257,379
749
110,177
148,650
21,954
855,026
111,000
113,406
7,440,804
650
91,581
273,179
23,936
1,650,046
111,000
113,406
10,618,341
9,704,602
150,000
—
410
448,208
496,112
(8)
1,628
1,096,350
407
450,116
382,455
(8)
3,272
836,242
$11,714,691
$10,540,844
See accompanying notes to consolidated financial statements.
62
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND OTHER
COMPREHENSIVE 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
Subordinated notes
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
Swap fees
Other
Total non-interest income
Non-interest expense
Salaries and employee benefits
Net occupancy expense
Marketing
Legal and professional
Communications and technology
FDIC insurance assessment
Allowance and other carrying costs for OREO
Litigation settlement expense
Other
Total non-interest expense
Income from continuing operations before income taxes
Income tax expense
Income from continuing operations
Income (loss) from discontinued operations (after-tax)
Net income
Preferred stock dividends
Net income available to common shareholders
Other comprehensive income
Change in unrealized gain on available-for-sale securities arising during period, before tax
Income tax benefit related to unrealized loss on available-for-sale securities
Other comprehensive loss net of tax
Comprehensive income
Basic earnings per common share
Income from continuing operations
Net income
Diluted earnings per common share
Income from continuing operations
Net income
Year ended December 31
2011
2012
2013
$441,314 $393,548 $314,753
6,458
37
352
4,688
13
208
3,015
65
231
444,625
398,457
321,600
14,030
686
18
515
7,327
2,536
25,112
13,644
979
13
2,149
2,037
2,756
21,578
14,950
602
10
528
—
2,573
18,663
419,513
19,000
376,879
11,500
302,937
28,500
400,513
365,379
274,437
6,783
5,023
1,917
16,980
5,520
7,801
44,024
157,752
16,821
16,203
18,104
13,762
8,057
1,788
(908)
25,155
6,605
4,822
2,168
17,596
4,909
6,940
43,040
121,456
14,852
13,449
17,557
11,158
5,568
9,075
4,000
22,729
6,480
4,219
2,095
11,335
1,935
6,168
32,232
100,535
13,657
11,109
14,996
9,608
7,543
9,586
—
21,167
256,734
219,844
188,201
187,803
66,757
121,046
5
121,051
7,394
188,575
67,866
120,709
(37)
120,672
—
118,468
42,366
76,102
(126)
75,976
—
$113,657 $120,672 $ 75,976
$ (2,529) $ (2,231) $
(885)
(781)
(1,644)
(1,450)
(974)
(341)
(633)
$119,407 $119,222 $ 75,343
$
$
$
$
2.78 $
2.78 $
3.09 $
3.09 $
2.72 $
2.72 $
3.01 $
3.00 $
2.04
2.03
1.99
1.98
See accompanying notes to consolidated financial statements.
63
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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 from continuing operations to net cash provided by
operating activities:
Provision for credit losses
Deferred tax expense
Depreciation and amortization
Amortization 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
Gain on sale of assets
Changes in operating assets and liabilities:
Accrued interest receivable and other assets
Accrued interest payable and other liabilities
Net cash provided by operating activities of continuing operations
Net cash provided by (used in) operating activities of discontinued operations
Net cash provided by 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
Originations of mortgage finance loans
Proceeds from pay-offs of mortgage finance loans
Net increase in loans held for investment, excluding mortgage finance loans
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 (costs) from issuance of stock related to stock-based awards and warrants
Net proceeds from issuance of common stock
Net proceeds from issuance of preferred stock
Preferred dividends paid
Net increase (decrease) in other borrowings
Excess tax benefits from stock-based compensation arrangements
Net increase (decrease) in federal funds purchased
Issuance of subordinated notes
Year ended December 31
2012
2011
2013
$
121,046 $
120,709 $
76,102
19,000
(11,599)
11,480
22
(1,917)
20,953
1,200
(3,427)
(931)
31,002
2,308
189,137
13
189,150
11,500
(3,131)
9,437
38
(2,168)
12,018
7,769
(22,197)
(917)
(61,334)
3,066
74,790
54
74,844
28,500
(6,682)
9,103
78
(2,095)
7,340
3,139
(8,970)
(80)
(63,247)
32,694
75,882
(29)
75,853
(2)
15,890
18,542
(13)
14,260
27,000
(10,000)
8,240
42,421
(51,087,328) (51,110,692) (27,234,509)
26,348,634
50,015,503
51,478,335
(890,753)
(1,220,626)
(1,706,505)
(3,286)
(3,538)
(4,029)
11,667
(2,445)
14,921
23,329
—
(11,482)
(1,275,875)
(2,263,185)
(1,727,406)
1,816,575
(2,210)
—
144,987
(6,960)
(797,002)
3,427
(124,529)
—
1,884,547
355
86,987
—
—
318,115
22,197
(139,070)
111,000
100,856
2,190
—
—
—
1,341,761
8,970
128,468
—
Net cash provided by financing activities of continuing operations
1,034,288
2,284,131
1,582,245
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
Transfers from loans/leases to OREO and other repossessed assets
$
$
(52,437)
206,348
95,790
110,558
(69,308)
179,866
153,911 $
206,348 $
110,558
24,962 $
77,635
1,331
21,527 $
69,095
3,489
20,643
32,127
24,327
See accompanying notes to consolidated financial statements.
65
(1) Operations and Summary of Significant Accounting Policies
Organization and Nature of Business
Texas Capital Bancshares, Inc. (“the Company”), a Delaware corporation, was incorporated in November
1996 and commenced 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, N.A. (“the Bank”). The
Bank currently provides commercial banking services to its customers largely 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.
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 (“GAAP”) requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates. The allowance for 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.
Correction of an Error in the Financial Statements
We determined during the fourth quarter of 2013 that purchases and sales of mortgage finance loan
interests that had been reported on our consolidated statements of cash flows as cash flows from operating
activities should have been reported as investing activities because the related asset balances should have
been reported as held for investment rather than held for sale on our consolidated balance sheets.
We have corrected the classification of these assets on the consolidated balance sheets to reflect them as
held for investment. We have corrected the previously presented cash flows for these loans and in doing so
the consolidated statements of cash flows for 2012 and 2011 were adjusted to increase net cash flows from
operating activities by $1.1 billion and $885.9 million, respectively, with corresponding decreases in net
cash flows from investing activities. The change does not impact our reported earnings as we do not believe
any reserve for loan losses relating to the mortgage finance portfolio is necessary based upon the risk profile
of the assets and the less than one basis point loss experience of the program over the last ten years. This
reclassification does not change total loans or total assets on our consolidated balance sheets. We have
evaluated the effect of the incorrect presentation, both qualitatively and quantitatively, and concluded that
it did not materially misstate our previously issued financial statements.
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.
66
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, 2013 and 2012.
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 investment includes legal ownership interests in mortgage loans that we purchase through
our mortgage warehouse lending division. The ownership interests are purchased from unaffiliated
mortgage originators who are seeking additional funding through sale of the undivided ownership interests
to facilitate their ability to originate loans. The mortgage originator has no obligation to offer and we have
no obligation to purchase these interests. The originator closes mortgage loans consistent with underwriting
standards established by approved investors, and, at the time of the sale to the investor, our ownership
interest and that of the originator are delivered by us to the investor selected by the originator and
approved by us. We typically purchase up to a 99% ownership interest in each mortgage with the originator
owning the remaining percentage. These mortgage ownership interests are held by us for an interim period,
usually less than 30 days and more typically 10-20 days. Because of conditions in agreements with
originators designed to reduce transaction risks, under Accounting Standards Codification 860, Transfers and
Servicing of Financial Assets (“ASC 860”), the ownership interests do not qualify as participating interests.
Under ASC 860, the ownership interests are deemed to be loans to the originators and payments we receive
from investors are deemed to be payments made by or on behalf of the originator to repay the loan deemed
67
made to the originator. Because we have an actual, legal ownership interest in the underlying residential
mortgage loan, these interests are not extensions of credit to the originators that are secured by the
mortgage loans as collateral.
Due to market conditions or events of default by the investor or the originator, we could be required to
purchase the remaining interests in the mortgage loans and hold them beyond the expected 10-20 days.
Mortgage loans acquired under these conditions could require future allocations of the allowance for loan
losses or be subject to charge off in the event the loans become impaired. Mortgage loan interests
purchased and disposed of as expected receive no allocation of the allowance for loan losses due to the
minimal loss experience with these assets.
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 a general reserve for estimated
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.
Other Real Estate Owned
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.
68
Stock-based Compensation
We account for all stock-based compensation transactions 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.
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, 2013 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. In general,
fair values of financial instruments are based upon quoted market prices, where available. If such quoted
market prices are not available, fair value is 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.
69
(2) Securities
The following is a summary of securities (in thousands):
Available-for-Sale Securities:
Residential mortgage-backed securities
Municipals
Equity securities(1)
Available-for-Sale Securities:
Residential mortgage-backed securities
Corporate securities
Municipals
Equity securities(1)
December 31, 2013
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$2,676
104
—
$2,780
$ —
—
(275)
$(275)
$41,462
14,505
7,247
$63,214
Amortized
Cost
$38,786
14,401
7,522
$60,709
December 31, 2013
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
$57,342
5,000
25,300
7,519
$95,161
$4,239
80
594
121
$5,034
$—
—
—
—
$—
Estimated
Fair
Value
$ 61,581
5,080
25,894
7,640
$100,195
(1) Equity securities consist of Community Reinvestment Act funds.
The amortized cost and estimated fair value of securities are presented below by contractual maturity (in
thousands, except percentage data):
Available-for-sale:
Residential mortgage-backed securities:(1)
Amortized cost
Estimated fair value
Weighted average yield(3)
Municipals:(2)
Amortized cost
Estimated fair value
Weighted average yield(3)
Equity securities:(4)
Amortized cost
Estimated fair value
Total available-for-sale securities:
Amortized cost
Estimated fair value
December 31, 2013
Less Than
One Year
After One
Through
Five Years
After Five
Through
Ten Years
After Ten
Years
Total
$ 238
252
4.32%
$14,720
15,641
$7,718
8,456
$16,110
17,113
$38,786
41,462
4.78%
5.56%
2.40%
3.94%
7,749
7,818
5.76%
7,522
7,247
6,652
6,687
5.71%
—
—
—
—
0.00%
—
—
—
—
—
—
—
14,401
14,505
5.73%
7,522
7,247
$60,709
$63,214
70
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:(4)
Amortized cost
Estimated fair value
Total available-for-sale securities:
Amortized cost
Estimated fair value
December 31, 2012
Less Than
One Year
After One
Through
Five Years
After Five
Through
Ten Years
After Ten
Years
Total
$ 656
690
4.20%
$ 5,698
6,113
$23,111
24,948
$27,877
29,830
$ 57,342
61,581
5.29%
4.86%
3.41%
4.19%
—
—
—
6,575
6,646
5.75%
7,519
7,640
5,000
5,080
7.38%
16,448
16,895
5.66%
—
—
—
—
—
2,277
2,353
6.01%
—
—
—
—
—
—
—
—
—
—
5,000
5,080
7.38%
25,300
25,894
5.72%
7,519
7,640
$ 95,161
$100,195
(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 1.4 years at December 31, 2013 and 1.6 years at December 31, 2012.
(2) Yields have been adjusted to a tax equivalent basis assuming a 35% federal tax rate.
(3) Yields are calculated based on amortized cost.
(4) These equity securities do not have a stated maturity.
Securities with carrying values of approximately $45,993,000 and $45,449,000 were pledged to secure
certain borrowings and deposits at December 31, 2013 and 2012, respectively. See Note 8 for discussion of
securities securing borrowings. Of the pledged securities at December 31, 2013 and 2012, approximately
$8,273,000 and $21,500,000, respectively, were pledged for certain deposits.
The following table discloses, as of December 31, 2013, 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
Equity securities
$7,247
$(275)
$—
$—
$7,247
$(275)
At December 31, 2013, there was one investment position in an unrealized loss position. This security is a
publicly traded equity fund and is subject to market pricing volatility. We do not believe that these
unrealized losses are “other than temporary.” We have evaluated the near-term prospects of the investment
in relation to the severity and duration of the impairment and based on that evaluation have the ability and
intent to hold the investment until recovery of fair value. We have not identified any issues related to the
ultimate repayment of principal as a result of credit concerns on this security.
At December 31, 2012, we did not have any investment securities in an unrealized loss position.
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
71
income of $119.4 million for the year ended December 31, 2013 and comprehensive income of $119.2
million for
the year ended December 31, 2012. Comprehensive income during the years ended
December 31, 2013 and 2012 included a net after-tax loss of $1.6 million and $1.5 million, respectively, 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
Mortgage finance
Construction
Real estate
Consumer
Equipment leases
Gross loans held for investment
Deferred income (net of direct origination costs)
Allowance for loan losses
Total
December 31
2013
2012
$ 5,020,565
2,784,265
1,262,905
2,146,228
15,350
93,160
$ 4,106,419
3,175,272
737,637
1,892,451
19,493
69,470
11,322,473
(51,899)
(87,604)
10,000,742
(39,935)
(74,337)
$11,182,970
$ 9,886,470
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.
Mortgage finance loans. Our mortgage finance loans consist of ownership interests 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 purchase interests
in individual loans they originate. All loans are underwritten consistent with established programs for
permanent financing with financially sound investors. Substantially all loans are conforming loans.
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, non-performing status, reserve allocation and actual credit loss and foreclosure.
These loans typically have floating rates and commitment fees.
Real Estate Loans. A portion of our real estate loan portfolio is comprised of loans secured by properties
other than market risk or investment-type real estate. Market risk loans are real estate loans where the
72
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 the impact of the inability of potential
purchasers and lessees to obtain financing and lack of transactions at comparable values.
As of December 31, 2013, 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.
At December 31, 2013, we had a blanket floating lien based on certain real estate loans used as collateral for
FHLB borrowings.
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
substandard loans with the added characteristics that the weaknesses make collection or liquidation in full
highly questionable and improbable. The possibility of loss is extremely high. All doubtful loans are on
nonaccrual.
The reserve allocation percentages assigned to each credit grade have been developed based primarily on
an analysis of our historical loss rates. The allocations are adjusted for certain qualitative factors for such
73
lower
than past experience. Each quarter we produce an adjustment
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, 2013 and 2012 (in thousands):
Commercial
Mortgage
Finance
Construction Real Estate Consumer Leases
Total
December 31,2013
Grade:
Pass
Special mention
Substandard-
accruing
Non-accrual
Total loans held for
investment
December 31, 2012
Grade:
Pass
Special mention
Substandard-
accruing
Non-accrual
Total loans held for
investment
$4,908,944 $2,784,265 $1,261,995 $2,099,450
6,338
24,132
102
—
$15,251
—
$89,317 $11,159,222
30,623
51
74,593
12,896
—
—
103
705
21,770
18,670
45
54
3,742
50
100,253
32,375
$5,020,565 $2,784,265 $1,262,905 $2,146,228
$15,350
$93,160 $11,322,473
Commercial
Mortgage
Finance
Construction Real Estate Consumer Leases
Total
$4,013,538 $3,175,272
—
33,137
$703,673
11,957
$1,816,027
12,461
$19,436
—
$68,327 $ 9,796,273
58,474
919
44,371
15,373
—
—
4,790
17,217
40,897
23,066
—
57
104
120
90,162
55,833
$4,106,419 $3,175,272
$737,637
$1,892,451
$19,493
$69,470 $10,000,742
74
The following table details activity in the reserve for loan losses by portfolio segment for the years ended
December 31, 2013 and 2012. Allocation of a portion of the reserve to one category of loans does not
preclude its availability to absorb losses in other categories.
Commercial
Mortgage
Finance Construction
Real
Estate Consumer Leases Unallocated Total
December 31, 2013
(in thousands)
Beginning balance
Provision for loan losses
Charge-offs
Recoveries
Net charge-offs (recoveries)
$21,547
23,693
6,575
1,203
5,372
$—
$12,097
$30,893
$ 226
$2,460
$ 7,114
$74,337
—
—
—
—
2,456
(6,809)
(105)
144
270
45
73
—
—
—
325
2
322
(1,395)
18,165
—
—
—
6,766
1,868
4,898
(126)
(28)
(320)
Ending balance
$39,868
$—
$14,553
$24,210
$ 149
$3,105
$ 5,719
$87,604
Period end amount allocated to:
Loans individually evaluated
for impairment
Loans collectively evaluated
for impairment
Ending balance
$ 2,015
37,853
$39,868
$—
—
$—
$ — $ 1,143
$
8
$
8
$ — $ 3,174
14,553
23,067
141
3,097
5,719
84,430
$14,553
$24,210
$ 149
$3,105
$ 5,719
$87,604
Commercial
Mortgage
Finance Construction
Real
Estate Consumer Leases Unallocated Total
December 31, 2012
(in thousands)
Beginning balance
Provision for loan losses
Charge-offs
Recoveries
Net charge-offs (recoveries)
$17,337
$—
$ 7,845
$33,721
$ 223
$2,356
$ 8,813
$70,295
10,086
6,708
832
5,876
—
—
—
—
4,242
(2,741)
—
10
(10)
899
812
87
19
49
33
16
200
204
108
96
(1,699)
10,107
—
—
—
7,860
1,795
6,065
Ending balance
$21,547
$—
$12,097
$30,893
$ 226
$2,460
$ 7,114
$74,337
Period end amount allocated to:
Loans individually evaluated
for impairment
Loans collectively evaluated
for impairment
Ending balance
$ 2,983
18,564
$21,547
$—
—
$—
$
14
$
899
$ 16
$
18
$ — $ 3,930
12,083
29,994
210
2,442
7,114
70,407
$12,097
$30,893
$ 226
$2,460
$ 7,114
$74,337
Our recorded investment in loans as of December 31, 2013 and 2012 related to each balance in the
allowance for loan losses by portfolio segment and disaggregated on the basis of our impairment
methodology was as follows (in thousands):
Commercial
Mortgage
Finance Construction
Real
Estate Consumer Lease
Total
December 31, 2013
Loans individually evaluated for
impairment
$
15,140 $
— $
705 $
24,027 $
54 $
50 $
39,976
Loans collectively evaluated for
impairment
5,005,425
2,784,265
1,262,200
2,122,201
15,296
93,110
11,282,497
Total
$5,020,565 $2,784,265 $1,262,905 $2,146,228 $15,350 $93,160 $11,322,473
75
Commercial
Mortgage
Finance Construction
Real
Estate Consumer Lease
Total
December 31, 2012
Loans individually evaluated for
impairment
$
15,373 $
— $ 18,179
$
32,512 $
57 $
120 $
66,241
Loans collectively evaluated for
impairment
Total
4,091,046
3,175,272
719,458
1,859,939
19,436
69,350
9,934,501
$4,106,419 $3,175,272
$737,637
$1,892,451 $19,493 $69,470 $10,000,742
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 decreased since December 31, 2012. We believe the level of unallocated reserves at
December 31, 2013 is warranted due to the continued uncertain 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.
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 $2.4 million in interest income on non-accrual loans during 2013 compared to $2.6
million in 2012 and $2.2 million in 2011. Additional interest income that would have been recorded if the
loans had been current during the years ended December 31, 2013, 2012 and 2011 totaled $2.5 million, $2.4
million and $5.9 million, respectively. As of December 31, 2013, none 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. The table below summarizes our non-accrual loans by type and purpose as of
December 31, 2013 (in thousands):
Commercial
Business loans
Construction
Market risk
Real estate
Market risk
Commercial
Secured by 1-4 family
Consumer
Leases
Total non-accrual loans
$12,896
705
15,607
508
2,555
54
50
$32,375
As of December 31, 2013, non-accrual loans included in the table above included $17.8 million related to
loans that met the criteria for restructured.
76
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
restructured loans in our impaired loan totals. The following tables detail our impaired loans, by portfolio
class as of December 31, 2013 and 2012 (in thousands):
December 31, 2013
With no related allowance recorded:
Commercial
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
Business loans
Energy loans
Construction
Market risk
Real estate
Market risk
Commercial
Secured by 1-4 family
Consumer
Equipment leases
Total impaired loans with no
allowance recorded
With an allowance recorded:
Commercial
Business loans
Energy loans
Construction
Market risk
Real estate
Market risk
Commercial
Secured by 1-4 family
Consumer
Equipment leases
Total impaired loans with an
allowance recorded
Combined:
Commercial
Business loans
Energy loans
Construction
Market risk
Real estate
Market risk
Commercial
Secured by 1-4 family
Consumer
Equipment leases
Total impaired loans
$ 2,005
1,614
$ 2,005
3,443
$ —
—
$ 4,265
969
705
705
13,524
508
1,320
—
—
13,524
508
1,320
—
—
—
—
—
—
—
—
3,111
9,796
5,458
2,464
—
—
$ —
—
114
—
—
—
—
—
$19,676
$21,505
$ —
$26,063
$114
$11,060
460
$12,425
460
$1,946
69
$14,240
913
$ —
—
—
—
6,289
—
2,387
54
50
6,289
—
2,387
54
50
—
822
—
321
8
8
160
7,912
477
914
43
72
—
—
—
—
—
—
$20,300
$21,665
$3,174
$24,731
$ —
$13,065
2,074
$14,430
3,903
$1,946
69
$18,505
1,882
705
705
19,813
508
3,707
54
50
19,813
508
3,707
54
50
—
822
—
321
8
8
3,271
17,708
5,935
3,378
43
72
$ —
—
114
—
—
—
—
—
$39,976
$43,170
$3,174
$50,794
$114
77
December 31, 2012
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
Equipment leases
Total impaired loans with no
allowance recorded
With an allowance recorded:
Commercial
Business loans
Construction
Market risk
Real estate
Market risk
Commercial
Secured by 1-4 family
Consumer
Equipment 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
Equipment leases
Total impaired loans
$ 2,938
$ 2,938
$ —
$ 1,409
$ —
17,217
17,217
9,061
6,604
2,632
—
—
9,061
6,604
2,632
—
—
—
—
—
—
—
—
18,571
677
7,944
6,451
1,827
—
—
—
—
—
—
—
$38,452
$38,452
$ —
$36,202
$677
$12,435
$18,391
$2,983
$15,484
$ —
962
962
11,439
2,013
763
57
120
11,439
2,013
763
57
120
14
535
89
275
16
18
321
11,811
671
1,632
59
182
—
—
—
—
—
—
$27,789
$33,745
$3,930
$30,160
$ —
$15,373
$21,329
$2,983
$16,893
$ —
18,179
18,179
14
18,892
677
20,500
8,617
3,395
57
120
20,500
8,617
3,395
57
120
535
89
275
16
18
19,755
7,122
3,459
59
182
—
—
—
—
—
$66,241
$72,197
$3,930
$66,362
$677
Average impaired loans outstanding during the years ended December 31, 2013, 2012 and 2011 totaled
$40.0 million, $66.4 million and $71.0 million respectively.
78
The table below provides an age analysis of our past due loans that are still accruing as of December 31,
2013 (in thousands):
Commercial
Business loans
Energy
Mortgage finance loans
Construction
Market risk
Secured by 1-4 family
Real estate
Market risk
Commercial
Secured by 1-4 family
Consumer
Equipment leases
Total loans held for
investment
30-59 Days
Past Due
60-89 Days
Past Due
Greater Than
90 Days
Total Past
Due
Current
Total(1)
$29,946
5,239
—
$ 7,683
1,092
—
$7,528
—
—
$45,157
6,331
—
$ 4,027,409 $ 4,072,566
935,103
2,784,265
928,772
2,784,265
1
—
6,013
15,024
2,607
37
189
—
—
3,100
—
266
177
—
103
—
—
—
1,694
—
—
104
—
1,245,388
16,708
1,245,492
16,708
9,113
15,024
4,567
214
189
1,623,706
387,856
87,292
15,082
92,921
1,632,819
402,880
91,859
15,296
93,110
$59,056
$12,318
$9,325
$80,699
$11,209,399 $11,290,098
(1) Loans past due 90 days and still accruing includes premium finance loans of $3.8 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 for borrowers of similar credit quality. 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, 2013, we have $1.9 million in loans considered
restructured that are not on nonaccrual. These loans do not have unfunded commitments at December 31,
2013. Of the nonaccrual loans at December 31, 2013, $17.8 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 tables summarize, as of December 31, 2013 and 2012, loans that have been restructured
during 2013 and 2012 (in thousands):
December 31, 2013
Commercial business loans
Real estate market risk
Total new restructured loans in 2012
Number of
Contracts
Pre-Restructuring
Outstanding Recorded
Investment
Post-Restructuring
Outstanding Recorded
Investment
$10,823
892
$11,715
$8,921
874
$9,795
3
1
4
79
December 31, 2012
Number of
Contracts
Pre-Restructuring
Outstanding Recorded
Investment
Post-Restructuring
Outstanding Recorded
Investment
Commercial business loans
Real estate market risk
Real estate — 1-4 family
Total new restructured loans in 2012
3
2
1
6
$ 7,140
1,726
1,424
$10,290
$7,103
1,147
1,393
$9,643
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 $1.9
million decrease in the post-restructuring recorded investment compared to the pre-restructuring recorded
investment is due to $1.4 million in charge-offs and $554,000 in paydowns. At December 31, 2013, $8.1
million of the above loans restructured in 2013 are on non-accrual. The restructuring of the loans did not
have a significant impact on our allowance for loan losses at December 31, 2013 or 2012.
The following table provides information on how loans were modified as a restructured loan during the year
ended December 31, 2013 and 2012 (in thousands):
Extended maturity
Adjusted payment schedule
Combination of maturity extension and payment schedule adjustment
Total
December 31,
2013
2012
$ 874
—
8,921
$1,913
1,393
6,337
$9,795
$9,643
As of December 31, 2013, none of the loans that were restructured within the last 12 months have
subsequently defaulted.
(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
2012
2011
2013
Beginning balance
Additions
Sales
Valuation allowance for OREO
Direct write-downs
Ending balance
$ 15,991
1,331
(11,292)
958
(1,878)
$ 34,077
3,434
(14,637)
(4,488)
(2,395)
$ 42,261
22,180
(23,566)
(3,922)
(2,876)
$ 5,110
$ 15,991
$ 34,077
(5) Goodwill and Other Intangible Assets
In May 2013, we acquired the assets of a premium finance company and recorded a total intangible asset of
$2.1 million. Of this total, $954,000 was allocated to goodwill, $554,000 to customer relationships, $457,000
to developed technology and $98,000 to trade name. The $554,00 customer relationship intangible will be
amortized over 14 years, the $457,000 technology intangible will be amortized over 7 years, and the $98,000
intangible related to the trade name was determined to have an indefinite life.
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.
80
Goodwill and other intangible assets at December 31, 2013 and 2012 are summarized as follows (in
thousands):
December 31, 2013
Goodwill
Intangible assets—customer relationships and
trademarks
Total goodwill and intangible assets
December 31, 2012
Goodwill
Intangible assets—customer relationships and
trademarks
Gross Goodwill
and Intangible
Assets
Accumulated
Amortization
Net
Goodwill
and
Intangible
Assets
$15,370
$ (374)
$14,996
9,104
$24,474
(2,814)
6,290
$(3,188)
$21,286
$14,416
$ (374)
$14,042
7,996
(2,155)
5,841
Total goodwill and intangible assets
$22,412
$(2,529)
$19,883
Amortization expense related to intangible assets totaled $660,000 in 2013, $597,000 in 2012 and $485,000
in 2011. The estimated aggregate future amortization expense for intangible assets remaining as of
December 31, 2013 is as follows (in thousands):
2014
2015
2016
2017
2018
Thereafter
$ 699
598
501
473
473
3,546
$6,290
(6) Premises and Equipment
Premises and equipment at December 31, 2013 and 2012 are summarized as follows (in thousands):
Premises
Furniture and equipment
Accumulated depreciation
Total premises and equipment, net
December 31
2013
2012
$ 14,113
28,865
$ 12,950
26,478
42,978
(31,496)
39,428
(27,983)
$ 11,482
$ 11,445
Depreciation expense for the above premises and equipment was approximately $3,992,000, $3,550,000 and
$3,397,000 in 2013, 2012 and 2011, respectively.
81
(7) Deposits
Deposits at December 31, 2013 and 2012 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
2013
2012
$3,347,567
$2,535,375
792,186
4,414,680
372,639
330,307
979,642
3,170,401
426,077
329,309
5,909,812
4,905,429
$9,257,379
$7,440,804
The scheduled maturities of interest bearing time deposits are as follows at December 31, 2013 (in
thousands):
2014
2015
2016
2017
2018
2019 and after
$ 343,654
25,599
1,105
2,041
167
73
$ 372,639
At December 31, 2013 and 2012, the Bank had approximately $27,139,000 and $30,310,000, respectively, in
deposits from related parties, including directors, stockholders, and their related affiliates on terms similar
to those from third parties.
At December 31, 2013 and 2012, interest bearing time deposits, including deposits in foreign branches, of
$100,000 or more were approximately $652,350,000 and $719,815,000, respectively.
(8) Borrowing Arrangements
The following table summarizes our borrowings at December 31, 2013, 2012 and 2011 (in thousands):
Federal funds purchased(4)
Customer repurchase
agreements(1)
FHLB borrowings(2)
Line of credit
Fed borrowings
Subordinated notes
Trust preferred subordinated
debentures
2013
2012
2011
Balance
Rate(3)
Balance
Rate(3)
Balance
Rate(3)
$ 148,650
0.22% $ 273,179
0.26% $ 412,249
0.27%
21,954
840,026
15,000
—
111,000
0.31%
0.12%
2.65%
—
6.50%
23,936
1,650,046
—
—
111,000
0.04%
0.09%
—
—
6.50%
23,801
1,200,066
—
132,000
—
0.06%
0.14%
—
0.75%
—
113,406
2.17%
113,406
2.24%
113,406
2.48%
Total borrowings
$1,250,036
$2,171,567
$1,881,522
Maximum outstanding at any
month end
$1,859,036
$2,432,945
$1,986,324
82
(1) Securities pledged for customer repurchase agreements were $37.7 million, $23.9 million and $28.3
million at December 31, 2013, 2012 and 2011, respectively.
(2) FHLB borrowings are collateralized by a blanket floating lien on certain real estate secured loans and
also certain pledged securities. The weighted-average interest rate for the years ended December 31,
2013, 2012 and 2011 was 0.14%, 0.16% and 0.11%, respectively. The average balance of FHLB
borrowings for the years ended December 31, 2013, 2012 and 2011 was $370.0 million, $1.2 billion and
$462.5 million, respectively.
(3)
Interest rate as of period end.
(4) The weighted-average interest rate on federal funds purchased for the years ended December 31,
2013, 2012 and 2011 was 0.27%, 0.28% and 0.25%, respectively. The average balance of federal funds
purchased for the years ended December 31, 2013, 2012 and 2011 was $254.3 million, $350.8 million
and $238.5 million, respectively.
The following table summarizes our other borrowing capacities in addition to balances outstanding at
December 31, 2013, 2012 and 2011 (in thousands):
FHLB borrowing capacity relating to loans
FHLB borrowing capacity relating to securities
Total FHLB borrowing capacity
2013
2012
2011
$693,302
8,482
$267,542
33,204
$
4,524
15,909
$701,784
$300,746
$ 20,433
Unused federal funds lines available from commercial banks
$890,000
$706,000
$390,720
At December 31, 2012, we had an existing non-revolving amortizing line of credit with $35.0 million of
unused capacity. During 2013, we modified the line of credit to increase the capacity to $100.0 million that
matures on December 15, 2014. The loan proceeds may be used for general corporate purposes including
funding regulatory capital infusions into the Bank. The loan agreement contains customary financial
covenants and restrictions. As of December 31, 2013, $15.0 million in borrowings were outstanding.
The scheduled maturities of our borrowings at December 31, 2013, were as follows (in thousands):
Federal funds purchased(1)
Customer repurchase
agreements(1)
FHLB borrowings(1)
Line of credit
Subordinated notes(1)
Trust preferred subordinated
debentures(1)
Within One
Year
After One
But Within
Three Years
After Three
But Within
Five Years
After Five
Years
Total
$ 148,650
$—
$—
$
— $ 148,650
21,954
840,000
15,000
—
—
—
26
—
—
—
—
—
—
—
—
—
—
—
111,000
21,954
840,026
15,000
111,000
113,406
113,406
Total borrowings
$1,025,604
$26
$—
$224,406
$1,250,036
(1) Excludes interest.
83
(9) Long-Term Debt
From November 2002 to September 2006 various Texas Capital Statutory Trusts were created and
subsequently issued floating rate trust preferred securities in various private offerings totaling $113.4
million. As of December 31, 2013, the details of the trust preferred subordinated debentures are
summarized below (in thousands):
Texas Capital
Bancshares
Statutory Trust I
Texas Capital
Statutory
Trust II
Texas Capital
Statutory
Trust III
Texas Capital
Statutory
Trust IV
Texas Capital
Statutory Trust V
November 19, 2002
April 10, 2003
October 6, 2005
April 28, 2006
September 29, 2006
Date issued
Trust preferred
securities issued
$ 10,310
$
10,310
$
25,774
$
25,774
$
41,238
Floating or fixed
rate securities
Interest rate on
subordinated
debentures
Maturity date
Floating
Floating
Floating
Floating
Floating
3 month LIBOR +
3 month LIBOR
3 month LIBOR
3 month LIBOR
3.35%
+ 3.25%
+ 1.51%
November 2032
April 2033
December 2035
+ 1.60%
June 2036
3 month LIBOR +
1.71%
December 2036
On September 21, 2012, we issued $111.0 million of subordinated notes. The notes mature in September
2042 and bear interest at a rate of 6.50% per annum, payable quarterly. The indenture governing the notes
contains customary covenants and restrictions.
Interest payments on all long-term debt are deductible for federal income tax purposes.
Because our bank had less than $15.0 billion in total consolidated assets as of December 31, 2009, we are
allowed to continue to classify our trust preferred securities, all of which were issued prior to May 19, 2010,
as Tier 1 capital.
(10) Income Taxes
We have a gross deferred tax asset of $60.2 million and $51.1 million at December 31, 2013 and 2012,
respectively, which relates primarily to our allowance for loan losses, loan origination fees and stock
compensation. 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.
Income tax expense/(benefit) consists of the following for the years ended (in thousands):
Year ended December 31
2012
2013
2011
Current:
Federal
State
Total
Deferred
Federal
State
Total
Total expense
Federal
State
Total
$ 76,481
1,878
$69,092
1,885
$47,799
1,183
$ 78,359
$70,977
$48,982
$(11,599)
—
$ (3,131)
—
$ (6,927)
245
$(11,599)
$ (3,131)
$ (6,682)
$ 64,882
1,878
$65,961
1,885
$40,872
1,428
$ 66,760
$67,846
$42,300
84
The following table shows the breakdown of total income tax expense for continuing operations and
discontinued operations for the years ended December 31, 2013, 2012 and 2011 (in thousands):
Total expense (benefit):
From continuing operations
From discontinued operations
Total
2013
2012
2011
$66,757
3
$67,866
(20)
$42,366
(66)
$66,760
$67,846
$42,300
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
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
Total deferred tax assets
Deferred tax liabilities:
Loan origination costs
Leases
Depreciation
Unrealized gain on securities
Other
Total deferred tax liabilities
Net deferred tax asset
December 31
2013
2012
$ 32,752
11,580
10,786
220
20
1,907
1,316
499
1,157
$ 27,725
8,991
5,777
245
20
2,739
957
3,168
1,452
60,237
51,074
(1,048)
(6,587)
(1,183)
(877)
(1,819)
(1,113)
(9,077)
(1,077)
(1,762)
(1,769)
(11,514)
(14,798)
$ 48,723
$ 36,276
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.
85
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 2011.
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
2011
2012
2013
35%
35%
35%
1%
1%
1%
1%
1%
1%
(1)% (1)% (1)%
36%
36%
36%
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 $3.7 million, $2.7 million, and $819,000 for the years ended
December 31, 2013, 2012 and 2011, 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, 2013, 2012 and 2011, 93,388, 85,013 and
76,561 shares had been purchased on behalf of the employees under the 2006 ESPP.
As of December 31, 2012, 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, 2013, 2012 and 2011 were 43,495, 26,615 and 15,865,
respectively. Total shares which may be issued under the 2010 Plan at December 31, 2013, 2012 and 2011
were 218,820, 363,020 and 431,200, 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.
86
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
2013
2012
2011
1.17%
0.76%
1.83%
0.409
5 years
0.404
5 years
0.414
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 2013, 2012 and 2011 is as follows:
December 31, 2013
December 31, 2012
December 31, 2011
Weighted
Average
Exercise
Price
Options
Options
Weighted
Average
Exercise
Price
Options
Weighted
Average
Exercise
Price
Options outstanding at beginning of year
Options exercised
Options forfeited
174,062 $13.51
(119,162) 11.14
—
—
569,410 $13.02
(391,348) 12.74
(4,000) 19.37
943,820 $12.62
(374,410) 12.00
—
—
Options outstanding at year-end
54,900 $18.65
174,062 $13.51
569,410 $13.02
Options vested and exercisable at year-end
Intrinsic value of options vested and
54,900 $18.65
174,062 $13.51
569,410 $13.02
exercisable
$2,391,014
$ 5,450,620
$10,015,721
Weighted average remaining contractual
life of options vested and exercisable (in
years)
Intrinsic value of options exercised
Weighted average remaining contractual
life of options currently outstanding (in
years)
0.97
1.15
$4,176,787
$10,246,387
$ 5,496,861
0.97
1.15
2.06
2.06
There was no expense related to stock option awards in 2013, 2012 and 2011. No stock options were
granted in 2013, 2012 or 2011.
87
In connection with the 2005 Long-term Incentive Plan, stock appreciation rights were issued in 2013, 2012
and 2011. These rights are service-based and generally vest over a period of five years.
SARs outstanding at beginning of year
SARs granted
SARs exercised
SARs forfeited
December 31, 2013
December 31, 2012
December 31, 2011
Weighted
Average
Exercise
Price
SARs /
PSARs
Weighted
Average
Exercise
Price
SARs /
PSARs
Weighted
Average
Exercise
Price
SARs
640,220 $20.90
43.73
53,500
19.21
(134,271)
18.99
(22,300)
983,700 $19.56
44.94
36,000
19.44
(345,480)
24.79
(34,000)
1,213,257 $19.42
24.70
19.86
16.56
33,000
(236,610)
(25,947)
SARs outstanding at year-end
537,149 $23.68
640,220 $20.90
983,700 $19.56
SARs vested and exercisable at year-end
Weighted average remaining contractual life
of SARs vested
Compensation expense
Weighted average fair value of SARs granted
384,974 $20.64
446,970 $20.41
687,175 $20.29
3.46
4.25
5.24
$ 564,000
$ 704,000
$1,272,000
during 2013, 2012 and 2011 (in years)
Fair value of shares vested during the year $ 566,341
Weighted average remaining contractual life
of SARs currently outstanding (in years)
$16.26
$16.21
$ 9.54
$ 758,543
$1,612,435
4.68
5.19
5.95
As of December 31, 2013, 2012 and 2011, the intrinsic value of SARs vested was $16.0 million, $10.9 million
and $7.1 million, respectively. As of December 31, 2011 the intrinsic value of SARs vested was negative as
the December 31, 2011 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:
Balance, January 1, 2011
Granted
Vested and issued
Forfeited
Balance, December 31, 2011
Granted
Vested and issued
Forfeited
Balance, December 31, 2012
Granted
Vested and issued
Forfeited
Balance, December 31, 2013
Non-Vested Stock Awards
Outstanding
Number
of Shares
897,351
165,891
(364,065)
(37,685)
661,492
105,000
(311,410)
(43,163)
411,919
163,500
(151,480)
(20,200)
403,739
Weighted-
Average Grant-
Date Fair Value
$14.64
24.77
16.07
18.70
17.44
39.89
18.82
25.25
23.80
45.35
20.47
24.96
$33.72
The RSUs granted during 2013, 2012 and 2011 vest over four to five years. Compensation cost for restricted
stock units was $3,551,000, $4,875,000, $6,068,000 for years ended December 31, 2013, 2012 and 2011,
respectively. The weighted average remaining contractual life of RSUs currently outstanding is 8.20 years.
88
Total compensation cost for all share-based arrangements, net of taxes, was $2,677,000, $3,626,000 and
$4,771,000 for the years ended December 31, 2013, 2012 and 2011, respectively.
Unrecognized stock-based compensation expense related to SAR grants issued through December 31, 2013
was $1.5 million. At December 31, 2013, the weighted average period over which this unrecognized
expense was expected to be recognized was 3.6 years. Unrecognized stock-based compensation expense
related to RSU grants through December 31, 2013 was $11.6 million. At December 31, 2013, the weighted
average period over which this unrecognized expense was expected to be recognized was 3.7 years.
Cash flows from financing activities included $3,427,000, $22,197,000 and $8,970,000 in cash inflows from
excess tax benefits related to stock compensation in 2013, 2012 and 2011, respectively. The tax benefit
realized from stock options exercised is $5,840,000, $7,769,000 and $3,139,000 in 2013, 2012 and 2011,
respectively.
Upon share option exercise, new shares are issued as opposed to treasury shares.
In connection with the 2010 Long-term Incentive Plan, a total of 173,035, 344,127 and 217,337 cash-based
performance units were issued in 2013, 2012 and 2011, with a total of 616,620 outstanding at December 31,
2013. Of the outstanding units at December 31, 2013, 309,202 are service-based and vest over a period of
five years. Additionally, 307,418 units contain both service and performance based vesting requirements:
25-40% of the units will vest on the third anniversary of the date of grant, and the balance will vest based
on attainment of certain performance metrics developed by our Board of Directors’ Human Resources
Committee. Since these units have a cash payout feature, they are accounted for under the liability method
and the related expense is based on the stock price at period end. Compensation cost for the units was
$17,287,000, $6,440,000 and $522,000 for the years ended December 31, 2013, 2012, and 2011 respectively.
At December 31, 2013, the weighted average remaining contractual life of the units was 8.13 years. Of the
$17, 287,000 compensation costs for 2013, approximately $4,618,000 related to a charge taken to reflect the
financial effect of the planned organization changed announced during the second quarter of 2013 related
to the retirement and transition of our CEO.
Total compensation cost for all cash-based arrangements, net of taxes, for the years ended December 31,
2013, 2012 and 2011 was $11,237,000, $4,186,000 and $339,000, respectively.
(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 that 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.
89
At December 31, 2013 and 2012, 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
2013
2012
$3,674,391
145,662
$2,648,454
83,429
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 1 capital to
risk-weighted assets, and of Tier 1 capital to average assets, each as defined in the regulations.
Management believes, as of December 31, 2013, 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 1 risk-based and Tier 1 leverage ratios as set forth in the tables below. As shown in the
table below, the Company’s capital ratios exceed the regulatory definition of adequately capitalized as of
December 31, 2013 and 2012. Based upon the information in its most recently filed call report, the Bank
meets the capital ratios necessary to be well capitalized. The regulatory authorities can apply changes in
classification of assets and such change may retroactively subject the Company to change in capital ratios.
Any such change could result in reducing one or more capital ratios below well-capitalized status. In
addition, a change may result in imposition of additional assessments by the FDIC or could result in
regulatory actions that could have a material effect on condition and results of operations.
In response to supplemental FFIEC Call Report instructions issued in early April 2013, we began using a
100% risk weight for the mortgage finance loans with our March 31, 2013 Call Report and Form 10-Q. In
previous filings, we applied a 50% risk weight (or 20% risk weight for government-guaranteed loans) to
these assets for purposes of calculating the Bank’s risk-based capital ratios. Having determined that the
100% risk weight must be applied under our current program we were required to amend our year-end Call
Reports for 2012 and 2011. This change required application of the 100% risk weight to our mortgage
finance loans in these earlier periods, which is consistent with all of our 2013 Call Reports. The amendment
of Call Reports had no impact on our consolidated balance sheet or statements of operations, stockholders’
equity and cash flows.
This retroactive change in risk weighting of our mortgage finance loans required that we amend the
previously reported values for our risk-weighted capital ratios for December 31, 2012 and 2011. See below
for amended December 31, 2012 and 2011 risk-weighted capital ratios. These amended ratios exceed levels
required to be “adequately capitalized” on a consolidated basis and at the Bank. As amended, the Bank was
“well capitalized” in the Tier 1 measure of capital adequacy, but the total risk-based capital ratio was below
that required to be considered “well capitalized”. The adjustment had no impact on the ratio of tangible
common equity to total assets. We believe that we had the financial and operational capacity to maintain
well-capitalized status had we determined that the higher risk weighting was required to be applied to our
ownership interests in mortgage finance loans at year-end 2012 and 2011.
90
Incidental to the amended Call Reports described above, we were assessed an additional $3.0 million for
deposit insurance by the FDIC that was paid during the third quarter of 2013.
Because our bank had less than $15.0 billion in total consolidated assets as of December 31, 2009, we are
allowed to continue to classify our trust preferred securities, all of which were issued prior to May 19, 2010,
as Tier 1 capital.
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Actual
For Capital
Adequacy
Purposes
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
As of December 31, 2013:
Total capital (to risk-weighted assets):
Company
Bank
$1,387,312
1,328,227
10.73% $1,034,721
10.27% 1,034,406
N/A
8.00%
8.00% $1,293,007
N/A
10.00%
Tier 1 capital (to risk-weighted assets):
Company
Bank
Tier 1 capital (to average assets):
$1,184,018
975,933
9.15% $ 517,361
517,203
7.55%
4.00%
N/A
4.00% $ 775,804
Company
Bank
$1,184,018
975,933
10.87% $ 435,750
435,601
8.96%
4.00%
N/A
4.00% $ 544,502
N/A
6.00%
N/A
5.00%
As of December 31, 2012:
Total capital (to risk-weighted assets):
Company
Bank
$1,112,924
948,328
9.97% $ 893,231
892,806
8.50%
8.00%
N/A
8.00% $1,116,008
N/A
10.00%
Tier 1 capital (to risk-weighted assets):
Company
Bank
Tier 1 capital (to average assets):
$ 923,677
800,081
8.27% $ 446,616
446,403
7.17%
4.00%
N/A
4.00% $ 669,605
Company
Bank
$ 923,677
800,081
9.41% $ 392,649
392,433
8.16%
4.00%
N/A
4.00% $ 490,541
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. The Basel III Capital Rules, effective for us on January 1, 2015, will
further limit the amount of dividends that be paid by our bank. No dividends were declared or paid on
common stock during 2013, 2012 or 2011.
The required reserve balances at the Federal Reserve at December 31, 2013 and 2012 were approximately
$51,692,000 and $33,141,000, respectively.
91
(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
2013
2012
2011
Numerator:
Net income from continuing operations
Preferred stock dividends
$
121,046
7,394
$
120,709
—
$
76,102
—
Net income from continuing operations available to
common shareholders
Gain (loss) from discontinued operations
Net income
Denominator:
113,652
5
120,709
(37)
76,102
(126)
$
113,657
$
120,672
$
75,976
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
40,864,225
402,593
513,063
39,046,340
645,771
473,736
37,334,743
682,694
315,640
41,779,881
40,165,847
38,333,077
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
$
$
$
$
2.78
2.78
2.72
2.72
$
$
$
$
3.09
3.09
3.01
3.00
$
$
$
$
2.04
2.03
1.99
1.98
(1) SARs and RSUs outstanding of 118,500, 79,500 and 98,000 in 2013, 2012 and 2011, 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
liabilities. Level 2 assets include U.S. government and agency mortgage-backed debt
92
securities, corporate securities, municipal bonds, and Community Reinvestment Act funds.
This category includes derivative assets and liabilities where values are obtained from
independent pricing services.
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.
Assets and liabilities measured at fair value at December 31, 2013 and 2012 are as follows (in thousands):
December 31, 2013
Available for sale securities:(1)
Mortgage-backed securities
Municipals
Equity securities
Loans(2)(4)
OREO(3)(4)
Derivative asset(5)
Derivative liability(5)
December 31, 2012
Available for sale securities:(1)
Mortgage-backed securities
Corporate securities
Municipals
Equity securities
Loans(2)(4)
OREO(3)(4)
Derivative asset(5)
Derivative liability(5)
Fair Value Measurements Using
Level 3
Level 2
Level 1
$—
—
—
—
—
—
—
$ 41,462
14,505
7,247
—
—
9,317
(9,317)
$ —
—
—
13,474
5,110
—
—
Fair Value Measurements Using
Level 3
Level 2
Level 1
$—
—
—
—
—
—
—
—
$ 61,581
5,080
25,894
7,640
—
—
28,473
(28,473)
$ —
—
—
—
11,639
15,991
—
—
(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.
93
Loans
During the year ended December 31, 2013, 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 $13.5 million total above includes impaired loans at
December 31, 2013 with a carrying value of $14.9 million that were reduced by specific valuation allowance
allocations totaling $1.4 million for a total reported fair value of $13.5 million based on collateral valuations
utilizing Level 3 valuation inputs. Fair values were based on third party appraisals; however, based on the
current economic conditions, comparative sales data typically used in the appraisals may be unavailable or
more subjective due to the lack of real estate market activity.
OREO
Certain foreclosed assets, upon initial recognition, were valued based on third party appraisals. At
December 31, 2013, OREO with a carrying value of $5.1 million with no specific valuation allowance
allocations for a total reported fair value of $5.1 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):
December 31, 2013
December 31, 2012
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
Cash and cash equivalents
Securities, available-for-sale
Loans held for sale from discontinued operations
Loans held for investment, net
Derivative asset
Deposits
Federal funds purchased
Other borrowings
Subordinated notes
Trust preferred subordinated debentures
Derivative liability
$
153,911
63,214
294
11,182,970
9,317
9,257,379
148,650
876,980
111,000
113,406
9,317
$
153,911
63,214
294
11,179,145
9,317
9,257,574
148,650
861,981
96,647
113,406
9,317
$ 206,348
100,195
302
9,886,470
28,473
7,440,804
273,179
1,673,982
111,000
113,406
28,473
$ 206,348
100,195
302
9,889,303
28,473
7,441,240
273,179
1,673,983
112,757
113,406
28,473
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, which is characterized as a Level 1 asset in the fair value hierarchy.
for cash and cash equivalents
94
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, which is characterized as a Level 2
asset in the fair value hierarchy. 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.
Loans, net
Loans are characterized as Level 3 assets in the fair value hierarchy. 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 mortgage finance loans approximates
fair value.
Derivatives
The estimated fair value of the interest rate swaps are obtained from independent pricing services based on
quote market prices for the same or similar derivative contracts and are characterized as a Level 2 asset in
the fair value hierarchy. On a quarterly basis, we independently verify the fair value using an additional
independent pricing source.
Deposits
Deposits are characterized as Level 3 liabilities in the fair value hierarchy. 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, subordinated notes and trust preferred subordinated
debentures
The carrying value reported in the consolidated balance sheet for Federal funds purchased and other short-
term, floating rate borrowings approximates their fair value, which is characterized as a Level 1 asset in the
fair value hierarchy. The fair value of any fixed rate short-term borrowings and trust preferred subordinated
debentures are estimated using a discounted cash flow calculation that applies interest rates currently being
offered on similar borrowings, which is characterized as a Level 3 liability in the fair value hierarchy. The
subordinated notes are publicly traded and are valued based on market prices, which is characterized as a
Level 2 liability in the fair value hierarchy.
(16) Commitments and Contingencies
We lease various premises under operating leases with various expiration dates ranging from March 2013
through May 2024. Rent expense incurred under operating leases amounted to approximately $10,216,000,
$8,993,000 and $7,982,000 for the years ended December 31, 2013, 2012 and 2011, respectively.
95
Minimum future lease payments under operating leases are as follows (in thousands):
Year ending December 31,
2014
2015
2016
2017
2018
2019 and thereafter
Minimum
Payments
$ 13,483
14,136
14,085
14,038
13,960
62,335
$132,037
(17) Parent Company Only
Summarized financial information for Texas Capital Bancshares, Inc. – Parent Company Only follows (in
thousands):
December 31
2013
2012
$
47,605
1,011,823
287,734
$ 141,257
836,204
94,121
$1,347,162
$1,071,582
$
1,254
15,000
111,000
113,406
240,660
150,000
410
458,360
496,112
(8)
1,628
$
782
—
111,000
113,406
225,188
—
407
460,268
382,455
(8)
3,272
1,106,502
846,394
$1,347,162
$1,071,582
Balance Sheet
Assets
Cash and cash equivalents
Investment in subsidiaries
Other assets
Total assets
Liabilities and Stockholders’ Equity
Other liabilities
Line of credit
Subordinated notes
Trust preferred subordinated debentures
Total liabilities
Preferred stock
Common stock
Additional paid-in capital
Retained earnings
Treasury stock
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
96
Statement of Earnings
Loan income
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
Preferred stock dividends
Year ended December 31
2012
2013
2011
$
$ 10,382
76
72
1,484
83
38
1,605
4,913
668
2,094
744
8,419
$ —
77
72
149
2,573
618
1,919
450
5,560
(6,814)
(2,435)
(4,379)
124,951
120,572
—
(5,411)
(1,887)
(3,524)
79,500
75,976
—
10,530
9,863
669
2,605
651
13,788
(3,258)
(1,165)
(2,093)
123,144
121,051
7,394
Net income available to common shareholders
$113,657
$120,572
$75,976
97
Statements of Cash Flows
2013
Year ended December 31
2012
(in thousands)
2011
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 sale of stock
Proceeds from issuance of preferred stock
Preferred dividends paid
Issuance of subordinated notes
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
$ 121,051
$ 120,572
$ 75,976
(123,144)
(3,613)
1,200
(124,951)
(11,562)
7,769
(79,500)
(3,747)
3,139
(3,427)
37
(7,896)
(22,197)
83
(8,970)
262
(30,286)
(12,840)
(240,000)
(70,000)
(66,000)
(240,000)
(70,000)
(66,000)
(2,210)
—
144,987
(6,960)
—
15,000
3,427
154,244
(93,652)
141,257
355
86,987
—
—
111,000
—
22,197
220,539
120,253
21,004
2,190
—
—
—
—
—
8,970
11,160
(67,680)
88,684
Cash and cash equivalents at end of year
$ 47,605
$ 141,257
$ 21,004
(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.
the income from discontinued operations was $5,000, net of
During 2013,
taxes. We still have
approximately $294,000 in loans held for sale from discontinued operations that are carried at the estimated
market value at December 31, 2013, 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 to repurchase loans previously sold. While the balances as of
December 31, 2013 include a liability for exposure to additional contingencies, including risk of having to
98
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 disposition of the discontinued mortgage
operation.
The results of operations of the discontinued components are presented separately in the accompanying
consolidated statements of income for 2013, 2012 and 2011, net of tax, following income from continuing
operations. Details are presented in the following tables (in thousands):
Revenues
Expenses
Income (loss) before income taxes
Income tax expense (benefit)
Income (loss) from discontinued operations
(20) Derivative Financial Instruments
Year ended
December 31
2012
2011
$(26)
31
$ 58
250
(57)
(20)
(192)
(66)
2013
$27
19
8
3
$ 5
$(37)
$(126)
The fair value of derivative positions outstanding is included in other assets and other liabilities in the
accompanying consolidated balance sheets.
During 2013 and 2012, 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, 2013 and 2012 presented in the following table (in thousands):
December 31, 2013
December 31, 2012
Notional
Amount
Estimated Fair
Value
Notional
Amount
Estimated Fair
Value
Non-hedging interest rate derivative:
Commercial loan/lease interest rate
swaps
$ 764,939
$ 8,652
$ 523,216
$ 28,469
Commercial loan/lease interest rate
swaps
Commercial loan/lease interest rate
caps
Commercial loan/lease interest rate
caps
(764,939)
(8,652)
(523,216)
(28,469)
(58,706)
(665)
(42,380)
58,706
665
42,380
(4)
4
99
The weighted-average receive and pay interest rates for interest rate swaps outstanding at December 31,
2013 were as follows:
Non-hedging interest rate swaps
December 31, 2013
Weighted-Average Interest Rate
December 31, 2012
Weighted-Average Interest Rate
Received
2.99%
Paid
4.89%
Received
4.76%
Paid
3.11%
The weighted-average strike rate for outstanding interest rate caps was 1.87% at December 31, 2013.
Our credit exposure on interest rate swaps and caps is limited to the net favorable value and interest
payments of all swaps and caps by each counterparty. In such cases collateral may be required from the
counterparties involved if the net value of the swaps and caps exceeds a nominal amount considered to be
immaterial. Our credit exposure, net of any collateral pledged, relating to interest rate swaps and caps was
approximately $9.3 million at December 31, 2013, all of which relates to bank customers. Collateral levels
are monitored and adjusted on a regular basis for changes in interest rate swap and cap values. At
December 31, 2013 and 2012, we had $10.7 million and $12.3 million in cash collateral pledged for these
derivatives included in interest-bearing deposits.
(21) Stockholders’ Equity
In January 2009, we issued $75 million of perpetual preferred stock and related warrants under the U.S.
Department of Treasury’s voluntary Capital Purchase Program. The preferred stock was repurchased in
May 2009 and the U.S. Treasury auctioned the related warrants in the first quarter of 2010. As of
December 31, 2013, warrants to purchase 710,598 shares at $14.84 per share are still outstanding.
On August 1, 2012 we completed a sale of 2.3 million shares of our common stock in a public offering. Net
proceeds from the sale totaled $87.0 million. The additional equity is being used for general corporate
purposes, including retirement of $15.0 million of debt and additional capital to support continued loan
growth at our bank.
On March 28, 2013, we completed a sale of 6.0 million shares of 6.5% non-cumulative preferred stock, par
value $0.01, with a liquidation preference of $25 per share, in a public offering. Dividends on the preferred
stock are not cumulative and will be paid when declared by our board of directors to the extent that we
have lawfully available funds to pay dividends. If declared, dividends will accrue and be payable quarterly,
in arrears, on the liquidation preference amount, on a non-cumulative basis, at a rate of 6.50% per annum.
We paid $7.0 million in dividends on the preferred stock for the year ended December 31, 2013 2013.
Holders of preferred stock will not have voting rights, except with respect to authorizing or increasing the
authorized amount of senior stock, certain changes in the terms of the preferred stock, certain dividend
non-payments and as otherwise required by applicable law. Net proceeds from the sale totaled $145.0
million. The additional equity is being used for general corporate purposes, including funding regulatory
capital infusions into the Bank.
100
(22) Quarterly Financial Data (unaudited)
The tables below summarize our quarterly financial information for the years December 31, 2013 and 2012
(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
Preferred stock dividends
Net income available to common shareholders
Basic earnings per share:
Income from continuing operations
Net income
Diluted earnings per share:
Income from continuing operations
Net income
Average shares
Basic
Diluted
2013 Selected Quarterly Financial Data
Fourth
Third
Second
First
$
117,965
6,490
111,475
5,000
106,475
11,184
70,291
47,368
17,012
30,356
3
30,359
2,438
115,217
6,441
108,776
5,000
103,776
10,431
62,009
52,198
18,724
33,474
2
33,476
2,437
$
107,264
6,044
101,220
7,000
94,220
11,128
68,734
36,614
12,542
24,072
1
24,073
2,438
$
104,179
6,137
98,042
2,000
96,042
11,281
55,700
51,623
18,479
33,144
(1)
33,143
81
27,921
$
31,039
$
21,635
$
33,062
0.68
0.68
0.67
0.67
$
$
$
$
0.76
0.76
0.74
0.74
$
$
$
$
0.53
0.53
0.52
0.52
$
$
$
$
0.82
0.82
0.80
0.80
$
$
$
$
$
$
40,983,000
40,902,000
40,814,000
40,474,000
41,889,000
41,792,000
41,724,000
41,429,000
101
(In thousands except per share and average share data)
Fourth
Third
Second
First
2012 Selected Quarterly Financial 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
(23) Subsequent Events
$
$
$
$
$
$
107,769
6,614
101,155
4,500
96,655
12,836
60,074
49,417
17,982
31,435
(6)
$
102,011
5,156
$
96,855
3,000
93,855
10,552
53,521
50,886
18,316
32,570
(34)
$
95,546
4,906
90,640
1,000
89,640
10,462
53,973
46,129
16,506
29,623
(1)
31,429
$
32,536
$
29,622
$
0.78
0.78
0.76
0.76
$
$
$
$
0.82
0.82
0.80
0.80
$
$
$
$
0.78
0.78
0.76
0.76
$
$
$
$
93,131
4,902
88,229
3,000
85,229
9,190
52,276
42,143
15,062
27,081
4
27,085
0.72
0.72
0.70
0.70
40,446,000
39,618,000
38,013,000
37,795,000
41,505,000
40,756,000
39,142,000
38,914,000
On January 29, 2014, we completed a sale of 1.7 million shares of our common stock in a public offering.
Net proceeds from the sale totaled $96.6 million. On January 31, 2014, the Bank issued $175.0 million of
subordinated notes in an offering to institutional investors exempt from registration under Section 3(a)(2) of
the Securities Act of 1933 and 12 C.F.R. Part 16. Net proceeds from the transaction were $172.1 million.
The notes mature in January 2026 and bear interest at a rate of 5.25% per annum, payable semi-annually.
The notes are unsecured and are subordinate to the Bank’s obligations to its depositors, its obligations
under banker’s acceptances and letters of credit, certain obligations to Federal Reserve Banks and the
FDIC and the Bank’s obligations to its other creditors, except any obligations which expressly rank on a
parity with or junior to the notes. The notes are expected to qualify as Tier 2 capital for regulatory capital
purposes, subject to applicable limitations.
The net proceeds of the offerings were available to the Company for general corporate purposes, including
retirement of $15.0 million of short-term debt, and as additional capital to support continued loan growth.
(24) New Accounting Standards
ASU 2013-01, “Balance Sheet (Topic 210)—Clarifying the Scope of Disclosures about Offsetting Assets and
Liabilities” (“ASU 2013-01”) amends Topic 210, “Balance Sheet” to clarify that the scope of ASU 2011-11,
“Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” would apply to
derivatives including bifurcated embedded derivatives, repurchase agreements and reverse repurchase
and
agreements
102
securities borrowing and securities lending transactions that are offset in accordance with Topic 815,
“Derivatives and Hedging”. ASU 2013-01 was effective January 1, 2013 and did not have a significant
impact on our financial statements.
ASU 2013-02, “Comprehensive Income (Topic 220)—Reporting of Amounts Reclassified Out of Accumulated Other
Comprehensive Income” (“ASU 2013-02”) amends Topic 220, “Comprehensive Income” to improve the
reporting of reclassifications out of accumulated other comprehensive income. Entities are required to
separately present significant amounts reclassified out of accumulated other comprehensive income for
each component of accumulated other comprehensive income and to disclose, for each affected line item in
the income statement, the amount of accumulated other comprehensive income that has been reclassified
into that line item. ASU 2013-02 was effective for fiscal years, and interim periods within those years,
beginning after December 13, 2012 and did not have a significant impact on our financial statements.
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 was effective for annual periods
beginning after December 15, 2011, and did not 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
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 was 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
“Comprehensive Income (Topic 820)—Deferral of the Effective Date for Amendments to the Presentation
of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards
Update No. 2011-05.” ASU 2011-05 did not 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 was effective of annual and interim
impairment tests beginning after December 15, 2011, and did not have a significant impact on our financial
statements.
ASU 2011-11, “Balance Sheet (Topic 210)—“Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”)
amends Topic 210, “Balance Sheet,” to require an entity to disclose both gross and net information about
financial
instruments and transactions eligible for offset in the statement of financial position and
instruments and transactions subject to an agreement similar to a master netting arrangement. ASU 2011-11
is effective for annual and interim periods beginning on January 1, 2013, and is not expected to have a
significant impact on our financial statements.
103
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 (the “Exchange Act”) 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. At the
end of 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 as required by
Exchange Act Rule 13a-15(b). Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective as of December 31, 2013.
There were no changes in our internal control over financial reporting that occurred during the fiscal
quarter ended December 31, 2013, 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, 2013, 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, 2013.
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, 2013. The report, which expresses an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2013, is included in this Item under
the heading “Report of Independent Registered Public Accounting Firm.”
104
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
reporting as of
December 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (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.
financial
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, 2013, 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, 2013 and 2012, and the related consolidated statements of comprehensive income,
stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013 and
our report dated February 20, 2014 expressed an unqualified opinion thereon.
Dallas, Texas
February 20, 2014
105
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 20, 2014, which proxy materials will be filed with the SEC no later than
April 10, 2014.
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 20, 2014, which proxy materials will be filed with the SEC no later than
April 10, 2014.
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 20, 2014, which proxy materials will be filed with the SEC no later than
April 10, 2014.
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 20, 2014, which proxy materials will be filed with the SEC no later than
April 10, 2014.
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 20, 2014, which proxy materials will be filed with the SEC no later than
April 10, 2014.
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
106
(3) Exhibits
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
Certificate of Incorporation, which is incorporated by reference to Exhibit 3.1 to our
registration statement on Form 10 dated August 24, 2000
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, 2000
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, 2000
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, 2000
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, 2000
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
Certificate of Designation of 6.50% Non-Cumulative Perpetual Preferred Stock, Series A,
which is incorporated by reference to Exhibit 4.1 to our Current Report on form 8-K dated
March 28, 2013
Form of Preferred Stock Certificate for 6.50% Non-Cumulative Perpetual Preferred Stock,
Series A, which is incorporated by reference to Exhibit 4.2 to our Current report on Form 8-K
dated March 28, 2013
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
107
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
4.21
4.22
10.1
10.2
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
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
Subordinated Indenture between Texas Capital Bancshares, Inc. and U.S. Bank National
Association, as Trustee, dated September 21, 2012, which is incorporated by reference to our
Current Report on Form 8-K dated September 18, 2012
Issuing and Paying Agency Agreement, dated January 31, 2014, between Texas Capital Bank,
N.A., as Issuer, and U.S. Bank National Association, as Agent, which is incorporated by
reference to our Current Report on Form 8-K dated January 31, 2014.
Form of Global 5.25% Subordinated Note due 2026, which is incorporated by reference to
our Current Report on Form 8-K dated January 31, 2014.
Deferred Compensation Agreement, which is incorporated by reference to Exhibit 10.2 to
our registration statement on Form 10 dated August 24, 2000+
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.+
108
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
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+
Retirement Transition Agreement and Release dated June 10, 2013, between Texas Capital
Bancshares, Inc. and George F. Jones, Jr., which is incorporated by reference to Exhibit 99.2
to our Current Report on Form 8-K dated June 11, 2013+
Amendment to Performance Award Agreements under the Texas Capital Bancshares, Inc.
2010 Long-Term Incentive Plan between George Jones and the Company with respect to the
Performance Units described therein dated January 10, 2011, February 21, 2012 and March
2013 and the Stock Appreciation Rights Agreement between George Jones and the Company
dated April 24, 2006, which is incorporated by reference to Exhibit 10.1 to our Current
Report on Form 8-K dated January 3, 2014+
Restricted Stock Unit Award Agreement under the Texas Capital Bancshares, Inc. 2010
Long-Term Incentive Plan between George Jones and the Company (2017 vesting), which is
incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K dated
January 3, 2014+
Restricted Stock Unit Award Agreement under the Texas Capital Bancshares, Inc. 2010
Long-Term Incentive Plan between George Jones and the Company (2018 vesting), which is
incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K dated
January 3, 2014+
Executive Employment Agreement between C. Keith Cargill and Texas Capital Bancshares,
Inc. dated July 11, 2013, which is incorporated by reference to our Current Report on
Form 8-K dated July 12, 2013+
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+
Form of Executive Employment Agreement
Bancshares, Inc.*+
for executive officers of Texas Capital
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+
Form of Indemnity Agreement for directors and officers of Texas Capital Bancshares, Inc.*+
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, 2000+
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+
Form of Restricted Stock Unit Award Agreement under the Texas Capital Bancshares, Inc.
2010 Long-Term Incentive Plan*+
109
10.20
10.21
21
23.1
31.1
31.2
32.1
Form of Stock Appreciation Rights Agreement under the Texas Capital Bancshares, Inc.
2010 Long-Term Incentive Plan*+
Form of Performance Award Agreement under the Texas Capital Bancshares, Inc. 2010
Long-Term Incentive Plan*+
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**
32.2
Section 1350 Certification of Chief Financial Officer**
101.INS
101.SCH
101.CAL
XBRL Instance Document*
XBRL Taxonomy Extension Schema Document*
XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB
101.PRE
XBRL Taxonomy Extension Label Linkbase Document*
XBRL Taxonomy Extension Presentation Linkbase Document*
*
Filed herewith
** Furnished herewith
+ Management contract or compensatory plan arrangement
110
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
Date: February 20, 2014
TEXAS CAPITAL BANCSHARES, INC.
By: /S/ C. KEITH CARGILL
C. Keith Cargill
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 20, 2014
/S/ LARRY L. HELM
Larry L. Helm
Chairman of the Board and Director
Date: February 20, 2014
/S/ PETER BARTHOLOW
Peter Bartholow
Executive Vice President, Chief Financial Officer
and Director
(principal financial officer)
Date: February 20, 2014
/S/
JULIE ANDERSON
Julie Anderson
Executive Vice President and Controller
(principal accounting officer)
Date: February 20, 2014
/S/
JAMES H. BROWNING
Date: February 20, 2014
James H. Browning
Director
/S/ PRESTON M. GEREN III
Preston M. Geren III
Director
Date: February 20, 2014
/S/ FREDERICK B. HEGI, JR.
Frederick B. Hegi, Jr.
Director
Date: February 20, 2014
/S/ CHARLES S. HYLE
Charles S. Hyle
Director
Date: February 20, 2014
/S/
JAMES R. HOLLAND, JR.
James R. Holland, Jr.
Director
111
Date: February 20, 2014
/S/ WALTER W. MCALLISTER III
Walter W. McAllister III
Director
Date: February 20, 2014
/S/ ELYSIA H. RAGUSA
Elysia H. Ragusa
Director
Date: February 20, 2014
/S/ STEVEN P. ROSENBERG
Date: February 20, 2014
Steven P. Rosenberg
Director
/S/ GRANT E. SIMS
Grant E. Sims
Director
Date: February 20, 2014
/S/ ROBERT W. STALLINGS
Robert W. Stallings
Director
Date: February 20, 2014
/S/ DALE W. TREMBLAY
Date: February 20, 2014
Dale W. Tremblay
Director
/S/
IAN J. TURPIN
Ian J. Turpin
Director
112
COR PORATE INFO RM ATI ON
Stock Exchange
Texas Capital Bancshares, Inc is
traded under the symbol TCBI
on the Nasdaq Stock Market.®
Transfer Agent
Computershare Investor Services LLC
250 Royall Street, Mail Stop 1A
Canton, Massachusetts 02021
800.568.3476
Annual Meeting
The annual meeting of shareholders
will be held on May 20 at 10 a.m. at
2000 McKinney Avenue 7th floor
in Dallas.
Other Information
Corporate governance and other
investor information may be found at
www.texascapitalbank.com
LO CA TI ONS
Corporate Headquarters
2000 McKinney Avenue
Dallas, Texas 75201
214.932.6700
Dallas/Premier Place
5910 North Central Expressway
Dallas, Texas 75206
214.245.1100
Plano
5800 Granite Parkway
Plano, Texas 75024
972.963.3000
Midway/Spring Valley
14131 Midway Road
Addison, Texas 75001
972.450.5050
Austin
98 San Jacinto Blvd.
Austin, Texas 78701
512.305.4000
San Antonio/Quarry Heights
7373 Broadway
San Antonio, Texas 78209
210.283.5220
Richardson
2350 Lakeside Blvd.
Richardson, Texas 75082
972.656.6700
Austin/Westlake Hills
3818 Bee Caves Road
Austin, Texas 78746
512.362.7300
Houston
One Riverway
Houston, Texas 77056
832.308.7000
Fort Worth
570 Throckmorton
Fort Worth, Texas 76102
817.852.4000
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
BO ARD O F DIRECTO RS
Peter B. Bartholow
James H. Browning
C. Keith Cargill
Preston M. Geren III
Frederick B. Hegi, Jr.
Larry L. Helm
James R. Holland, Jr.
Charels S. Hyle
W.W. McAllister III
Elysia Holt Ragusa
Steven P. Rosenberg
Grant E. Sims
Robert W. Stallings
Dale W. Tremblay
Ian J. Turpin
www.texascapitalbank.com