TEXAS CAPITAL BANCSHARES INC/TX
10-Ks and 10-Qs
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Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|
þ
|
Annual Report pursuant to Section 13 or 15(d) of the Securities
and
Exchange Act of 1934 for the fiscal year ended December 31, 2009 |
|
|
o
|
Transition Report pursuant to Section 13 or 15(d) of the
Securities and
Exchange Act of 1934 for the transition period from to (No fee required) |
Texas
Capital Bancshares, Inc.
(Exact Name of Registrant as
Specified in Its Charter)
|
Delaware
|
000-30533 | 75-2679109 | ||
| (State or other jurisdiction of incorporation or organization) | (Commission File Number) | (I.R.S. Employer Identification Number) | ||
|
2000 McKinney Avenue, Suite 700,
Dallas, Texas, U.S.A. |
75201 |
214-932-6600 |
||
| (Address of principal executive offices) | (Zip Code) | (Registrant’s telephone number, including area code) |
Securities registered under Section 12(b) of the Exchange Act:
Common stock, par value $0.01 per share
(Title of class)
The Nasdaq Stock Market LLC
(Name of Exchange on Which
Registered)
Securities registered under
Section 12 (g) of the Exchange Act: NONE
Indicate by check mark if the
issuer is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act. Yes
o
No
þ
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
o
No
þ
Indicate by check mark whether the
issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes
þ
No
o
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
o
No
o
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.
o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting
company” in Rule
12b-2
of the
Exchange Act. (Check one):
|
Large accelerated filer
o
|
Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the issuer is a shell company (as
defined in
Rule 12b-2
of the Securities
Act). Yes
o
No
þ
As of June 30, 2009, the last business day of the
registrant’s most recently completed second fiscal quarter,
the aggregate market value of the shares of common stock held by
non-affiliates, based upon the closing price per share of the
registrant’s common stock as reported on The Nasdaq Global
Select Market, was approximately $526,919,000. There were
36,156,062 shares of the registrant’s common stock
outstanding on February 16, 2010.
Documents Incorporated by Reference
Portions of the registrant’s Proxy Statement relating to
the 2010 Annual Meeting of Stockholders, which will be filed no
later than April 8, 2010, are incorporated by reference
into Part III of this
Form 10-K.
TABLE OF
CONTENTS
i
Table of Contents
| ITEM 1. | BUSINESS |
Background
Texas Capital Bancshares, Inc., a financial holding company, is
the parent of Texas Capital Bank, National Association, a
Texas-based bank headquartered in Dallas, with banking offices
in Dallas, Houston, Fort Worth, Austin and
San Antonio, the state’s five largest metropolitan
areas. All of our business activities are conducted through our
bank subsidiary. Our market focus is commercial businesses and
high net worth individuals, and we offer a variety of banking
products and services to our customers. We have focused on
organic growth, maintenance of credit quality and bankers with
strong personal and professional relationships in their
communities.
We focus on serving the needs of commercial and high net worth
customers, the core of our model since our organization in March
1998. We do not incur the costs of competing in an over-branched
and over-crowded consumer market. We are primarily a secured
lender in Texas, and, as a result, we have experienced a low
percentage of charge-offs relative to both total loans and
non-performing loans since inception. Our loan portfolio is
diversified by industry, collateral and geography in Texas.
Growth
History
We have grown substantially in both size and profitability since
our formation. The table below sets forth data regarding the
growth of key areas of our business from December 2005 through
December 2009 (in thousands):
| December 31 | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
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Loans held for investment
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$ | 4,457,293 | $ | 4,027,871 | $ | 3,462,608 | $ | 2,722,097 | $ | 2,075,961 | ||||||||||
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Total loans(1)
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5,150,797 | 4,524,222 | 3,636,774 | 2,921,111 | 2,148,344 | |||||||||||||||
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Assets(1)
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5,698,318 | 5,141,034 | 4,287,853 | 3,659,445 | 3,003,430 | |||||||||||||||
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Deposits
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4,120,725 | 3,333,187 | 3,066,377 | 3,069,330 | 2,495,179 | |||||||||||||||
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Stockholders’ equity
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481,360 | 387,073 | 295,138 | 253,515 | 215,523 | |||||||||||||||
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| (1) | From continuing operations. |
The following table provides information about the growth of our
loan portfolio by type of loan from December 2005 to December
2009 (in thousands):
| December 31 | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
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Commercial loans
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$ | 2,457,533 | $ | 2,276,054 | $ | 2,035,049 | $ | 1,602,577 | $ | 1,182,734 | ||||||||||
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Total real estate loans
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1,903,127 | 1,656,221 | 1,347,429 | 1,068,963 | 865,797 | |||||||||||||||
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Construction loans
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669,426 | 667,437 | 573,459 | 538,586 | 387,163 | |||||||||||||||
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Real estate term loans
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1,233,701 | 988,784 | 773,970 | 530,377 | 478,634 | |||||||||||||||
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Loans held for sale
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693,504 | 496,351 | 174,166 | 199,014 | 72,383 | |||||||||||||||
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Loans held for sale from discontinued operations
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586 | 648 | 731 | 16,844 | 38,795 | |||||||||||||||
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Equipment leases
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99,129 | 86,937 | 74,523 | 45,280 | 16,337 | |||||||||||||||
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Consumer loans
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25,065 | 32,671 | 28,334 | 21,113 | 19,962 | |||||||||||||||
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The Texas
Market
The Texas market for banking services is highly competitive.
Texas’ largest banking organizations are headquartered
outside of Texas and are controlled by
out-of-state
organizations. We also compete with other providers of financial
services, such as savings and loan associations, credit unions,
consumer finance companies, securities firms, insurance
companies, insurance agencies, commercial finance and leasing
companies, full service brokerage firms and discount brokerage
firms. We believe that many middle market
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Table of Contents
companies and high net worth individuals are interested in
banking with a company headquartered in, and with
decision-making authority based in, Texas and with established
Texas bankers who have the expertise to act as trusted advisors
to the customer with regard to its banking needs. Our banking
centers in our target markets are served by experienced bankers
with lending expertise in the specific industries found in their
market areas and established community ties. We believe our bank
can offer customers more responsive and personalized service. We
believe that, if we service these customers properly, we will be
able to establish long-term relationships and provide multiple
products to our customers, thereby enhancing our profitability.
Business
Strategy
Utilizing the business and community ties of our management and
their banking experience, our strategy is building an
independent bank that focuses primarily on middle market
business customers and high net worth individuals in each of the
five major metropolitan markets of Texas. To achieve this, we
seek to implement the following strategies:
| • | target middle market businesses and high net worth individuals; | |
| • | grow our loan and deposit base in our existing markets by hiring additional experienced Texas bankers; | |
| • | continue the emphasis on credit policy to provide for credit quality consistent with long-term objectives; | |
| • | improve our financial performance through the efficient management of our infrastructure and capital base, which includes: |
| • | leveraging our existing infrastructure to support a larger volume of business; | |
| • | maintaining stringent internal approval processes for capital and operating expenses; | |
| • | extensive use of outsourcing to provide cost-effective operational support with service levels consistent with large-bank operations; and |
| • | extend our reach within our target markets of Austin, Dallas, Fort Worth, Houston and San Antonio through service innovation and service excellence. |
Products
and Services
We offer a variety of loan, deposit account and other financial
products and services to our customers.
Business Customers.
We offer a full range of
products and services oriented to the needs of our business
customers, including:
| • | commercial loans for general corporate purposes including financing for working capital, internal growth, acquisitions and financing for business insurance premiums; | |
| • | real estate term and construction loans; | |
| • | equipment leasing; | |
| • | cash management services; | |
| • | trust and escrow services; and | |
| • | letters of credit. |
Individual Customers.
We also provide complete
banking services for our individual customers, including:
| • | personal trust and wealth management services; | |
| • | certificates of deposit; | |
| • | interest bearing and non-interest bearing checking accounts with optional features such as Visa ® debit/ATM cards and overdraft protection; |
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| • | traditional money market and savings accounts; | |
| • | consumer loans, both secured and unsecured; | |
| • | branded Visa ® credit card accounts, including gold-status accounts; and | |
| • | internet banking. |
Lending
Activities
We target our lending to middle market businesses and high net
worth individuals that meet our credit standards. The credit
standards are set by our standing Credit Policy Committee with
the assistance of our Bank’s Chief Credit Officer, who is
charged with ensuring that credit standards are met by loans in
our portfolio. Our Credit Policy Committee is comprised of
senior Bank officers including our Bank’s Chief Executive
Officer, our President/Chief Lending Officer and our Bank’s
Chief Credit Officer. We believe we have maintained a
diversified loan portfolio. Credit policies and underwriting
guidelines are tailored to address the unique risks associated
with each industry represented in the portfolio. Our credit
standards for commercial borrowers reference numerous criteria
with respect to the borrower, including historical and projected
financial information, strength of management, acceptable
collateral and associated advance rates, and market conditions
and trends in the borrower’s industry. In addition,
prospective loans are also analyzed based on current industry
concentrations in our loan portfolio to prevent an unacceptable
concentration of loans in any particular industry. We believe
our credit standards are consistent with achieving business
objectives in the markets we serve and will generally mitigate
risks. We believe that we differentiate our bank from its
competitors by focusing on and aggressively marketing to our
core customers and accommodating, to the extent permitted by our
credit standards, their individual needs.
We generally extend variable rate loans in which the interest
rate fluctuates with a predetermined indicator such as the
United States prime rate or the London Interbank Offered Rate
(LIBOR). Our use of variable rate loans is designed to protect
us from risks associated with interest rate fluctuations since
the rates of interest earned will automatically reflect such
fluctuations.
Deposit
Products
We offer a variety of deposit products to our core customers at
interest rates that are competitive with other banks. Our
business deposit products include commercial checking accounts,
lockbox accounts, cash concentration accounts, and other cash
management products. Our consumer deposit products include
checking accounts, savings accounts, money market accounts and
certificates of deposit. We also allow our consumer deposit
customers to access their accounts, transfer funds, pay bills
and perform other account functions over the Internet and
through ATM machines.
Trust and
Asset Management
Our 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
In June 2003, we received authorization from the Cayman Islands
Monetary Authority to establish a branch of our bank in the
Cayman Islands. We believe that a Cayman Islands branch of our
bank enables us to offer more competitive cash management and
deposit products to our core customers. Our Cayman Islands
branch consists of an agented office to facilitate our offering
of these products. We opened our Cayman Islands branch in
September 2003. All deposits in the Cayman Branch come from
U.S. based customers of our Bank. Deposits do not originate
from foreign sources, and funds transfers neither come from nor
go to facilities outside of the
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U.S. All deposits are in U.S. dollars. As of
December 31, 2009, our Cayman Islands deposits totaled
$384.1 million.
Employees
As of December 31, 2009, we had 631 full-time
employees relating to our continuing operations. None of our
employees is represented by a collective bargaining agreement
and we consider our relations with our employees to be good.
Regulation
and Supervision
Current banking laws contain numerous provisions affecting
various aspects of our business. Our bank is subject to federal
banking laws and regulations that impose specific requirements
on and provide regulatory oversight of virtually all aspects of
our operations. These laws and regulations are generally
intended for the protection of depositors, the deposit insurance
funds of the Federal Deposit Insurance Corporation, or the FDIC,
and the banking system as a whole, rather than for the
protection of our stockholders. Banking regulators have broad
enforcement powers over financial holding companies and banks
and their affiliates, including the power to establish
regulatory requirements, impose large fines and other penalties
for violations of laws and regulations. The following is a brief
summary of laws and regulations to which we are subject.
National banks such as our bank are subject to examination by
the Office of the Comptroller of the Currency, or the OCC. The
OCC and the FDIC regulate or monitor all areas of a national
bank’s operations, including security devices and
procedures, adequacy of capitalization and loss reserves, loans,
investments, borrowings, deposits, mergers, issuances of
securities, payment of dividends, interest rate risk management,
establishment of branches, corporate reorganizations,
maintenance of books and records, and adequacy of staff training
to carry on safe lending and deposit gathering practices. The
OCC requires national banks to maintain capital ratios and
imposes limitations on its aggregate investment in real estate,
bank premises and furniture and fixtures. National banks are
currently required by the OCC to prepare quarterly reports on
their financial condition and to conduct an annual audit of
their financial affairs in compliance with minimum standards and
procedures prescribed by the OCC.
Restrictions on Dividends and Repurchases.
Our
source of funding to pay dividends is our bank. Our bank is
subject to the dividend restrictions set forth by the OCC. Under
such restrictions, national banks may not, without the prior
approval of the OCC, declare dividends in excess of the sum of
the current year’s net profits plus the retained net
profits from the prior two years, less any required transfers to
surplus. In addition, under the Federal Deposit Insurance
Corporation Improvement Act of 1991, our bank may not pay any
dividend if payment would cause it to become undercapitalized or
in the event it is undercapitalized.
It is the policy of the Federal Reserve, which regulates
financial holding companies such as ours, that financial holding
companies should pay cash dividends on common stock only out of
income available over the past year and only if prospective
earnings retention is consistent with the organization’s
expected future needs and financial condition. The policy
provides that financial holding companies should not maintain a
level of cash dividends that undermines the financial holding
company’s ability to serve as a source of strength to its
banking subsidiaries.
If, in the opinion of the applicable federal bank regulatory
authority, a depository institution or holding company is
engaged in or is about to engage in an unsound practice (which
could include the payment of dividends), such authority may
require, generally after notice and hearing, that such
institution or holding company cease and desist such practice.
The federal banking agencies have indicated that paying
dividends that deplete a depository institution’s or
holding company’s capital base to an inadequate level would
be such an unsafe banking practice. Moreover, the Federal
Reserve and the FDIC have issued policy statements providing
that financial holding companies and insured depository
institutions generally should only pay dividends out of current
operating earnings.
Supervision by the Federal Reserve.
We operate
as a financial holding company registered under the Bank Holding
Company Act, and, as such, we are subject to supervision,
regulation and examination by the Federal
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Table of Contents
Reserve. The Bank Holding Company Act and other Federal laws
subject financial holding companies to particular restrictions
on the types of activities in which they may engage, and to a
range of supervisory requirements and activities, including
regulatory enforcement actions for violations of laws and
regulations.
Because we are a legal entity separate and distinct from our
bank, our right to participate in the distribution of assets of
any subsidiary upon the subsidiary’s liquidation or
reorganization will be subject to the prior claims of the
subsidiary’s creditors. In the event of a liquidation or
other resolution of a subsidiary, the claims of depositors and
other general or subordinated creditors are entitled to a
priority of payment over the claims of holders of any obligation
of the institution to its stockholders, including any financial
holding company (such as ours) or any stockholder or creditor
thereof.
Support of Subsidiary Banks.
Under Federal
Reserve policy, a financial holding company is expected to act
as a source of financial and managerial strength to each of its
banking subsidiaries and commit resources to their support. Such
support may be required at times when, absent this Federal
Reserve policy, a holding company may not be inclined to provide
it. As discussed below, a financial holding company in certain
circumstances could be required to guarantee the capital plan of
an undercapitalized banking subsidiary in order for it to be
accepted by the regulators.
In the event of a financial holding company’s bankruptcy
under Chapter 11 of the U.S. Bankruptcy Code, the
bankruptcy trustee will be deemed to have assumed and is
required to cure immediately any deficit under any commitment by
the debtor holding company to any of the federal banking
agencies to maintain the capital of an insured depository
institution, and any claim for breach of such obligation will
generally have priority over most other unsecured claims.
Capital Adequacy Requirements.
The bank
regulators have adopted a system using risk-based capital
guidelines to evaluate the capital adequacy of banking
organizations. Under the guidelines, specific categories of
assets and off-balance sheet activities such as letters of
credit are assigned different risk weights, based generally on
the perceived credit risk of the asset. These risk weights are
multiplied by corresponding asset balances to determine a
“risk weighted” asset base. The guidelines require a
minimum total risk-based capital ratio of 8% (of which at least
4% is required to consist of Tier 1 capital elements).
In addition to the risk-based capital guidelines, the OCC and
the Federal Reserve uses a leverage ratio as an additional tool
to evaluate the capital adequacy of banking organizations. The
leverage ratio is a company’s Tier 1 capital divided
by its average total consolidated assets. Banking organizations
must maintain a minimum leverage ratio of at least 3%, although
most organizations are expected to maintain leverage ratios that
are at least 100 to 200 basis points above this minimum
ratio.
The federal banking agencies’ risk-based and leverage
ratios are minimum supervisory ratios generally applicable to
banking organizations that meet specified criteria, assuming
that they have the highest regulatory rating. Banking
organizations not meeting these criteria are expected to operate
with capital positions well above the minimum ratios. The
federal bank regulatory agencies may set capital requirements
for a particular banking organization that are higher than the
minimum ratios when circumstances warrant. Federal Reserve and
OCC guidelines also provide that banking organizations
experiencing significant internal growth or making acquisitions
will be expected to maintain strong capital positions
substantially above the minimum supervisory levels, without
significant reliance on intangible assets. In addition, the
regulations of the bank regulators provide that concentration of
credit risks arising from non-traditional activities, as well as
an institution’s ability to manage these risks, are
important factors to be taken into account by regulatory
agencies in assessing an organization’s overall capital
adequacy.
Transactions with Affiliates and Insiders.
Our
bank is subject to Section 23A of the Federal Reserve Act
which places limits on the amount of loans or extensions of
credit to affiliates that it may make. In addition, extensions
of credit must be collateralized by Treasury securities or other
collateral in prescribed amounts. Most of these loans and other
transactions must be secured in prescribed amounts. It also
limits the amount of advances to third parties which are
collateralized by our securities or obligations or the
securities or obligations of any of our non-banking subsidiaries.
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Our bank also is subject to Section 23B of the Federal
Reserve Act, which, among other things, prohibits an institution
from engaging in transactions with affiliates unless the
transactions are on terms substantially the same, or at least as
favorable to such institution or its subsidiaries, as those
prevailing at the time for comparable transactions with
non-affiliates.
We are subject to restrictions on extensions of credit to
executive officers, directors, principal stockholders and their
related interests. These restrictions contained in the Federal
Reserve Act and Federal Reserve Regulation O apply to all
insured institutions and their subsidiaries and holding
companies. These restrictions include limits on loans to one
borrower and conditions that must be met before such a loan can
be made. There is also an aggregate limitation on all loans to
insiders and their related interests. These loans cannot exceed
the institution’s total unimpaired capital and surplus, and
the FDIC may determine that a lesser amount is appropriate.
Insiders are subject to enforcement actions for knowingly
accepting loans in violation of applicable restrictions.
Corrective Measures for Capital
Deficiencies.
The Federal Deposit Insurance
Corporation Improvement Act imposes a regulatory matrix which
requires the federal banking agencies, which include the FDIC,
the OCC and the Federal Reserve, to take “prompt corrective
action” with respect to capital deficient institutions. The
prompt corrective action provisions subject undercapitalized
institutions to an increasingly stringent array of restrictions,
requirements and prohibitions as their capital levels
deteriorate and supervisory problems mount. Should these
corrective measures prove unsuccessful in recapitalizing the
institution and correcting its problems, the Federal Deposit
Insurance Corporation Improvement Act mandates that the
institution be placed in receivership.
Pursuant to regulations promulgated under the Federal Deposit
Insurance Corporation Improvement Act, the corrective actions
that the banking agencies either must or may take are tied
primarily to an institution’s capital levels. In accordance
with the framework adopted by the Federal Deposit Insurance
Corporation Improvement Act, the banking agencies have developed
a classification system, pursuant to which all banks and thrifts
are placed into one of five categories. Agency regulations
define, for each capital category, the levels at which
institutions are “well capitalized”, “adequately
capitalized”, “undercapitalized”,
“significantly undercapitalized” and “critically
undercapitalized.” A well capitalized bank has a total
risk-based capital ratio (total capital to risk-weighted assets)
of 10% or higher; a Tier 1 risk-based capital ratio
(Tier 1 capital to risk-weighted assets) of 6% or higher; a
leverage ratio (Tier 1 capital to total adjusted assets) of
5% or higher; and is not subject to any written agreement, order
or directive requiring it to maintain a specific capital level
for any capital measure. An institution is critically
undercapitalized if it has a tangible equity to total assets
ratio that is equal to or less than 2%. Our bank’s total
risk-based capital ratio was 10.36% at December 31, 2009
and, as a result, it is currently classified as “well
capitalized” for purposes of the OCC’s prompt
corrective action regulations. The bank’s capital category
of “well capitalized” is determined solely for the
purposes of applying prompt corrective action and that the
capital category may not constitute an accurate representation
of the bank’s overall financial condition or prospects. The
OCC, Federal Reserve and FDIC may, pursuant to changes in their
regulatory or statutory responsibilities, determine that
additional capital may be required.
In addition to requiring undercapitalized institutions to submit
a capital restoration plan which must be guaranteed by its
holding company (up to specified limits) in order to be accepted
by the bank regulators, agency regulations contain broad
restrictions on activities of undercapitalized institutions
including asset growth, acquisitions, branch establishment and
expansion into new lines of business. With some exceptions, an
insured depository institution is prohibited from making capital
distributions, including dividends, and is prohibited from
paying management fees to control persons if the institution
would be undercapitalized after any such distribution or payment.
As an institution’s capital decreases, the OCC’s
enforcement powers become more severe. A significantly
undercapitalized institution is subject to mandated capital
raising activities, restrictions on interest rates paid and
transactions with affiliates, removal of management and other
restrictions. The OCC has only very limited discretion in
dealing with a critically undercapitalized institution and is
virtually required to appoint a receiver or conservator (the
FDIC) if the capital deficiency is not corrected promptly.
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Banks with risk-based capital and leverage ratios below the
required minimums may also be subject to certain administrative
actions, including the termination of deposit insurance upon
notice and hearing, or a temporary suspension of insurance
without a hearing in the event the institution has no tangible
capital.
Sarbanes-Oxley Act of 2002.
The Sarbanes-Oxley
Act of 2002 (“Sarbanes-Oxley”) contains important
requirements for public companies in the area of financial
disclosure and corporate governance. In accordance with
Section 302(a) of Sarbanes-Oxley, written certifications by
our chief executive officer and chief financial officer are
required. These certifications attest that our quarterly and
annual reports do not contain any untrue statement of a material
fact.
Financial Modernization Act of 1999.
The
Gramm-Leach-Bliley Financial Modernization Act of 1999 (the
Modernization Act):
| • | allows bank holding companies meeting management, capital and Community Reinvestment Act standards to engage in a substantially broader range of non-banking activities than was permissible prior to enactment, including insurance underwriting and making merchant banking investments in commercial and financial companies; | |
| • | allows insurers and other financial services companies to acquire banks; and | |
| • | removes various restrictions that applied to bank holding company ownership of securities firms and mutual fund advisory companies; and establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations. |
The Modernization Act also modifies other current financial
laws, including laws related to financial privacy. The financial
privacy provisions generally prohibit financial institutions,
including us, from disclosing non-public personal financial
information to non-affiliated third parties unless customers
have the opportunity to “opt out” of the disclosure.
Community Reinvestment Act.
The Community
Reinvestment Act of 1977 (CRA) requires depository institutions
to assist in meeting the credit needs of their market areas
consistent with safe and sound banking practice. Under the CRA,
each depository institution is required to help meet the credit
needs of its market areas by, among other things, providing
credit to low- and moderate-income individuals and communities.
Depository institutions are periodically examined for compliance
with the CRA and are assigned ratings. In order for a financial
holding company to commence new activity permitted by the Bank
Holding Company Act, each insured depository institution
subsidiary of the financial holding company must have received a
rating of at least “satisfactory” in its most recent
examination under the CRA.
The USA Patriot Act, the International Money Laundering
Abatement and Financial Anti-Terrorism Act and the Bank Secrecy
Act.
A major focus of governmental policy on
financial institutions in recent years has been aimed at
combating money laundering and terrorist financing. The USA
Patriot Act of 2001 and the International Money Laundering
Abatement and Financial Anti-Terrorism Act of 2001 substantially
broadened the scope of United States anti-money laundering laws
and penalties, specifically related to the Bank Secrecy Act, and
expanded the extra-territorial jurisdiction of the United
States. The United States Treasury Department has issued a
number of implementing regulations which apply various
requirements of the USA Patriot Act to financial institutions
such as our bank. These regulations impose obligations on
financial institutions to maintain appropriate policies,
procedures and controls to detect, prevent and report money
laundering and terrorist financing and to verify the identity of
their customers. Failure of a financial institution to maintain
and implement adequate programs to combat money laundering and
terrorist financing, or to comply with relevant laws or
regulations, could have serious legal, reputational and
financial consequences for the institution. Because of the
significance of regulatory emphasis on these requirements, we
will continue to expend significant staffing, technology and
financial resources to maintain programs designed to ensure
compliance with applicable laws and regulations and an effective
audit function for testing our compliance with the Bank Secrecy
Act on an ongoing basis.
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Available
Information
Under the Securities Exchange Act of 1934, we are required to
file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission
(“SEC”). You may read and copy any document filed by
us with the SEC at the SEC’s Public Reference Room at
100 F Street, N.E., Washington, D.C. 20549.
Please call the SEC at
1-800-SEC-0330
for further information about the public reference room. The SEC
maintains a website at
www.sec.gov
that contains reports,
proxy and information statements and other information regarding
issuers that file electronically with the SEC. We file
electronically with the SEC.
We make available, free of charge through our website, our
reports on
Forms 10-K,
10-Q
and
8-K,
and
amendments to those reports, as soon as reasonably practicable
after such reports are filed with or furnished to the SEC.
Additionally, we have adopted and posted on our website a code
of ethics that applies to our principal executive officer,
principal financial officer and principal accounting officer.
The address for our website is
www.texascapitalbank.com
.
We will provide a printed copy of any of the aforementioned
documents to any requesting shareholder.
| ITEM 1A. | RISK FACTORS |
An investment in our common stock involves certain risks. You
should consider carefully the following risks and other
information in this report, including our financial information
and related notes, before investing in our common stock. The
risks and uncertainties described below are not the only ones
facing us. Additional risks and uncertainties that management is
not aware of or focused on or that management currently deems
immaterial may also impair our business operations. This report
is qualified in its entirety by these risk factors.
Risk
Factors Associated With Our Business
We must effectively manage our credit
risk.
There are risks inherent in making any
loan, including risks with respect to the period of time over
which the loan may be repaid, risks resulting from changes in
economic and industry conditions, risks inherent in dealing with
individual borrowers and risks resulting from uncertainties as
to the future value of collateral. The risk of non-payment of
loans is inherent in commercial banking. Although we attempt to
minimize our credit risk by carefully monitoring the
concentration of our loans within specific industries and
through prudent loan approval practices in all categories of our
lending, we cannot assure you that such monitoring and approval
procedures will reduce these lending risks. We cannot assure you
that our credit administration personnel, policies and
procedures will adequately adapt to changes in economic or any
other conditions affecting customers and the quality of the loan
portfolio.
Our results of operation and financial condition would be
adversely affected if our allowance for loan losses is not
sufficient to absorb actual losses.
Experience in
the banking industry indicates that a portion of our loans in
all categories of our lending business will become delinquent,
and some may only be partially repaid or may never be repaid at
all. Our methodology for establishing the adequacy of the
allowance for loan losses depends on subjective application of
risk grades as indicators of borrowers’ ability to repay.
Deterioration in general economic conditions and unforeseen
risks affecting customers may have an adverse effect on
borrowers’ capacity to repay timely their obligations
before risk grades could reflect those changing conditions. In
times of improving credit quality, with growth in our loan
portfolio, the allowance for loan losses may decrease as a
percent of total loans. Changes in economic and market
conditions may increase the risk that the allowance would become
inadequate if borrowers experience economic and other conditions
adverse to their businesses. Maintaining the adequacy of our
allowance for loan losses may require that we make significant
and unanticipated increases in our provisions for loan losses,
which would materially affect our results of operations and
capital adequacy. Recognizing that many of our loans
individually represent a significant percentage of our total
allowance for loan losses, adverse collection experience in a
relatively small number of loans could require an increase in
our allowance. Federal regulators, as an integral part of their
respective supervisory functions, periodically review our
allowance for loan losses. The regulatory agencies may require
us to change classifications or grades on loans, increase the
allowance for loan losses with large provisions for loan losses
and to recognize further loan charge-offs based upon their
judgments, which may be different from
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ours. Any increase in the allowance for loan losses required by
these regulatory agencies could have a negative effect on our
results of operations and financial condition.
Our growth plans are dependent on the availability of capital
and funding.
Our historical dependence on trust
preferred and other forms of debt capital, became limited by
market conditions beyond our control, as has been evidenced with
the economic downturn and issues affecting the financial
services industry. Pricing of capital, in terms of interest or
dividend requirements or dilutive impact on earnings available
to shareholders have increased dramatically, and an increase in
costs of capital can have a direct impact on operating
performance and the ability to achieve growth objectives. Costs
of funding could also increase dramatically and affect our
growth objectives, as well as our financial performance.
Additionally, the FDIC’s unlimited guarantee on
non-interest bearing deposits ends June 30, 2010 and that
could adversely affect our ability to attract and maintain
non-interest bearing deposits as a source of cost effective
funding. Adverse changes in operating performance or financial
condition or changes in statutory or regulatory requirements
could make the capital necessary to support or maintain the
bank’s “well capitalized” status either difficult
to obtain or extremely expensive.
Our operations are significantly affected by interest rate
levels.
Our profitability is dependent to a large
extent on our net interest income, which is the difference
between interest income we earn as a result of interest paid to
us on loans and investments and interest we pay to third parties
such as our depositors and those from whom we borrow funds. Like
most financial institutions, we are affected by changes in
general interest rate levels, which are currently at record low
levels, and by other economic factors beyond our control.
Prolonged periods of unusually low interest rates may have an
adverse effect on earnings by reducing the value of demand
deposits, stockholders’ equity and fixed rate liabilities
with rates higher than available earning assets. Interest rate
risk can result from mismatches between the dollar amount of
repricing or maturing assets and liabilities and from mismatches
in the timing and rate at which our assets and liabilities
reprice. Although we have implemented strategies which we
believe reduce the potential effects of changes in interest
rates on our results of operations, these strategies will not
always be successful. In addition, any substantial and prolonged
increase in market interest rates could reduce our
customers’ desire to borrow money from us or adversely
affect their ability to repay their outstanding loans by
increasing their costs since most of our loans have adjustable
interest rates that reset periodically. If our borrowers’
ability to repay is affected, our level of non-performing assets
would increase and the amount of interest earned on loans will
decrease, thereby having an adverse effect on operating results.
Any of these events could adversely affect our results of
operations or financial condition.
Our business faces unpredictable economic and business
conditions.
General economic conditions and
specific business conditions impact the banking industry and our
customers’ businesses. The credit quality of our loan
portfolio necessarily reflects, among other things, the general
economic conditions in the areas in which we conduct our
business. Our continued financial success depends somewhat on
factors beyond our control, including:
| • | national and local economic conditions; | |
| • | the supply and demand for investable funds; | |
| • | interest rates; and | |
| • | federal, state and local laws affecting these matters. |
Substantial deterioration in any of the foregoing conditions, as
we have experienced with the current economic downturn, can have
a material adverse effect on our results of operations and
financial condition, and we may not be able to sustain our
historical rate of growth. Our bank’s customer base is
primarily commercial in nature, and our bank does not have a
significant branch network or retail deposit base. In periods of
economic downturn, business and commercial deposits may tend to
be more volatile than traditional retail consumer deposits and,
therefore, during these periods our financial condition and
results of operations could be adversely affected to a greater
degree than our competitors that have a larger retail customer
base.
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We are dependent upon key personnel.
Our
success depends to a significant extent upon the performance of
certain key employees, the loss of whom could have an adverse
effect on our business. Although we have entered into employment
agreements with certain employees, we cannot assure you that we
will be successful in retaining key employees.
Our business is concentrated in Texas and a downturn in the
economy of Texas may adversely affect our
business.
A substantial majority of our business
is located in Texas. As a result, our financial condition and
results of operations may be affected by changes in the Texas
economy. A prolonged period of economic recession or other
adverse economic conditions in Texas may result in an increase
in non-payment of loans and a decrease in collateral value.
Our business strategy focuses on organic growth within our
target markets and, if we fail to manage our growth effectively,
it could negatively affect our operations.
We
intend to develop our business principally through organic
growth. Our prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in
significant growth stages of development. In order to execute
our growth strategy successfully, we must, among other things:
| • | identify and expand into suitable markets and lines of business; | |
| • | build our customer base; | |
| • | maintain credit quality; | |
| • | attract sufficient deposits to fund our anticipated loan growth; | |
| • | attract and retain qualified bank management in each of our targeted markets; | |
| • | identify and pursue suitable opportunities for opening new banking locations; and | |
| • | maintain adequate regulatory capital. |
Failure to manage our growth effectively could have a material
adverse effect on our business, future prospects, financial
condition or results of operations, and could adversely affect
our ability to successfully implement our business strategy.
We compete with many larger financial institutions which have
substantially greater financial resources than we
have.
Competition among financial institutions in
Texas is intense. We compete with other financial and bank
holding companies, state and national commercial banks, savings
and loan associations, consumer finance companies, credit
unions, securities brokerages, insurance companies, mortgage
banking companies, money market mutual funds, asset-based
non-bank lenders and other financial institutions. Many of these
competitors have substantially greater financial resources,
lending limits and larger branch networks than we do, and are
able to offer a broader range of products and services than we
can. Failure to compete effectively for deposit, loan and other
banking customers in our markets could cause us to lose market
share, slow our growth rate and may have an adverse effect on
our financial condition and results of operations.
The risks involved in commercial lending may be
material.
We generally invest a greater
proportion of our assets in commercial loans than other banking
institutions of our size, and our business plan calls for
continued efforts to increase our assets invested in these
loans. Commercial loans may involve a higher degree of credit
risk than some other types of loans due, in part, to their
larger average size, the effects of changing economic conditions
on commercial loans, the dependency on the cash flow of the
borrowers’ businesses to service debt, the sale of assets
securing the loans, and disposition of collateral which may not
be readily marketable. Losses incurred on a relatively small
number of commercial loans could have a materially adverse
impact on our results of operations and financial condition.
Real estate lending in our core Texas markets involves risks
related to a decline in value of commercial and residential real
estate.
Our real estate lending activities, and
the exposure to fluctuations in real estate values, are
significant and expected to increase. The market value of real
estate can fluctuate significantly in a relatively short period
of time as a result of market conditions in the geographic area
in which the real estate is located. If the value of the real
estate serving as collateral for our loan portfolio were to
decline materially, a significant part of our loan
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portfolio could become under-collateralized and we may not be
able to realize the amount of security that we anticipated at
the time of originating the loan. Conditions in certain segments
of the real estate industry, including homebuilding, lot
development and mortgage lending, may have an effect on values
of real estate pledged as collateral in our markets. The
inability of purchasers of real estate, including residential
real estate, to obtain financing may weaken the financial
condition of borrowers dependent on the sale or refinancing of
property. Failure to sell some loans held for sale in accordance
with contracted terms may result in mark to market charges to
other operating income. In addition, after the mark to market,
we may transfer the loans into the loans held for investment
portfolio where they will then be subject to changes in grade,
classification, accrual status, foreclosure, or loss which could
have an effect on the adequacy of the allowance for loan losses.
When conditions warrant, we may find it beneficial to
restructure loans to improve prospects of collectability, and
such actions may require loans to be treated as troubled debt
restructurings, or non-performing loans.
Our future profitability depends, to a significant extent,
upon revenue we receive from our middle market business
customers and their ability to meet their loan
obligations.
Our future profitability depends, to
a significant extent, upon revenue we receive from middle market
business customers, and their ability to continue to meet
existing loan obligations. As a result, adverse economic
conditions or other factors adversely affecting this market
segment may have a greater adverse effect on us than on other
financial institutions that have a more diversified customer
base.
System failure or breaches of our network security could
subject us to increased operating costs as well as litigation
and other liabilities.
The computer systems and
network infrastructure we use could be vulnerable to unforeseen
problems. Our operations are dependent upon our ability to
protect our computer equipment against damage from fire, power
loss, telecommunications failure or a similar catastrophic
event. Any damage or failure that causes an interruption in our
operations could have an adverse effect on our customers. In
addition, we must be able to protect the computer systems and
network infrastructure utilized by us against physical damage,
security breaches and service disruption caused by the Internet
or other users. Such computer break-ins and other disruptions
would jeopardize the security of information stored in and
transmitted through our computer systems and network
infrastructure, which may result in significant liability to us
and deter potential customers. Although we, with the help of
third-party service providers, will continue to implement
security technology and establish operational procedures to
prevent such damage, there can be no assurance that these
security measures will be successful. In addition, the failure
of our customers to maintain appropriate security for their
systems may increase our risk of loss. We have and will continue
to incur costs with the training of our customers about
protection of their systems. However, we cannot be assured that
this training will be adequate to avoid risk to our customers
or, under unknown circumstances to us.
We are subject to extensive government regulation and
supervision.
We are subject to extensive federal
and state regulation and supervision. Banking regulations are
primarily intended to protect depositors’ funds, federal
deposit insurance funds and the banking system as a whole, not
shareholders. These regulations affect our lending practices,
capital structure, investment practices, dividend policy,
operations and growth, among other things. These regulations
also impose obligations to maintain appropriate policies,
procedures and controls, among other things, to detect, prevent
and report money laundering and terrorist financing and to
verify the identities of our customers. Congress and federal
regulatory agencies continually review banking laws, regulations
and policies for possible changes. Changes to statutes,
regulations or regulatory policies, including changes in
interpretation or implementation of statutes, regulations or
policies, could affect us in substantial and unpredictable ways.
Such changes could subject us to additional costs, impose
requirements for additional capital, limit the types of
financial services and products we may offer
and/or
increase the ability of non-banks to offer competing financial
services and products, among other things. We expend substantial
effort and incur costs to improve our systems, audit
capabilities, staffing and training in order to satisfy
regulatory requirements, but the regulatory authorities may
determine that such efforts are insufficient. Failure to comply
with relevant laws, regulations or policies could result in
sanctions by regulatory agencies, civil money penalties
and/or
reputation damage, which could have a material adverse effect on
our business, financial condition and results of operations.
While we have policies and procedures designed to prevent any
such violations, there can be no assurance that such violations
will not occur. In addition, the FDIC has imposed higher general
and special assessments on deposits based on general industry
conditions and as a
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result of changes in specific programs, and there is no
restriction on the amount by which the FDIC may increase deposit
assessments in the future. These increased FDIC assessments have
affected our earnings to a significant degree, and the industry
may be subject to additional assessments, fees, or taxes.
Furthermore, Sarbanes-Oxley, and the related rules and
regulations promulgated by the SEC and Financial Industry
Regulatory Authority (FINRA) that are applicable to us, have
increased the scope, complexity and cost of corporate
governance, reporting and disclosure practices. As a result, we
have experienced, and may continue to experience, greater
compliance costs.
Severe weather, natural disasters, acts of war or terrorism
and other external events could significantly impact our
business.
Severe weather, natural disasters, acts
of war or terrorism and other adverse external events could have
a significant impact on our ability to conduct business. Such
events could affect the stability of our deposit base, impair
the ability of borrowers to repay outstanding loans, impair the
value of collateral securing loans, cause significant property
damage, result in loss of revenue
and/or
cause
us to incur additional expenses. Periodically, hurricanes have
caused extensive flooding and destruction along the coastal
areas of Texas, including communities where we conduct business,
and our operations in Houston have been disrupted to a minor
degree. While the impact of these hurricanes did not
significantly affect us, other severe weather or natural
disasters, acts of war or terrorism or other adverse external
events may occur in the future. Although management has
established disaster recovery policies and procedures, the
occurrence of any such event could have a material adverse
effect on our business, which, in turn, could have a material
adverse effect on our financial condition and results of
operations.
Our management maintains significant control over
us.
Our current executive officers and directors
beneficially own approximately 5% of the outstanding shares of
our common stock. Accordingly, our current executive officers
and directors are able to influence, to a significant extent,
the outcome of all matters required to be submitted to our
stockholders for approval (including decisions relating to the
election of directors), the determination of
day-to-day
corporate and management policies and other significant
corporate activities.
There are substantial regulatory limitations on changes of
control.
With certain limited exceptions, federal
regulations prohibit a person or company or a group of persons
deemed to be “acting in concert” from, directly or
indirectly, acquiring more than 10% (5% if the acquirer is a
bank holding company) of any class of our voting stock or
obtaining the ability to control in any manner the election of a
majority of our directors or otherwise direct the management or
policies of our company without prior notice or application to
and the approval of the Federal Reserve. Accordingly,
prospective investors need to be aware of and comply with these
requirements, if applicable, in connection with any purchase of
shares of our common stock.
Anti-takeover provisions of our certificate of incorporation,
bylaws and Delaware law may make it more difficult for you to
receive a change in control premium.
Certain
provisions of our certificate of incorporation and bylaws could
make a merger, tender offer or proxy contest more difficult,
even if such events were perceived by many of our stockholders
as beneficial to their interests. These provisions include
advance notice for nominations of directors and
stockholders’ proposals, and authority to issue the
issuance of “blank check” preferred stock with such
designations, rights and preferences as may be determined from
time to time by our board of directors. In addition, as a
Delaware corporation, we are subject to Section 203 of the
Delaware General Corporation Law which, in general, prevents an
interested stockholder, defined generally as a person owning 15%
or more of a corporation’s outstanding voting stock, from
engaging in a business combination with our company for three
years following the date that person became an interested
stockholder unless certain specified conditions are satisfied.
We are subject to claims and litigation pertaining to
fiduciary responsibility, employment practices and other general
business matters litigation.
From time to time,
customers make claims and take legal action pertaining to our
performance of our fiduciary responsibilities. Whether customer
claims and legal action related to our performance of its
fiduciary responsibilities are founded or unfounded, if such
claims and legal actions are not resolved in a manner favorable
to us they may result in significant financial liability
and/or
adversely affect the market perception of us and our products
and services as well as impact customer demand for those
products and services. In addition, employees can make claims
related to our employment practices. If such claims or legal
actions are not resolved in a manner favorable to us they may
result in significant financial liability
and/or
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adversely affect the market perception of us. Any financial
liability or reputation damage could have a material adverse
effect on our business, which, in turn, could have a material
adverse effect on our financial condition and results of
operations.
Our controls and procedures may fail or be
circumvented.
Management regularly reviews and
updates our internal controls, disclosure controls and
procedures, and corporate governance policies and procedures.
Any system of controls, however well designed and operated, is
based in part on certain assumptions and can provide only
reasonable, not absolute, assurances that the objectives of the
system are met. Any failure or circumvention of our controls and
procedures or failure to comply with regulations related to
controls and procedures could have a material adverse effect on
our business, results of operations and financial condition.
New lines of business or new products and services may
subject us to additional risks.
From time to
time, we may develop and grow new lines of business or offer new
products and services within existing lines of business. There
are substantial risks and uncertainties associated with these
efforts, particularly in instances where the markets are not
fully developed. In developing and marketing new lines of
business
and/or
new
products and services we may invest significant time and
resources. Initial timetables for the introduction and
development of new lines of business
and/or
new
products or services may not be achieved and price and
profitability targets may not prove feasible. External factors,
such as compliance with regulations, competitive alternatives
and shifting market preferences, may also impact the successful
implementation of a new line of business or a new product or
service. Furthermore, any new line of business
and/or
new
product or service could have a significant impact on the
effectiveness of our system of internal controls. Failure to
successfully manage these risks in the development and
implementation of new lines of business or new products or
services could have a material adverse effect on our business,
results of operations and financial condition. All service
offerings, including current offerings and those which may be
provided in the future may become more risky due to changes in
economic, competitive and market conditions beyond our control.
Risks
Associated With Our Common Stock
Our stock price can be volatile.
Stock price
volatility may make it more difficult for you to resell your
common stock when you want and at prices you find attractive.
Our stock price can fluctuate significantly in response to a
variety of factors including, among other things:
| • | actual or anticipated variations in quarterly results of operations; | |
| • | recommendations by securities analysts; | |
| • | operating and stock price performance of other companies that investors deem comparable to us; | |
| • | news reports relating to trends, concerns and other issues in the financial services industry, including the failures of other financial institutions in the current economic downturn; | |
| • | perceptions in the marketplace regarding us and/or our competitors; | |
| • | new technology used, or services offered, by competitors; | |
| • | significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors; | |
| • | failure to integrate acquisitions or realize anticipated benefits from acquisitions; | |
| • | changes in government regulations; and | |
| • | geopolitical conditions such as acts or threats of terrorism or military conflicts. |
General market fluctuations, industry factors and general
economic and political conditions and events, such as economic
slowdowns or recessions, interest rate changes or credit loss
trends, could also cause our stock price to decrease regardless
of operating results as evidenced by the current volatility and
disruption of capital and credit markets.
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The trading volume in our common stock is less than that of
other larger financial services
companies.
Although our common stock is traded on
the Nasdaq Global Select Market, the trading volume in our
common stock is less than that of other larger financial
services companies. A public trading market having the desired
characteristics of depth, liquidity and orderliness depends on
the presence in the marketplace of willing buyers and sellers of
our common stock at any given time. This presence depends on the
individual decisions of investors and general economic and
market conditions over which we have no control. Given the lower
trading volume of our common stock, significant sales of our
common stock, or the expectation of these sales, could cause our
stock price to fall.
An investment in our common stock is not an insured
deposit.
Our common stock is not a bank deposit
and, therefore, is not insured against loss by the FDIC, any
other deposit insurance fund or by any other public or private
entity. Investment in our common stock is inherently risky for
the reasons described in this “Risk Factors” section
and elsewhere in this report and is subject to the same market
forces that affect the price of common stock in any company. As
a result, if you acquire our common stock, you may lose some or
all of your investment.
The holders of our junior subordinated debentures have rights
that are senior to those of our shareholders.
As
of December 31, 2009, we had $113.4 million in junior
subordinated debentures outstanding that were issued to our
statutory trusts. The trusts purchased the junior subordinated
debentures from us using the proceeds from the sale of trust
preferred securities to third party investors. Payments of the
principal and interest on the trust preferred securities are
conditionally guaranteed by us to the extent not paid or made by
each trust, provided the trust has funds available for such
obligations.
The junior subordinated debentures are senior to our shares of
common stock. As a result, we must make payments on the junior
subordinated debentures (and the related trust preferred
securities) before any dividends can be paid on our common stock
and, in the event of our bankruptcy, dissolution or liquidation,
the holders of the debentures must be satisfied before any
distributions can be made to our shareholders. If certain
conditions are met, we have the right to defer interest payments
on the junior subordinated debentures (and the related trust
preferred securities) at any time or from time to time for a
period not to exceed 20 consecutive quarters in a deferral
period, during which time no dividends may be paid to holders of
our common stock.
We do not currently pay dividends. Our ability to
pay dividends is limited and we may be unable to pay future
dividends.
We do not currently pay dividends on
our common stock. Our ability to pay dividends is limited by
regulatory restrictions and the need to maintain sufficient
consolidated capital. The ability of our bank subsidiary, Texas
Capital Bank, to pay dividends to us is limited by its
obligations to maintain sufficient capital and by other general
restrictions on its dividends that are applicable to our
regulated bank subsidiary. If these regulatory requirements are
not met, our subsidiary bank will not be able to pay dividends
to us, and we could be unable to pay dividends on our common
stock or meet debt or other contractual obligations of our
parent company.
Risks
Associated With Our Industry
The earnings of financial services companies are
significantly affected by general business and economic
conditions.
As a financial services company, our
operations and profitability are impacted by general business
and economic conditions in the United States and abroad. These
conditions include short-term and long-term interest rates,
inflation, money supply, political issues, legislative and
regulatory changes, fluctuation in both debt and equity capital
markets, broad trends in industry and finance and the strength
of the U.S. economy and the local economies in which we
operate, all of which are beyond our control. Continued weakness
or further deterioration in economic conditions could result in
decreases in loan collateral values and increases in loan
delinquencies, non-performing assets and losses on loans and
other real estate acquired through foreclosure of loans.
Industry conditions, competition and the performance of our bank
could also result in a decrease in demand for our products and
services, among other things, any of which could have a material
adverse impact on our results of operation and financial
condition.
There can be no assurance that recently proposed or future
legislation will not subject us to heightened regulation, and
the impact of such legislation on us cannot be reliably
determined at this time.
We cannot predict what
legislation may be enacted affecting banks and bank holding
companies and their operations, or what regulations might be
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adopted by bank regulators or the effects thereof. In light of
current economic conditions in the financial markets and the
United States economy, Congress and regulators have increased
their focus on the regulation of the banking industry. If
enacted, any new legislative initiatives could affect us in
substantial and unpredictable ways, including increased
compliance costs and additional operating restrictions on our
business, and could result in an adverse effect on our business,
financial condition, and results of operations.
Financial services companies depend on the accuracy and
completeness of information about customers and
counterparties.
In deciding whether to extend
credit or enter into other transactions, we may rely on
information furnished by or on behalf of customers and
counterparties, including financial statements, credit reports
and other financial information. We may also rely on
representations of those customers, counterparties or other
third parties, such as independent auditors, as to the accuracy
and completeness of that information. Reliance on inaccurate or
misleading financial statements, credit reports or other
financial information could have a material adverse impact on
our business and, in turn, our results of operations and
financial condition.
We compete in an industry that continually experiences
technological change, and we may have fewer resources than many
of our competitors to continue to invest in technological
improvements.
The financial services industry is
undergoing rapid technological changes, with frequent
introductions of new technology-driven products and services
which our customers may require. Many of our competitors have
substantially greater resources to invest in technological
improvements. We may not be able to effectively implement new
technology-driven products and services or be successful in
marketing these products and services to our customers.
Consumers and businesses may decide not to use banks to
complete their financial transactions.
Technology
and other changes are allowing parties to complete financial
transactions that historically have involved banks through
alternative methods. The possibility of eliminating banks as
intermediaries could result in the loss of interest and fee
income, as well as the loss of customer deposits and the related
income generated from those deposits. The loss of these revenue
streams and the lower cost deposits as a source of funds could
have a material adverse effect on our results of operations and
financial condition.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None
As of December 31, 2009, we conducted business at nine full
service banking locations and one operations center. Our
operations center houses our loan and deposit operations and the
BankDirect call center. We lease the space in which our banking
centers and the operations call center are located. These leases
expire between March 2013 and July 2019, not including any
renewal options that may be available.
15
Table of Contents
The following table sets forth the location of our executive
offices, operations center and each of our banking centers.
| Type of Location | Address | |
|
|
||
|
Executive offices, banking location
|
2000 McKinney Avenue
Suite 700 Dallas, Texas 75201 |
|
|
Operations center
|
2350 Lakeside Drive
Suite 800 Richardson, Texas 75083 |
|
|
Banking location
|
14131 Midway Road
Suite 100 Addison, Texas 75001 |
|
|
Banking location
|
5910 North Central Expressway
Suite 150 Dallas, Texas 75206 |
|
|
Banking location
|
5800 Granite Parkway
Suite 150 Plano, Texas 75024 |
|
|
Banking location
|
500 Throckmorton
Suite 300 Fort Worth, Texas 76102 |
|
|
Banking location
|
114 W. 7th St.
Suite 100 Austin, Texas 78701 |
|
|
Banking location
|
745 East Mulberry Street
Suite 350 San Antonio, Texas 78212 |
|
|
Banking location
|
7373 Broadway
Suite 100 San Antonio, Texas 78209 |
|
|
Banking location
|
One Riverway
Suite 150 Houston, Texas 77056 |
|
|
|
||
| ITEM 3. | LEGAL PROCEEDINGS |
We are not involved in any material pending legal proceedings
other than legal proceedings occurring in the ordinary course of
business. Management believes that none of these legal
proceedings, individually or in the aggregate, will have a
material adverse impact on our results of operations or
financial condition.
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matters were submitted to a vote of security holders during
the fourth quarter of 2009.
16
Table of Contents
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES |
Our common stock began trading on The Nasdaq Global Select
Market on August 13, 2003, and is traded under the symbol
“TCBI”. Our common stock was neither publicly traded,
nor was there an established market therefor, prior to
August 13, 2003. On February 16, 2010 there were
approximately 353 holders of record of our common stock.
No cash dividends have ever been paid by us on our common stock,
and we do not anticipate paying any cash dividends in the
foreseeable future. Our principal source of funds to pay cash
dividends on our common stock would be cash dividends from our
bank. The payment of dividends by our bank is subject to certain
restrictions imposed by federal and state banking laws,
regulations and authorities.
The following table presents the range of high and low bid
prices reported on The Nasdaq Global Select Market for each of
the four quarters of 2008 and 2009.
| Price Per Share | ||||||||
| Quarter Ended | High | Low | ||||||
|
|
||||||||
|
March 31, 2008
|
$ | 18.18 | $ | 14.40 | ||||
|
June 30, 2008
|
19.50 | 15.33 | ||||||
|
September 30, 2008
|
25.01 | 13.51 | ||||||
|
December 31, 2008
|
22.00 | 12.56 | ||||||
|
March 31, 2009
|
13.63 | 6.55 | ||||||
|
June 30, 2009
|
16.24 | 9.87 | ||||||
|
September 30, 2009
|
18.30 | 14.25 | ||||||
|
December 31, 2009
|
17.03 | 12.98 | ||||||
|
|
||||||||
Equity
Compensation Plan Information
The following table presents certain information regarding our
equity compensation plans as of December 31, 2009.
|
Number of Securities
|
Weighted Average
|
Number of Securities
|
||||||||||
|
to be Issued Upon
|
Exercise Price of
|
Remaining Available
|
||||||||||
|
Exercise of
|
Outstanding
|
for Future Issuance
|
||||||||||
|
Outstanding Options,
|
Options, Warrants
|
Under Equity
|
||||||||||
| Plan category | Warrants and Rights | and Rights | Compensation Plans | |||||||||
|
|
||||||||||||
|
Equity compensation plans approved by security holders
|
2,221,950 | $ | 14.22 | 367,470 | ||||||||
|
Equity compensation plans not approved by security holders
|
— | — | — | |||||||||
|
|
||||||||||||
|
Total
|
2,221,950 | $ | 14.22 | 367,470 | ||||||||
17
Table of Contents
Stock
Performance Graph
The following table and graph sets forth the cumulative total
stockholder return for the Company’s common stock beginning
on August 12, 2003, the date of the Company’s initial
public offering compared to an overall stock market index
(Russell 2000 Index) and the Company’s peer group index
(Nasdaq Bank Index). The Russell 2000 Index and Nasdaq Bank
Index are based on total returns assuming reinvestment of
dividends. The graph assumes an investment of $100 on
August 12, 2003. The performance graph represents past
performance and should not be considered to be an indication of
future performance.
| 12/31/03 | 12/31/04 | 12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Texas Capital (TCBI)
|
$ | 14.48 | $ | 21.62 | $ | 22.38 | $ | 19.88 | $ | 18.25 | $ | 13.36 | $ | 13.96 | ||||||||||||||
|
Russell 2000 Index RTY
|
556.91 | 658.72 | 681.26 | 796.70 | 775.75 | 509.18 | 633.31 | |||||||||||||||||||||
|
Nasdaq Bank Index CBNK
|
2,899.18 | 3,288.71 | 3,154.28 | 3,498.55 | 2,746.89 | 2,098.35 | 1,693.34 | |||||||||||||||||||||
TCBI
Stock Performance Graph
Source: Bloomberg
18
Table of Contents
| ITEM 6. | SELECTED CONSOLIDATED FINANCIAL DATA |
You should read the selected financial data presented below in
conjunction with “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and our
consolidated financial statements and the related notes
appearing elsewhere in this
Form 10-K.
|
(in thousands, except per share,
|
At or For The Year Ended December 31 | |||||||||||||||||||
| average share and percentage data) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
|
|
||||||||||||||||||||
|
Consolidated Operating Data (1)
|
||||||||||||||||||||
|
Interest income
|
$ | 243,153 | $ | 248,930 | $ | 289,292 | $ | 236,482 | $ | 158,953 | ||||||||||
|
Interest expense
|
46,462 | 97,193 | 149,540 | 119,312 | 65,329 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net interest income
|
196,691 | 151,737 | 139,752 | 117,170 | 93,624 | |||||||||||||||
|
Provision for credit losses
|
43,500 | 26,750 | 14,000 | 4,000 | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Net interest income after provision for credit losses
|
153,191 | 124,987 | 125,752 | 113,170 | 93,624 | |||||||||||||||
|
Non-interest income
|
29,260 | 22,470 | 20,627 | 17,684 | 12,507 | |||||||||||||||
|
Non-interest expense
|
145,542 | 109,651 | 98,606 | 86,912 | 65,344 | |||||||||||||||
|
|
||||||||||||||||||||
|
Income from continuing operations before income taxes
|
36,909 | 37,806 | 47,773 | 43,942 | 40,787 | |||||||||||||||
|
Income tax expense
|
12,522 | 12,924 | 16,420 | 14,961 | 13,860 | |||||||||||||||
|
|
||||||||||||||||||||
|
Income from continuing operations
|
24,387 | 24,882 | 31,353 | 28,981 | 26,927 | |||||||||||||||
|
Income (loss) from discontinued operations (after-tax)
|
(235 | ) | (616 | ) | (1,931 | ) | (57 | ) | 265 | |||||||||||
|
|
||||||||||||||||||||
|
Net income
|
24,152 | 24,266 | 29,422 | 28,924 | 27,192 | |||||||||||||||
|
Preferred stock dividends
|
5,383 | — | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Net income available to common shareholders
|
$ | 18,769 | $ | 24,266 | $ | 29,422 | $ | 28,924 | $ | 27,192 | ||||||||||
|
Consolidated Balance Sheet Data
(1)
|
||||||||||||||||||||
|
Total assets(3)
|
$ | 5,698,318 | $ | 5,141,034 | $ | 4,287,853 | $ | 3,659,445 | $ | 3,003,430 | ||||||||||
|
Loans held for investment
|
4,457,293 | 4,027,871 | 3,462,608 | 2,722,097 | 2,075,961 | |||||||||||||||
|
Loans held for sale
|
693,504 | 496,351 | 174,166 | 199,014 | 72,383 | |||||||||||||||
|
Loans held for sale from discontinued operations
|
586 | 648 | 731 | 16,844 | 38,795 | |||||||||||||||
|
Securities
available-for-sale
|
266,128 | 378,752 | 440,119 | 520,091 | 620,539 | |||||||||||||||
|
Deposits
|
4,120,725 | 3,333,187 | 3,066,377 | 3,069,330 | 2,495,179 | |||||||||||||||
|
Federal funds purchased
|
580,519 | 350,155 | 344,813 | 165,955 | 103,497 | |||||||||||||||
|
Other borrowings
|
376,510 | 930,452 | 439,038 | 45,604 | 162,224 | |||||||||||||||
|
Trust preferred subordinated debentures
|
113,406 | 113,406 | 113,406 | 113,406 | 46,394 | |||||||||||||||
|
Stockholders’ equity
|
481,360 | 387,073 | 295,138 | 253,515 | 215,523 | |||||||||||||||
19
Table of Contents
|
(in thousands, except per share,
|
At or For The Year Ended December 31 | |||||||||||||||||||
| average share and percentage data) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
|
|
||||||||||||||||||||
|
Other Financial Data
|
||||||||||||||||||||
|
Income per share:
|
||||||||||||||||||||
|
Basic
|
||||||||||||||||||||
|
Income from continuing operations
|
$ | .56 | $ | .89 | $ | 1.20 | $ | 1.12 | $ | 1.05 | ||||||||||
|
Net income
|
.55 | .87 | 1.12 | 1.11 | 1.06 | |||||||||||||||
|
Diluted
|
||||||||||||||||||||
|
Income from continuing operations
|
.55 | .89 | 1.18 | 1.10 | 1.01 | |||||||||||||||
|
Net income
|
.55 | .87 | 1.10 | 1.09 | 1.02 | |||||||||||||||
|
Tangible book value per share(4)
|
12.96 | 12.19 | 10.92 | 9.32 | 8.19 | |||||||||||||||
|
Book value per share(4)
|
13.23 | 12.44 | 11.22 | 9.82 | 8.68 | |||||||||||||||
|
Weighted average shares:
|
||||||||||||||||||||
|
Basic
|
34,113,285 | 27,952,973 | 26,187,084 | 25,945,065 | 25,619,594 | |||||||||||||||
|
Diluted
|
34,410,454 | 28,048,463 | 26,678,571 | 26,468,811 | 26,645,198 | |||||||||||||||
|
Selected Financial Ratios:
|
||||||||||||||||||||
|
Performance Ratios
|
||||||||||||||||||||
|
From continuing operations:
|
||||||||||||||||||||
|
Net interest margin
|
3.89 | % | 3.54 | % | 3.82 | % | 3.84 | % | 3.66 | % | ||||||||||
|
Return on average assets
|
.46 | % | .55 | % | .80 | % | .88 | % | .97 | % | ||||||||||
|
Return on average equity
|
5.15 | % | 7.46 | % | 11.51 | % | 12.62 | % | 13.16 | % | ||||||||||
|
Efficiency ratio (excludes securities gains)
|
64.41 | % | 62.94 | % | 61.48 | % | 64.45 | % | 61.57 | % | ||||||||||
|
Non-interest expense to average earning assets
|
2.87 | % | 2.54 | % | 2.68 | % | 2.83 | % | 2.53 | % | ||||||||||
|
From consolidated:
|
||||||||||||||||||||
|
Net interest margin
|
3.89 | % | 3.54 | % | 3.82 | % | 4.00 | % | 3.90 | % | ||||||||||
|
Return on average assets
|
.45 | % | .54 | % | .75 | % | .87 | % | .97 | % | ||||||||||
|
Return on average equity
|
5.10 | % | 7.28 | % | 10.80 | % | 12.59 | % | 13.29 | % | ||||||||||
|
Asset Quality Ratios
|
||||||||||||||||||||
|
Net charge-offs (recoveries) to average loans(2)
|
.46 | % | .35 | % | .07 | % | .08 | % | (.01 | )% | ||||||||||
|
Reserve for loan losses to loans held for investment(2)
|
1.52 | % | 1.13 | % | .92 | % | .74 | % | .91 | % | ||||||||||
|
Reserve for loan losses to non-accrual loans
|
.7 | x | 1.0 | x | 1.5 | x | 2.2 | x | 3.3 | x | ||||||||||
|
Non-accrual loans to loans(2)
|
2.15 | % | 1.18 | % | .62 | % | .33 | % | .27 | % | ||||||||||
|
Total NPAs to loans plus OREO(2)
|
2.74 | % | 1.81 | % | .69 | % | .37 | % | .27 | % | ||||||||||
|
|
||||||||||||||||||||
20
Table of Contents
|
(in thousands, except per share,
|
At or For The Year Ended December 31 | |||||||||||||||||||
| average share and percentage data) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
|
|
||||||||||||||||||||
|
Capital and Liquidity Ratios
|
||||||||||||||||||||
|
Total capital ratio
|
11.98 | % | 10.92 | % | 10.56 | % | 11.16 | % | 10.83 | % | ||||||||||
|
Tier 1 capital ratio
|
10.73 | % | 9.97 | % | 9.41 | % | 9.68 | % | 10.09 | % | ||||||||||
|
Tier 1 leverage ratio
|
10.54 | % | 10.21 | % | 9.38 | % | 9.18 | % | 8.68 | % | ||||||||||
|
Average equity/average assets
|
8.91 | % | 7.38 | % | 6.98 | % | 6.96 | % | 7.40 | % | ||||||||||
|
Tangible common equity/ total tangible assets
(4)
|
8.18 | % | 7.36 | % | 6.73 | % | 6.74 | % | 6.96 | % | ||||||||||
|
Average net loans/average deposits
|
128.43 | % | 120.03 | % | 103.64 | % | 93.89 | % | 89.74 | % | ||||||||||
|
|
||||||||||||||||||||
| (1) | The consolidated statement of operating data and consolidated balance sheet data presented above for the five most recent fiscal years ended December 31 have been derived from our audited consolidated financial statements. The historical results are not necessarily indicative of the results to be expected in any future period. | |
| (2) | Excludes loans held for sale. | |
| (3) | From continuing operations. | |
| (4) | Excludes unrealized gains/losses on securities. |
21
Table of Contents
Consolidated
Interim Financial Information (Unaudited)
| 2009 Selected Quarterly Financial Data | ||||||||||||||||
| (in thousands except per share data) | Fourth | Third | Second | First | ||||||||||||
|
|
||||||||||||||||
|
Interest income
|
$ | 65,137 | $ | 62,197 | $ | 60,013 | $ | 55,806 | ||||||||
|
Interest expense
|
10,031 | 10,631 | 11,211 | 14,589 | ||||||||||||
|
|
||||||||||||||||
|
Net interest income
|
55,106 | 51,566 | 48,802 | 41,217 | ||||||||||||
|
Provision for credit losses
|
10,500 | 13,500 | 11,000 | 8,500 | ||||||||||||
|
|
||||||||||||||||
|
Net interest income after provision for credit losses
|
44,606 | 38,066 | 37,802 | 32,717 | ||||||||||||
|
Non-interest income
|
7,811 | 7,133 | 7,416 | 6,900 | ||||||||||||
|
Non-interest expense
|
42,796 | 37,067 | 35,373 | 30,306 | ||||||||||||
|
|
||||||||||||||||
|
Income from continuing operations before income taxes
|
9,621 | 8,132 | 9,845 | 9,311 | ||||||||||||
|
Income tax expense
|
3,194 | 2,779 | 3,363 | 3,186 | ||||||||||||
|
|
||||||||||||||||
|
Income from continuing operations
|
6,427 | 5,353 | 6,482 | 6,125 | ||||||||||||
|
Loss from discontinued operations (after-tax)
|
(55 | ) | (41 | ) | (44 | ) | (95 | ) | ||||||||
|
|
||||||||||||||||
|
Net income
|
6,372 | 5,312 | 6,438 | 6,030 | ||||||||||||
|
Preferred stock dividends
|
— | — | 4,453 | 930 | ||||||||||||
|
|
||||||||||||||||
|
Net income available to common shareholders
|
$ | 6,372 | $ | 5,312 | $ | 1,985 | $ | 5,100 | ||||||||
|
Basic earnings per share:
|
||||||||||||||||
|
Income from continuing operations
|
$ | .18 | $ | .15 | $ | .06 | $ | .17 | ||||||||
|
Net income
|
$ | .18 | $ | .15 | $ | .06 | $ | .16 | ||||||||
|
Diluted earnings per share:
|
||||||||||||||||
|
Income from continuing operations
|
$ | .18 | $ | .15 | $ | .06 | $ | .17 | ||||||||
|
Net income
|
$ | .18 | $ | .15 | $ | .06 | $ | .16 | ||||||||
|
Average shares:
|
||||||||||||||||
|
Basic
|
35,850,000 | 35,754,000 | 33,784,000 | 26,528,000 | ||||||||||||
|
Diluted
|
36,311,000 | 36,304,000 | 33,866,000 | 31,072,000 | ||||||||||||
22
Table of Contents
| 2008 Selected Quarterly Financial Data | ||||||||||||||||
| (In thousands except per share data) | Fourth | Third | Second | First | ||||||||||||
|
|
||||||||||||||||
|
Interest income
|
$ | 58,873 | $ | 62,240 | $ | 61,008 | $ | 66,809 | ||||||||
|
Interest expense
|
20,161 | 23,974 | 22,848 | 30,210 | ||||||||||||
|
|
||||||||||||||||
|
Net interest income
|
38,712 | 38,266 | 38,160 | 36,599 | ||||||||||||
|
Provision for credit losses
|
11,000 | 4,000 | 8,000 | 3,750 | ||||||||||||
|
|
||||||||||||||||
|
Net interest income after provision for credit losses
|
27,712 | 34,266 | 30,160 | 32,849 | ||||||||||||
|
Non-interest income
|
5,950 | 4,885 | 5,952 | 5,683 | ||||||||||||
|
Non-interest expense
|
28,443 | 27,675 | 27,256 | 26,277 | ||||||||||||
|
|
||||||||||||||||
|
Income from continuing operations before income taxes
|
5,219 | 11,476 | 8,856 | 12,255 | ||||||||||||
|
Income tax expense
|
1,732 | 3,911 | 3,056 | 4,225 | ||||||||||||
|
|
||||||||||||||||
|
Income from continuing operations
|
3,487 | 7,565 | 5,800 | 8,030 | ||||||||||||
|
Loss from discontinued operations (after-tax)
|
(100 | ) | (252 | ) | (116 | ) | (148 | ) | ||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 3,387 | $ | 7,313 | $ | 5,684 | $ | 7,882 | ||||||||
|
Basic earnings per share:
|
||||||||||||||||
|
Income from continuing operations
|
$ | .11 | $ | .27 | $ | .22 | $ | .30 | ||||||||
|
Net income
|
$ | .11 | $ | .26 | $ | .21 | $ | .30 | ||||||||
|
Diluted earnings per share:
|
||||||||||||||||
|
Income from continuing operations
|
$ | .11 | $ | .27 | $ | .22 | $ | .30 | ||||||||
|
Net income
|
$ | .11 | $ | .26 | $ | .21 | $ | .30 | ||||||||
|
Average shares:
|
||||||||||||||||
|
Basic
|
30,884,000 | 27,726,000 | 26,706,000 | 26,466,000 | ||||||||||||
|
Diluted
|
31,038,000 | 27,793,000 | 26,805,000 | 26,528,000 | ||||||||||||
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-Looking
Statements
Statements and financial analysis contained in this document
that are not historical facts are forward looking statements
made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 (the “Act”).
In addition, certain statements may be contained in our future
filings with SEC, in press releases, and in oral and written
statements made by or with our approval that are not statements
of historical fact and constitute forward-looking statement
within the meaning of the Act. Forward looking statements
describe our future plans, strategies and expectations and are
based on certain assumptions. Words such as
“believes”, “anticipates”,
“expects”, “intends”, “targeted”,
“continue”, “remain”, “will”,
“should”, “may” and other similar
expressions are intended to identify forward-looking statements
but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties, many
of which are beyond our control that may cause actual results to
differ materially from those in such statements. The important
factors that could cause actual results to differ materially
from the forward looking statements include, but are not limited
to, the following:
(1) Changes in interest rates and the relationship between
rate indices, including LIBOR and Fed Funds
23
Table of Contents
(2) Changes in the levels of loan prepayments, which could
affect the value of our loans or investment securities
(3) Changes in general economic and business conditions in
areas or markets where we compete
(4) Competition from banks and other financial institutions
for loans and customer deposits
(5) The failure of assumptions underlying the establishment
of and provisions made to the allowance for credit losses
(6) The loss of senior management or operating personnel
and the potential inability to hire qualified personnel at
reasonable compensation levels
(7) Changes in government regulations including changes as
a result of the current economic crisis
Forward-looking statements speak only as of the date on which
such statements are made. We have no obligation to update or
revise any forward looking statements as a result of new
information or future events. In light of these assumptions,
risks and uncertainties, the events discussed in any forward
looking statements in this annual report might not occur.
Overview
of Our Business Operations
We commenced operations in December 1998. An important aspect of
our growth strategy has been our ability to service and
effectively manage a large number of loans and deposit accounts
in multiple markets in Texas. Accordingly, we created an
operations infrastructure sufficient to support state-wide
lending and banking operations.
The following discussions and analyses present the significant
factors affecting our financial condition as of
December 31, 2009 and 2008 and results of operations for
each of the three years in the period ended December 31,
2009. This discussion should be read in conjunction with our
consolidated financial statements and notes to the financial
statements appearing later in this report. Please also note the
below description about our discontinued operations and how it
is reflected in the following discussions of our financial
condition and results of operations.
On October 16, 2006, we completed the sale of our
residential mortgage lending division (RML). The sale was
effective as of September 30, 2006, and, accordingly, all
operating results for this discontinued component of our
operations were reclassified to discontinued operations. All
prior periods were restated to reflect the change. Subsequent to
the end of the first quarter of 2007, Texas Capital Bank and the
purchaser of its residential mortgage loan division (RML) agreed
to terminate and settle the contractual arrangements related to
the sale of the division.
The loss from discontinued operations was $235,000 and $616,000,
net of taxes, for the years 2009 and 2008, respectively. The
2009 losses are primarily related to continuing legal and salary
expenses incurred in dealing with the remaining loans and
requests from investors related to the repurchase of previously
sold loans. We still have approximately $586,000 in loans held
for sale from discontinued operations that are carried at the
estimated market value at year-end, which is less than the
original cost. We plan to sell these loans, but timing and price
to be realized cannot be determined at this time due to market
conditions. In addition, we continue to address requests from
investors related to repurchasing loans previously sold. While
the balances as of December 31, 2009 include a liability
for exposure to additional contingencies, including risk of
having to repurchase loans previously sold, we recognize that
market conditions may result in additional exposure to loss and
the extension of time necessary to complete the discontinued
mortgage operation. Our mortgage warehouse operations were not
part of the sale, and are included in the results from
continuing operations. Except as otherwise noted, all amounts
and disclosures throughout this document reflect only the
Company’s continuing operations.
On March 30, 2007, Texas Capital Bank completed the sale of
its TexCap Insurance Services subsidiary; the sale was,
accordingly, reported as a discontinued operation. Historical
operating results of TexCap and the net after-tax gain of
$1.09 million from the sale are reflected as discontinued
operations in the financial statements
24
Table of Contents
and schedules. All prior periods have been restated to reflect
the change. Except as otherwise noted, all amounts and
disclosures throughout this document reflect only the
Company’s continuing operations.
Year
ended December 31, 2009 compared to year ended
December 31, 2008
We reported net income of $24.4 million for the year ended
December 31, 2009, compared to $24.9 million for the
same period in 2008. We reported net income available to common
shareholders of $19.0 million, or $.55 per diluted common
share, for the year ended December 31, 2009, compared to
$24.9 million, or $.89 per diluted common share, for the
same period in 2008 as a result of preferred dividends paid.
Return on average equity was 5.15% and return on average assets
was .46% for the year ended December 31, 2009, compared to
7.46% and .55%, respectively, for the same period in 2008.
Net income decreased $495,000, or 2%, for the year ended
December 31, 2009, and net income available to common
shareholders decreased $5.9 million, or 24%, compared to
the same period in 2008. The $495,000 decrease was primarily the
result of a $16.8 million increase in the provision for
credit losses and a $35.9 million increase in non-interest
expense, offset by a $45.0 million increase in net interest
income and a $6.8 million increase in non-interest income
and a $402,000 decrease in income tax expense.
Details of the changes in the various components of net income
are further discussed below.
Year
ended December 31, 2008 compared to year ended
December 31, 2007
We reported net income of $24.9 million, or $.89 per
diluted common share, for the year ended December 31, 2008,
compared to $31.4 million, or $1.18 per diluted common
share, for the same period in 2007. Return on average equity was
7.46% and return on average assets was .55% for the year ended
December 31, 2008, compared to 11.51% and .80%,
respectively, for the same period in 2007.
Net income decreased $6.5 million, or 20.7%, for the year
ended December 31, 2008 compared to the same period in
2007. The decrease was primarily the result of a
$12.8 million increase in the provision for credit losses
and an $11.1 million increase in non-interest expense,
offset by an $11.9 million increase in net interest income
and a $1.9 million increase in non-interest income and a
$3.5 million decrease in income tax expense.
Details of the changes in the various components of net income
are further discussed below.
Net
Interest Income
Net interest income was $196.7 million for the year ended
December 31, 2009 compared to $151.7 million for the
same period of 2008. The increase in net interest income was
primarily due to an increase of $764.8 million in average
earning assets and the increase in our net interest margin. The
increase in average earning assets from 2008 included an
$835.3 million increase in average net loans offset by a
$76.6 million decrease in average securities. For the year
ended December 31, 2009, average net loans and securities
represented 93% and 6%, respectively, of average earning assets
compared to 91% and 9%, respectively, in 2008.
Average interest bearing liabilities for the year ended
December 31, 2009 increased $431.0 million from the
year ended December 31, 2008, which included a
$206.4 million increase in interest bearing deposits and a
$224.6 million increase in other borrowings. For the same
periods, the average balance of demand deposits increased to
$760.8 million from $529.5 million. The significant
increase in average other borrowings is a result of the combined
effects of maturities of transaction-specific deposits and
growth in loans during 2009. The average cost of interest
bearing liabilities decreased from 2.67% for the year ended
December 31, 2008 to 1.14% in 2009, reflecting the
significant decline in market interest rates.
Net interest income was $151.7 million for the year ended
December 31, 2008 compared to $139.8 million for the
same period of 2007. The increase in net interest income was
primarily due to an increase of $632.2 million in average
earning assets, offset by a 28 basis point decrease in the
net interest margin, which resulted from growth, asset
sensitivity and the impact of the increase in non-accrual loans.
The increase in average earning assets from 2007 included a
$705.3 million increase in average net loans offset by an
$84.5 million decrease in
25
Table of Contents
average securities. For the year ended December 31, 2008,
average net loans and securities represented 91% and 9%,
respectively, of average earning assets compared to 87% and 13%,
respectively, in 2007.
Average interest bearing liabilities for the year ended
December 31, 2008 increased $495.5 million from the
year ended December 31, 2007, which included a
$99.4 million increase in interest bearing deposits and a
$396.1 million increase in other borrowings. For the same
periods, the average balance of demand deposits increased
slightly to $529.5 million from $463.1 million. The
average cost of interest bearing liabilities decreased from
4.76% for the year ended December 31, 2007 to 2.67% in
2008, reflecting the significant decline in market interest
rates during 2008. Of the increase in average interest bearing
liabilities, total borrowings grew due to combined effects of
maturities of transaction-specific deposits and strong loan
growth during 2008.
Volume/Rate
Analysis
| Years Ended December 31, | ||||||||||||||||||||||||
| 2009/2008 | 2008/2007 | |||||||||||||||||||||||
| Change Due To(1) | Change Due To(1) | |||||||||||||||||||||||
| (in thousands) | Change | Volume | Yield/Rate | Change | Volume | Yield/Rate | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||
|
Securities(2)
|
$ | (4,184 | ) | $ | (3,586 | ) | $ | (598 | ) | $ | (4,262 | ) | $ | (4,005 | ) | $ | (257 | ) | ||||||
|
Loans
|
(1,509 | ) | 49,955 | (51,464 | ) | (36,162 | ) | 58,521 | (94,683 | ) | ||||||||||||||
|
Federal funds sold
|
(137 | ) | (51 | ) | (86 | ) | 76 | 476 | (400 | ) | ||||||||||||||
|
Deposits in other banks
|
13 | 111 | (98 | ) | (23 | ) | 69 | (92 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
| (5,817 | ) | 46,429 | (52,246 | ) | (40,371 | ) | 55,061 | (95,432 | ) | |||||||||||||||
|
Interest expense :
|
||||||||||||||||||||||||
|
Transaction deposits
|
(221 | ) | 178 | (399 | ) | (460 | ) | 81 | (541 | ) | ||||||||||||||
|
Savings deposits
|
(4,320 | ) | 7,299 | (11,619 | ) | (21,085 | ) | (1,993 | ) | (19,092 | ) | |||||||||||||
|
Time deposits
|
(16,477 | ) | 3,532 | (20,009 | ) | 1,564 | 19,567 | (18,003 | ) | |||||||||||||||
|
Deposits in foreign branches
|
(14,010 | ) | (9,271 | ) | (4,739 | ) | (28,412 | ) | (12,175 | ) | (16,237 | ) | ||||||||||||
|
Borrowed funds
|
(15,703 | ) | 5,032 | (20,735 | ) | (3,954 | ) | 19,718 | (23,672 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
| (50,731 | ) | 6,770 | (57,501 | ) | (52,347 | ) | 25,198 | (77,545 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Net interest income
|
$ | 44,914 | $ | 39,659 | $ | 5,255 | $ | 11,976 | $ | 29,863 | $ | (17,887 | ) | |||||||||||
| (1) | Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis. | |
| (2) | Taxable equivalent rates used where applicable. |
Net interest margin from continuing operations, the ratio of net
interest income to average earning assets, from continuing
operations increased from 3.54% in 2008 to 3.89% in 2009. This
35 basis point increase was a result of a steep decline in
the costs of interest bearing liabilities and growth in
non-interest bearing deposits and stockholders’ equity.
Total cost of funding decreased from 2.15% for 2008 to .87% for
2009. The benefit of the reduction in funding costs was
partially offset by a 99 basis point decline in yields on
earning assets.
Net interest margin, the ratio of net interest income to average
earning assets, decreased from 3.82% in 2007 to 3.54% in 2008.
This decrease was due primarily to the decline in contribution
of free funds, including demand deposits and stockholders’
equity, to the margin. While the yield on earning assets and the
cost of interest bearing liabilities both decreased by
209 basis points, leaving the net interest spread
unchanged, the contribution of free funds declined 28 basis
points in a declining rate environment.
26
Table of Contents
Consolidated
Daily Average Balances, Average Yields and Rates
| Year Ended December 31 | ||||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
|
Average
|
Revenue/
|
Yield/
|
Average
|
Revenue/
|
Yield/
|
Average
|
Revenue/
|
Yield/
|
||||||||||||||||||||||||||||
| (in thousands except percentage data) | Balance | Expense(1) | Rate | Balance | Expense(1) | Rate | Balance | Expense(1) | Rate | |||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||||||
|
Securities — Taxable
|
$ | 269,888 | $ | 11,928 | 4.42 | % | $ | 343,870 | $ | 16,000 | 4.65 | % | $ | 427,490 | $ | 20,236 | 4.73% | |||||||||||||||||||
|
Securities — Non-taxable(2)
|
44,873 | 2,538 | 5.66 | % | 47,450 | 2,650 | 5.58 | % | 48,291 | 2,676 | 5.54% | |||||||||||||||||||||||||
|
Federal funds sold
|
8,196 | 31 | 0.38 | % | 11,744 | 168 | 1.43 | % | 1,903 | 92 | 4.83% | |||||||||||||||||||||||||
|
Deposits in other banks
|
12,266 | 44 | 0.36 | % | 2,675 | 31 | 1.16 | % | 1,175 | 54 | 4.60% | |||||||||||||||||||||||||
|
Loans held for sale
|
596,271 | 28,336 | 4.75 | % | 255,808 | 14,842 | 5.80 | % | 155,046 | 10,721 | 6.91% | |||||||||||||||||||||||||
|
Loans
|
4,200,174 | 201,164 | 4.79 | % | 3,685,301 | 216,167 | 5.87 | % | 3,068,452 | 256,450 | 8.36% | |||||||||||||||||||||||||
|
Less reserve for loan losses
|
55,784 | — | — | 35,769 | — | — | 23,430 | — | — | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Loans, net
|
4,740,661 | 229,500 | 4.84 | % | 3,905,340 | 231,009 | 5.92 | % | 3,200,068 | 267,171 | 8.35% | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total earning assets
|
5,075,884 | 244,041 | 4.81 | % | 4,311,079 | 249,858 | 5.80 | % | 3,678,927 | 290,229 | 7.89% | |||||||||||||||||||||||||
|
Cash and other assets
|
245,034 | 206,634 | 220,914 | |||||||||||||||||||||||||||||||||
|
Total assets
|
$ | 5,320,918 | $ | 4,517,713 | $ | 3,899,841 | ||||||||||||||||||||||||||||||
|
Liabilities and stockholders’ equity
|
||||||||||||||||||||||||||||||||||||
|
Transaction deposits
|
$ | 147,961 | $ | 242 | 0.16 | % | $ | 106,720 | $ | 463 | 0.43 | % | $ | 98,159 | $ | 923 | 0.94% | |||||||||||||||||||
|
Savings deposits
|
1,182,442 | 10,082 | 0.85 | % | 784,685 | 14,402 | 1.84 | % | 831,370 | 35,487 | 4.27% | |||||||||||||||||||||||||
|
Time deposits
|
1,188,964 | 20,870 | 1.76 | % | 1,086,252 | 37,347 | 3.44 | % | 702,248 | 35,783 | 5.10% | |||||||||||||||||||||||||
|
Deposits in foreign branches
|
411,116 | 6,630 | 1.61 | % | 746,399 | 20,640 | 2.77 | % | 992,837 | 49,052 | 4.94% | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total interest bearing deposits
|
2,930,483 | 37,824 | 1.29 | % | 2,724,056 | 72,852 | 2.67 | % | 2,624,614 | 121,245 | 4.62% | |||||||||||||||||||||||||
|
Other borrowings
|
1,023,198 | 4,406 | 0.43 | % | 798,647 | 17,896 | 2.24 | % | 402,540 | 20,038 | 4.98% | |||||||||||||||||||||||||
|
Trust preferred subordinated debentures
|
113,406 | 4,232 | 3.73 | % | 113,406 | 6,445 | 5.68 | % | 113,406 | 8,257 | 7.28% | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total interest bearing liabilities
|
4,067,087 | 46,462 | 1.14 | % | 3,636,109 | 97,193 | 2.67 | % | 3,140,560 | 149,540 | 4.76% | |||||||||||||||||||||||||
|
Demand deposits
|
760,776 | 529,471 | 463,142 | |||||||||||||||||||||||||||||||||
|
Other liabilities
|
19,207 | 18,616 | 23,817 | |||||||||||||||||||||||||||||||||
|
Stockholders’ equity
|
473,848 | 333,517 | 272,322 | |||||||||||||||||||||||||||||||||
|
Total liabilities and stockholders’ equity
|
$ | 5,320,918 | $ | 4,517,713 | $ | 3,899,841 | ||||||||||||||||||||||||||||||
|
Net interest income
|
$ | 197,579 | $ | 152,665 | $ | 140,689 | ||||||||||||||||||||||||||||||
|
Net interest margin
|
3.89 | % | 3.54 | % | 3.82% | |||||||||||||||||||||||||||||||
|
Net interest spread
|
3.67 | % | 3.13 | % | 3.13% | |||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
(1) The loan averages include
loans on which the accrual of interest has been discontinued and
are stated net of unearned income.
|
||||||||||||||||||||||||||||||||||||
|
(2) Taxable equivalent rates
used where applicable.
|
||||||||||||||||||||||||||||||||||||
|
Additional information from
discontinued operations:
|
||||||||||||||||||||||||||||||||||||
|
Loans held for sale from discontinued operations
|
$ | 600 | $ | 699 | $ | 4,546 | ||||||||||||||||||||||||||||||
|
Borrowed funds
|
600 | 699 | 4,546 | |||||||||||||||||||||||||||||||||
|
Net interest income
|
$ | 61 | $ | 54 | $ | 180 | ||||||||||||||||||||||||||||||
|
Net interest margin — consolidated
|
3.89 | % | 3.54 | % | 3.82% | |||||||||||||||||||||||||||||||
Non-interest
Income
| Year Ended December 31 | ||||||||||||
| (in thousands) | 2009 | 2008 | 2007 | |||||||||
|
|
||||||||||||
|
Service charges on deposit accounts
|
$ | 6,287 | $ | 4,699 | $ | 4,091 | ||||||
|
Trust fee income
|
3,815 | 4,692 | 4,691 | |||||||||
|
Bank owned life insurance (BOLI) income
|
1,579 | 1,240 | 1,198 | |||||||||
|
Brokered loan fees
|
9,043 | 3,242 | 1,870 | |||||||||
|
Equipment rental income
|
5,557 | 5,995 | 6,138 | |||||||||
|
Other(1)
|
2,979 | 2,602 | 2,639 | |||||||||
|
|
||||||||||||
|
Total non-interest income
|
$ | 29,260 | $ | 22,470 | $ | 20,627 | ||||||
27
Table of Contents
| (1) | Other income includes such items as letter of credit fees, rental income, mark to market on mortgage warehouse loans, 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 $6.8 million, or 30%,
during the year ended December 31, 2009 to
$29.3 million, compared to $22.5 million during the
same period in 2008. The increase was primarily due to an
increase in brokered loan fees, which increased
$5.8 million to $9.0 million for the year ended
December 31, 2009, compared to $3.2 million for the
same period in 2008 due to an increase in our mortgage warehouse
volume. Service charges increased $1.6 million to
$6.3 million for the year ended December 31, 2009,
compared to $4.7 million for the same period in 2008 due to
lower earnings credit rates and an increase in fees. These
increases were offset by an $877,000 decrease in trust fee
income, which is due to the overall lower market values of trust
assets.
Non-interest income increased by $1.9 million, or 9.2%,
during the year ended December 31, 2008 to
$22.5 million, compared to $20.6 million during the
same period in 2007. The increase was primarily due to an
increase in brokered loan fees, which increased
$1.3 million to $3.2 million for the year ended
December 31, 2008, compared to $1.9 million for the
same period in 2007 due to an increase in our mortgage warehouse
volume. Service charges increased $608,000 to $4.7 million
for the year ended December 31, 2008, compared to
$4.1 million for the same period in 2007 due to lower
earnings credit rates and an increase in fees.
While management expects continued growth in non-interest
income, the future rate of growth could be affected by increased
competition from nationwide and regional financial institutions
and by decreased demand in mortgage warehouse volume. In order
to achieve continued growth in non-interest income, we may need
to introduce new products or enter into new markets. Any new
product introduction or new market entry could place additional
demands on capital and managerial resources.
Non-interest
Expense
| Year Ended December 31 | ||||||||||||
| (in thousands) | 2009 | 2008 | 2007 | |||||||||
|
|
||||||||||||
|
Salaries and employee benefits
|
$ | 73,419 | $ | 61,438 | $ | 56,608 | ||||||
|
Net occupancy expense
|
12,291 | 9,631 | 8,430 | |||||||||
|
Leased equipment depreciation
|
4,319 | 4,667 | 4,958 | |||||||||
|
Marketing
|
3,034 | 2,729 | 3,004 | |||||||||
|
Legal and professional
|
11,846 | 9,622 | 7,245 | |||||||||
|
Communications and data processing
|
3,743 | 3,314 | 3,357 | |||||||||
|
FDIC insurance assessment
|
8,464 | 1,797 | 1,424 | |||||||||
|
Allowance and other carrying costs for OREO
|
10,345 | 1,541 | 133 | |||||||||
|
Other(1)
|
18,081 | 14,912 | 13,447 | |||||||||
|
|
||||||||||||
|
Total non-interest expense
|
$ | 145,542 | $ | 109,651 | $ | 98,606 | ||||||
| (1) | Other expense includes such items as courier expenses, regulatory assessments other than FDIC insurance, due from bank charges, software amortization and maintenance, and other general operating expenses, none of which account for 1% or more of total interest income and non-interest income. |
Non-interest expense for the year ended December 31, 2009
increased $35.9 million compared to the same period of 2008
primarily related to increases in salaries and employee
benefits, FDIC assessment expenses, and expenses related to
other real estate owned (“OREO”) included valuation
allowances.
Salaries and employee benefits expense increased by
$12.0 million to $73.4 million during the year ended
December 31, 2009. This increase resulted primarily from
general business growth.
Occupancy expense increased by $2.7 million to
$12.3 million during the year ended December 31, 2009
compared to the same period in 2008 and is related to expansion
of leased facilities to support our general business growth.
28
Table of Contents
Legal and professional expenses increased $2.2 million, or
23%, during the year ended December 31, 2009 mainly related
to general business growth, and continued regulatory and
compliance costs. Regulatory and compliance costs continue to be
a factor in our expense growth and we anticipate that they will
continue to increase.
FDIC insurance assessment expense increased by $6.7 million
from $1.8 million in 2008 to $8.5 million due to the
rate increase and special assessment. The FDIC assessment rates
may continue to increase and will continue to be a factor in our
expense growth.
Allowance and other carrying costs for OREO increased
$8.8 million during the year ended December 31, 2009
related to deteriorating values of assets held in OREO. Of the
$10.3 million expense for 2009, $6.6 million was
related to establishing and increasing the valuation allowance
during the year and $1.2 million related to direct
write-downs of the OREO balance.
Non-interest expense for the year ended December 31, 2008
increased $11.1 million compared to the same period of
2007. This increase is due primarily to a $4.8 million
increase in salaries and employee benefits resulting primarily
from growth.
Occupancy expense increased by $1.2 million to
$9.6 million during the year ended December 31, 2008
compared to the same period in 2007 and is related to expansion
of leased facilities to support our general business growth.
Legal and professional expenses increased $2.4 million, or
33.3%, during the year ended December 31, 2008 mainly
related to general business growth, and continued regulatory and
compliance costs. Regulatory and compliance costs continue to be
a factor in our expense growth and we anticipate that they will
continue to increase.
Analysis
of Financial Condition
Loan
Portfolio
Our loan portfolio has grown at an annual rate of 25%, 24% and
14% in 2007, 2008 and 2009, respectively, reflecting the
build-up
of
our lending operations. Our business plan focuses primarily on
lending to middle market businesses and high net worth
individuals, and as such, commercial and real estate loans have
comprised a majority of our loan portfolio since we commenced
operations, comprising 71% of total loans at December 31,
2009. Construction loans have decreased from 18% of the
portfolio at December 31, 2005 to 13% of the portfolio at
December 31, 2009. Consumer loans generally have
represented 1% or less of the portfolio from December 31,
2005 to December 31, 2009. Loans held for sale, which
relates to our mortgage warehouse operations and are principally
mortgage loans being warehoused for sale (typically within 10 to
20 days), fluctuate based on the level of market demand in
the product. Due to market conditions experienced in the
mortgage industry during 2007, loans not sold within the normal
timeframe were transferred to the loans held for investment
portfolio. Loans were transferred at a lower of cost or market
basis and are then subject to normal loan review, grading and
reserve allocation requirements. The remaining balance of loans
transferred was $6.8 million at December 31, 2009, and
$2.5 million of such loans were NPAs with allocated
reserves of approximately $618,000.
We originate substantially all of the loans held in our
portfolio, except participations in residential mortgage loans
held for sale, select loan participations and syndications,
which are underwritten independently by us prior to purchase,
and certain USDA and SBA government guaranteed loans that we
purchase in the secondary market. We also participate in
syndicated loan relationships, both as a participant and as an
agent. As of December 31, 2009, we have $447.9 million
in syndicated loans, $145.1 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
12/31/09,
$21.9 million of our syndicated loans were nonperforming,
and none are considered potential problem loans.
29
Table of Contents
The following summarizes our loan portfolio on a gross basis by
major category as of the dates indicated (in thousands):
| December 31 | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
|
|
||||||||||||||||||||
|
Commercial
|
$ | 2,457,533 | $ | 2,276,054 | $ | 2,035,049 | $ | 1,602,577 | $ | 1,182,734 | ||||||||||
|
Construction
|
669,426 | 667,437 | 573,459 | 538,586 | 387,163 | |||||||||||||||
|
Real estate
|
1,233,701 | 988,784 | 773,970 | 530,377 | 478,634 | |||||||||||||||
|
Consumer
|
25,065 | 32,671 | 28,334 | 21,113 | 19,962 | |||||||||||||||
|
Equipment leases
|
99,129 | 86,937 | 74,523 | 45,280 | 16,337 | |||||||||||||||
|
Loans held for sale
|
693,504 | 496,351 | 174,166 | 199,014 | 72,383 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 5,178,358 | $ | 4,548,234 | $ | 3,659,501 | $ | 2,936,947 | $ | 2,157,213 | ||||||||||
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, 2009, funded commercial loans
and leases totaled approximately $2.6 billion,
approximately 49% of our total funded loans.
Real Estate Loans.
Approximately 23% of our
real estate loan portfolio (excluding construction loans) and 6%
of the total portfolio is comprised of loans secured by
properties other than market risk or investment-type real
estate. Market risk loans are real estate loans where the
primary source of repayment is expected to come from the sale or
lease of the real property collateral. We generally provide
temporary financing for commercial and residential property.
These loans are viewed primarily as cash flow loans and
secondarily as loans secured by real estate. Our real estate
loans generally have maximum terms of five to seven years, and
we provide loans with both floating and fixed rates. We
generally avoid long-term loans for commercial real estate held
for investment. Real estate loans may be more adversely affected
by conditions in the real estate markets or in the general
economy. Appraised values may be highly variable due to market
conditions and impact of the inability of potential purchasers
and lessees to obtain financing and lack of transactions at
comparable values. At December 31, 2009, real estate term
loans totaled approximately $1.2 billion, or 24% of our
total funded loans; of this total, $1,019.3 million were
loans with floating rates and $214.4 million were loans
with fixed rates.
Construction Loans.
Our construction loan
portfolio consists primarily of single-family residential
properties and commercial projects used in manufacturing,
warehousing, service or retail businesses. Our construction
loans generally have terms of one to three years. We typically
make construction loans to developers, builders and contractors
that have an established record of successful project completion
and loan repayment and have a substantial investment of the
borrowers’ equity. However, construction loans are
generally based upon estimates of costs and value associated
with the completed project. Sources of repayment for these types
of loans may be pre-committed permanent loans from other
lenders, sales of developed property, or an interim loan
commitment from us until permanent financing is obtained. The
nature of these loans makes ultimate repayment extremely
sensitive to overall economic conditions. Borrowers may not be
able to correct conditions of default in loans, increasing risk
of exposure to classification, NPA status, reserve allocation
and actual credit loss and foreclosure. These loans typically
have floating rates and commitment fees. At December 31,
2009, funded construction real estate loans totaled
approximately $669.4 million, approximately 13% of our
total funded loans.
Loans Held for Sale.
Our loans held for sale
portfolio consists of participations purchased in single-family
residential mortgages funded through our mortgage warehouse
group. These loans are typically on our
30
Table of Contents
balance sheet for 10 to 20 days or less. We have agreements
with brokers and participate in individual loans they originate.
All loans are subject to pre-committed programs for permanent
financing with financially sound investors. Substantially all
loans are conforming loans. At December 31, 2009, loans
held for sale totaled approximately $693.5 million,
approximately 13% 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, 2009, our commitments under letters of credit
totaled approximately $66.4 million.
Portfolio
Geographic and Industry Concentrations
We continue to lend primarily in Texas. As of December 31,
2009, a substantial majority of the principal amount of the
loans held for investment in our portfolio was to businesses and
individuals in Texas. This geographic concentration subjects the
loan portfolio to the general economic conditions in Texas. The
table below summarizes the industry concentrations of our funded
loans at December 31, 2009. 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 adequate to
cover estimated losses on loans at each balance sheet date.
|
Percent of Total
|
||||||||
| (in thousands) | Amount | Loans | ||||||
|
|
||||||||
|
Services
|
$ | 2,126,513 | 41.1 | % | ||||
|
Loans held for sale
|
693,504 | 13.4 | % | |||||
|
Contracting — construction and real estate development
|
592,750 | 11.5 | % | |||||
|
Investors and investment management companies
|
576,827 | 11.1 | % | |||||
|
Petrochemical and mining
|
474,495 | 9.2 | % | |||||
|
Personal/household
|
199,564 | 3.9 | % | |||||
|
Manufacturing
|
186,637 | 3.6 | % | |||||
|
Retail
|
140,638 | 2.7 | % | |||||
|
Wholesale
|
114,370 | 2.2 | % | |||||
|
Contracting — trades
|
59,219 | 1.1 | % | |||||
|
Government
|
12,670 | 0.2 | % | |||||
|
Agriculture
|
1,171 | 0.0 | % | |||||
|
|
||||||||
|
Total
|
$ | 5,178,358 | 100.0 | % | ||||
Our largest concentration in any single industry is in services.
Loans extended to borrowers within the services industries
include loans to finance working capital and equipment, as well
as loans to finance investment and owner-occupied real estate.
Significant trade categories represented within the services
industries include, but are not limited to, real estate
services, financial services, leasing companies, transportation
and communication, and hospitality services. Borrowers
represented within the real estate services category are largely
owners and managers of both residential and non-residential
commercial real estate properties. Personal/household loans
include loans to certain high net worth individuals for
commercial purposes, in addition to consumer loans. Loans held
for sale are those loans originated by our mortgage warehouse
group. Loans extended to borrowers within the contracting
industry are comprised largely of loans to land developers and
to both heavy construction and general commercial contractors.
Many of these loans are secured by real estate properties, the
development of which is or may be financed by our bank. Loans
extended to borrowers within the petrochemical and mining
industries are predominantly loans to finance the exploration
and production of petroleum and natural gas. These loans are
generally secured by proven petroleum and natural gas reserves.
We make loans that are appropriately collateralized under our
credit standards. Approximately 96% of our funded loans are
secured by collateral. Over 90% of the real estate collateral is
located in Texas. The table
31
Table of Contents
below sets forth information regarding the distribution of our
funded loans among various types of collateral at
December 31, 2009 (in thousands except percentage data):
|
Percent of
|
||||||||
| Amount | Total Loans | |||||||
|
|
||||||||
|
Collateral type:
|
||||||||
|
Real property
|
$ | 1,903,127 | 36.7 | % | ||||
|
Business assets
|
1,591,980 | 30.7 | % | |||||
|
Loans held for sale
|
693,504 | 13.4 | % | |||||
|
Energy
|
373,705 | 7.2 | % | |||||
|
Unsecured
|
221,284 | 4.3 | % | |||||
|
Other assets
|
175,025 | 3.4 | % | |||||
|
Highly liquid assets
|
166,413 | 3.2 | % | |||||
|
Rolling stock
|
34,314 | 0.7 | % | |||||
|
U. S. Government guaranty
|
19,006 | 0.4 | % | |||||
|
|
||||||||
|
Total
|
$ | 5,178,358 | 100.0 | % | ||||
As noted in the table above, 36.7% 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, 2009
(in thousands except percentage data):
|
Percent of
|
||||||||
|
Total
|
||||||||
|
Real Estate
|
||||||||
| Amount | Loans | |||||||
|
|
||||||||
|
Property type:
|
||||||||
|
Market Risk
|
||||||||
|
Commercial buildings
|
$ | 581,990 | 30.6 | % | ||||
|
Real estate-permanent
|
185,097 | 9.7 | % | |||||
|
Apartment buildings
|
166,082 | 8.7 | % | |||||
|
Shopping center/mall buildings
|
144,253 | 7.6 | % | |||||
|
1-4 Family dwellings (other than condominium)
|
116,899 | 6.1 | % | |||||
|
Residential lots
|
115,439 | 6.1 | % | |||||
|
Hotel/motel buildings
|
87,901 | 4.6 | % | |||||
|
Other
|
183,298 | 9.6 | % | |||||
|
Other Than Market Risk
|
||||||||
|
Commercial buildings
|
172,798 | 9.1 | % | |||||
|
1-4 Family dwellings (other than condominium)
|
83,416 | 4.4 | % | |||||
|
Other
|
65,954 | 3.5 | % | |||||
|
|
||||||||
|
Total real estate loans
|
$ | 1,903,127 | 100.0 | % | ||||
The table below summarizes our market risk real estate portfolio
as segregated by the geographic region in which the property is
located (in thousands except percentage data):
|
Percent of
|
||||||||
| Amount | Total | |||||||
|
|
||||||||
|
Geographic region:
|
||||||||
|
Dallas/Fort Worth
|
$ | 583,226 | 36.9 | % | ||||
|
Houston
|
267,422 | 16.9 | % | |||||
|
Austin
|
213,704 | 13.5 | % | |||||
|
San Antonio
|
259,162 | 16.4 | % | |||||
|
Other Texas cities
|
106,926 | 6.8 | % | |||||
|
Other states
|
150,519 | 9.5 | % | |||||
|
|
||||||||
|
Total market risk real estate loans
|
$ | 1,580,959 | 100.0 | % | ||||
32
Table of Contents
The determination of collateral value is critically important
when financing real estate. As a result, obtaining current and
objectively prepared appraisals is a major part of our
underwriting and monitoring processes. Generally, our policy
requires a new appraisal every three years. However, in the
current economic downturn where real estate values have been
fluctuating rapidly, more current appraisals are obtained when
warranted by conditions such as a borrower’s deteriorating
financial condition, their possible inability to perform on the
loan, and the increased risks involved with reliance on the
collateral value as sole repayment of the loan. Generally, loans
graded substandard or worse where real estate is a material
portion of the collateral value
and/or
the
income from the real estate or sale of the real estate is the
primary source of debt service, annual appraisals are obtained.
In all cases, appraisals are reviewed to determine
reasonableness of the appraised value. The reviewer will
challenge whether or not the data used is adequate and relevant,
form an opinion as to the appropriateness of the appraisal
methods and techniques used, and determine if overall the
analysis and conclusions of the appraiser can be relied upon.
Both the appraisal process and the appraisal review process have
become increasingly difficult in the current economic
environment with the lack of comparable sales which is partially
as a result of the lack of available financing which has
ultimately led to overall depressed real estate values.
Large
Credit Relationships
The market areas we serve include the five major metropolitan
markets of Texas, including Austin, Dallas, Fort Worth,
Houston and San Antonio. As a result, we originate and
maintain large credit relationships with numerous customers in
the ordinary course of business. The legal limit of our bank is
approximately $75 million and our house limit is generally
$15 to $20 million. We consider large credit relationships
to be those with commitments equal to or in excess of
$10.0 million. The following table provides additional
information on our large credit relationships outstanding at
year-end (in thousands):
|
2009
|
2008
|
|||||||||||||||||||||||
|
Number of
|
Period-End Balances |
Number of
|
Period-End Balances | |||||||||||||||||||||
| Relationships | Committed | Outstanding | Relationships | Committed | Outstanding | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Large credit relationships:
|
||||||||||||||||||||||||
|
$20.0 million and greater
|
15 | $ | 353,585 | $ | 297,189 | 18 | $ | 411,023 | $ | 304,460 | ||||||||||||||
|
$10.0 million to $19.9 million
|
128 | 1,733,593 | 1,272,870 | 119 | 1,633,960 | 1,077,168 | ||||||||||||||||||
Growth in outstanding balances related to large credit
relationships primarily resulted from an increase in
commitments. The average commitment per large credit
relationship in excess of $20.0 million totaled
$23.6 million at December 31, 2009 and
$22.8 million at December 31, 2008. The average
outstanding balance per large credit relationship with a
commitment greater than $20.0 million totaled $19.8 at
December 31, 2009 and $16.9 million at
December 31, 2008. The average commitment per large credit
relationship between $10.0 million and $19.9 million
totaled $13.5 million at December 31, 2009 and
$13.7 million at December 31, 2008. The average
outstanding balance per large credit relationship with a
commitment between $10.0 million and $19.9 million
totaled $9.9 million at December 31, 2009 and
$9.1 million at December 31, 2008.
33
Table of Contents
Loan
Maturity and Interest Rate Sensitivity on December 31,
2009
| Remaining Maturities of Selected Loans | ||||||||||||||||
| (in thousands) | Total | Within 1 Year | 1-5 Years | After 5 Years | ||||||||||||
|
|
||||||||||||||||
|
Loan maturity:
|
||||||||||||||||
|
Commercial
|
$ | 2,457,533 | $ | 1,360,378 | $ | 1,062,639 | $ | 34,516 | ||||||||
|
Construction
|
669,426 | 244,069 | 403,141 | 22,216 | ||||||||||||
|
Real estate
|
1,233,701 | 313,406 | 740,307 | 179,989 | ||||||||||||
|
Consumer
|
25,065 | 20,417 | 4,648 | — | ||||||||||||
|
Equipment leases
|
99,129 | 7,753 | 84,145 | 7,230 | ||||||||||||
|
|
||||||||||||||||
|
Total loans held for investment
|
$ | 4,484,854 | $ | 1,946,023 | $ | 2,294,880 | $ | 243,951 | ||||||||
|
Interest rate sensitivity for selected loans with:
|
||||||||||||||||
|
Predetermined interest rates
|
$ | 795,839 | $ | 408,706 | $ | 307,085 | $ | 80,048 | ||||||||
|
Floating or adjustable interest rates
|
3,689,015 | 1,537,317 | 1,987,795 | 163,903 | ||||||||||||
|
|
||||||||||||||||
|
Total loans held for investment
|
$ | 4,484,854 | $ | 1,946,023 | $ | 2,294,880 | $ | 243,951 | ||||||||
Interest
Reserve Loans
As of December 31, 2009, we had $347.5 million in
loans with interest reserves, which represents approximately 78%
of our construction loans. Loans with interest reserves are
common when originating construction loans, but the use of
interest reserves is carefully controlled by our underwriting
standards. The use of interest reserves is based on the
feasibility of the project, the creditworthiness of the borrower
and guarantors, and the loan to value coverage of the
collateral. The interest reserve account allows the borrower,
when financial conditions precedents are met to draw loan funds
to pay interest charges on the outstanding balance of the loan.
When drawn, the interest is capitalized and added to the loan
balance, subject to conditions specified at the time the credit
is approved and during the initial underwriting. We have
effective and ongoing controls for monitoring compliance with
loan covenants for advancing funds and determination of default
conditions. When lending relationships involve financing of land
on which improvements will be
c
onstructed, construction
funds are not advanced until borrower has received lease or
purchase commitments which will meet cash flow coverage
requirements. We maintain current financial statements on the
borrowing entity and guarantors, as well as periodical
inspections of the project and analysis of whether the project
is on schedule or delayed. Updated appraisals are ordered when
necessary to validate the collateral values to support all
advances, including reserve interest. Advances of interest
reserves are discontinued if collateral values do not support
the advances or if the borrower does not comply with other terms
and conditions in the loan agreements. In addition, most of our
construction lending is performed in Texas and our lenders are
very familiar with trends in local real estate. At a point where
we believe that our collateral position is jeopardized, we
retain the right to stop the use of the interest reserves. As of
December 31, 2009 $16.3 million of our loans with
interest reserves were on nonaccrual, and in all cases, the use
of the reserves has been suspended.
34
Table of Contents
Non-performing
Assets
Non-performing assets include non-accrual loans and equipment
leases, accruing loans 90 or more days past due, restructured
loans, and other repossessed assets. The table below summarizes
our non-accrual loans by type (in thousands):
| Year Ended December 31 | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Non-accrual loans:(1)(3)
|
||||||||||||
|
Commercial
|
$ | 34,021 | $ | 15,676 | $ | 14,693 | ||||||
|
Construction
|
44,598 | 22,362 | 4,147 | |||||||||
|
Real estate
|
10,189 | 6,239 | 2,453 | |||||||||
|
Consumer
|
273 | 296 | 90 | |||||||||
|
Equipment leases
|
6,544 | 2,926 | 2 | |||||||||
|
|
||||||||||||
|
Total non-accrual loans
|
95,625 | 47,499 | 21,385 | |||||||||
|
Other repossessed assets:
|
||||||||||||
|
OREO(3)(4)
|
27,264 | 25,904 | 2,671 | |||||||||
|
Other repossessed assets
|
162 | 25 | 45 | |||||||||
|
|
||||||||||||
|
Total other repossessed assets
|
27,426 | 25,929 | 2,716 | |||||||||
|
|
||||||||||||
|
Total non-performing assets
|
$ | 123,051 | $ | 73,428 | $ | 24,101 | ||||||
|
|
||||||||||||
|
Loans past due 90 days and accruing(2)
|
6,081 | 4,115 | 4,147 | |||||||||
| (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 $3.6 million, $2.9 million and $1.1 million for the years ended December 31, 2009, 2008 and 2007, respectively. | |
| (2) | At December 31, 2009, 2008 and 2007, loans past due 90 days and still accruing includes premium finance loans of $2.4 million, $2.1 million and $1.8 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, 2009, 2008 and 2007, non-performing assets include $2.6 million, $4.4 million, $4.1 million, respectively, of mortgage warehouse loans which were transferred to our loans held for investment portfolio at lower of cost or market during the past eighteen months, and some were subsequently moved to OREO. | |
| (4) | At December 31, 2009, OREO balance is net of $6.6 million valuation allowance. |
Nonperforming assets include non-accrual loans, restructured
loans and repossessed assets. Total nonperforming assets at
December 31, 2009 increased $45.5 million from
December 31, 2008, compared to $49.3 million at
December 31, 2007. The increases in the past two years are
reflective of the overall economic deterioration during 2008 and
2009. As a result our allowance for loans losses as a percentage
of loans, as well as our provision for credit losses recorded in
2008 and 2009 have increased.
At December 31, 2009, our total non-accrual loans were
$95.6 million. Of these, $34.0 million were
characterized as commercial loans. This included a
$7.6 million line of credit secured by single family
residences and the borrower’s notes receivable, a
$6.0 million line of credit secured by various single
family properties, a $5.5 million residence rehabilitation
loan secured by single family residences, a $4.3 million
manufacturing loan secured by the assets of the borrower, a
$2.5 million loan secured by a first lien security
35
Table of Contents
interest in the borrower’s accounts receivable and assets,
a $2.4 million loan secured by the borrower’s assets,
a $2.0 million lender finance loan secured by the
borrower’s material assets and $1.2 million in auto
dealer loans secured by the borrower’s accounts receivable
and inventory. Non-accrual loans also included
$44.6 million characterized as construction loans. This
included a $16.3 million commercial real estate lot
development loan secured by residential lots, a
$16.2 million commercial real estate loan secured by
condominiums, a $5.0 million commercial real estate loan
secured by unimproved land, a $2.1 million commercial real
estate loan secured by retail property, $1.6 million in
commercial real estate loans secured by single family
residences, $1.5 million in residential real estate loans
secured by single family residences and a $1.0 million real
estate investment loan secured by unimproved lots. Non-accrual
loans also included $10.2 million characterized as real
estate loans, $6.9 of which relates to a real estate loan
secured by an apartment building. Also included in this category
are $2.5 million in single family mortgages that were
originated in our mortgage warehouse operation. Each of these
loans were reviewed for impairment and specific reserves were
allocated as necessary and included in the allowance for loan
losses as of December 31, 2009 to cover any probable loss.
Reserves on impaired loans were $18.4 million at
December 31, 2009, compared to $13.1 million at
December 31, 2008 and $5.9 million at
December 31, 2007. We recognized $25,000 in interest income
on non-accrual loans during 2009 compared to $33,000 in 2008 and
$44,000 in 2007. Additional interest income that would have been
recorded if the loans had been current during the years ended
December 31, 2009, 2008 and 2007 totaled $3.6 million,
$2.9 million and $1.1 million, respectively.
Generally, we place loans on non-accrual when there is a clear
indication that the borrower’s cash flow may not be
sufficient to meet payments as they become due, which is
generally when a loan is 90 days past due. When a loan is
placed on non-accrual status, all previously accrued and unpaid
interest is reversed. Interest income is subsequently recognized
on a cash basis as long as the remaining unpaid principal amount
of the loan is deemed to be fully collectible. If collectibility
is questionable, then cash payments are applied to principal. As
of December 31, 2009, none of our non-accrual loans were
earning on a cash basis.
A loan is considered impaired when, based on current information
and events, it is probable that we will be unable to collect all
amounts due (both principal and interest) according to the terms
of the original loan agreement. Reserves on impaired loans are
measured based on the present value of the expected future cash
flows discounted at the loan’s effective interest rate or
the fair value of the underlying collateral.
Restructured loans are loans on which, due to the
borrower’s financial difficulties, we have granted a
concession that we would not otherwise consider. This may
include a transfer of real estate or other assets from the
borrower, a modification of loan terms, or a combination of the
two. Modifications of terms that could potentially qualify as a
restructuring include reduction of contractual interest rate,
extension of the maturity date at a contractual interest rate
lower than the current rate for new debt with similar risk, or a
reduction of the face amount of debt, either forgiveness of
principal or accrued interest. As of December 31, 2009 we
have no loans considered restructured that are not already on
nonaccrual. Of the nonaccrual loans at December 31, 2009,
$30.3 million met the criteria for restructured. A loan
continues to qualify as restructured until a consistent payment
history has been evidenced, generally no less than twelve
months. A loan is placed back on accrual status when both
principal and interest are current and it is probable that we
will be able to collect all amounts due (both principal and
interest) according to the terms of the loan agreement.
Potential problem loans consist of loans that are performing in
accordance with contractual terms, but for which we have
concerns about the borrower’s ability to comply with
repayment terms because of the borrower’s potential
financial difficulties. We monitor these loans closely and
review their performance on a regular basis. At
December 31, 2009 and 2008, we had $53.1 million and
$22.5 million in loans of this type, which were not
included in either the non-accrual or 90 days past due
categories. The increase in the amount of potential problem
loans from December 2008 to December 2009 is consistent with the
overall economic deterioration and the increase in nonperforming
loans that we have experienced this year.
36
Table of Contents
The table below presents a summary of the activity related to
OREO (in thousands):
| Year Ended December 31 | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Beginning balance
|
$ | 25,904 | $ | 2,671 | $ | 882 | ||||||
|
Additions
|
23,466 | 28,835 | 2,582 | |||||||||
|
Sales
|
(14,265 | ) | (5,602 | ) | (793 | ) | ||||||
|
Valuation allowance
|
(6,619 | ) | — | — | ||||||||
|
Direct write-downs
|
(1,222 | ) | — | — | ||||||||
|
|
||||||||||||
|
Ending balance
|
$ | 27,264 | $ | 25,904 | $ | 2,671 | ||||||
The $27.3 million balance in OREO at December 31, 2009
included unimproved commercial real estate values at
$7.5 million and residential real estate lots and
undeveloped land valued at $7.1 million and
$3.4 million, respectively. Also included is a commercial
real estate property consisting of single family residences and
developed lots valued at $3.4 million, unimproved
commercial real estate lots valued at $2.9 million and $1.6
million, an office building valued at $2.6 million, and
commercial real estate property consisting of single family
residences and a mix of lots at various levels of completion
valued at $1.1 million.
When foreclosure occurs, fair value, which is generally based on
appraised values, may result in partial charge-off of loan upon
taking property, and so long as property is retained, reductions
in appraised values will result in valuation adjustment taken as
non-interest expense. In addition, if the decline in value is
believed to be permanent and not just driven by market
conditions, a direct write-down to the OREO balance may be
taken. We generally pursue sales of OREO when conditions
warrant, but we may choose to hold certain properties for a
longer term, which can result in additional exposure related to
the appraised values during that holding period. During the year
ended December 31, 2009, we recorded $7.8 million in
valuation expense. Of the $7.8 million, $6.6 million
related to increases to the valuation allowance, and
$1.2 million related to direct write-downs.
Summary
of Loan Loss Experience
The provision for loan losses is a charge to earnings to
maintain the reserve for loan losses at a level consistent with
management’s assessment of the collectability of the loan
portfolio in light of current economic conditions and market
trends. We recorded a provision of $43.5 million for the
year ended December 31, 2009, $26.8 million for the
year ended December 31, 2008, and $14.0 million for
the year ended December 31, 2007. The amount of reserves
and provision required to support the reserve have increased
over the last two years as a result of credit deterioration in
our loan portfolio driven by negative changes in national and
regional economic conditions and the impact on those conditions
on the financial condition of borrowers and the values of
assets, including real estate assets, pledged as collateral.
The reserve for loan losses is comprised of specific reserves
for impaired loans and an estimate of losses inherent in the
portfolio at the balance sheet date, but not yet identified with
specified loans. We regularly evaluate our reserve for loan
losses to maintain an adequate level to absorb estimated loan
losses inherent in the loan portfolio. Factors contributing to
the determination of reserves include the credit worthiness of
the borrower, changes in the value of pledged collateral, and
general economic conditions. All loan commitments rated
substandard or worse and greater than $500,000 are specifically
reviewed for impairment. 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.
37
Table of Contents
The reserve allocation percentages assigned to each credit grade
have been developed based primarily on an analysis of our
historical loss rates. The allocations are adjusted for certain
qualitative factors for such things as general economic
conditions, changes in credit policies and lending standards.
Changes in the trend and severity of problem loans can cause the
estimation of losses to differ from past experience. In
addition, the reserve considers the results of reviews performed
by independent third party reviewers as reflected in their
confirmations of assigned credit grades within the portfolio.
The portion of the allowance that is not derived by the
allowance allocation percentages compensates for the uncertainty
and complexity in estimating loan and lease losses including
factors and conditions that may not be fully reflected in the
determination and application of the allowance allocation
percentages. We evaluate many factors and conditions in
determining the unallocated portion of the allowance, including
the economic and business conditions affecting key lending
areas, credit quality trends and general growth in the
portfolio. The allowance is considered adequate and appropriate,
given management’s assessment of potential losses within
the portfolio as of the evaluation date, the significant growth
in the loan and lease portfolio, current economic conditions in
the Company’s market areas and other factors.
The methodology used in the periodic review of reserve adequacy,
which is performed at least quarterly, is designed to be dynamic
and responsive to changes in portfolio credit quality and
anticipated future credit losses. 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 reserve for credit losses, which includes a liability for
losses on unfunded commitments, totaled $70.9 million at
December 31, 2009, $46.8 million at December 31,
2008 and $32.8 million at December 31, 2007. The total
reserve percentage increased to 1.59% at year-end 2009 from
1.16% and 0.95% of loans held for investment at
December 31, 2008 and 2007, respectively. The total reserve
percentage has increased over the past two years as a result of
the effects of national and regional economic conditions on
borrowers and values of assets pledged as collateral. These
changes in economic conditions have resulted in increases in
loans with weakened credit quality and nonperforming loans. The
overall reserve for loan losses continues to be driven by the
loan loss reserve methodology as described above. At
December 31, 2009, 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.
38
Table of Contents
The table below presents a summary of our loan loss experience
for the past five years (in thousands except percentage and
multiple data):
| Year Ended December 31 | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
|
|
||||||||||||||||||||
|
Reserve for loan losses:
|
||||||||||||||||||||
|
Beginning balance
|
$ | 45,365 | $ | 31,686 | $ | 20,063 | $ | 18,897 | $ | 18,698 | ||||||||||
|
Loans charged-off:
|
||||||||||||||||||||
|
Commercial
|
4,000 | 7,395 | 2,528 | 2,525 | 410 | |||||||||||||||
|
Real estate — Construction
|
6,508 | 1,866 | 313 | — | — | |||||||||||||||
|
Real estate — Term
|
4,696 | 4,168 | — | — | 28 | |||||||||||||||
|
Consumer
|
502 | 193 | 48 | 3 | 93 | |||||||||||||||
|
Equipment leases
|
4,022 | 12 | 81 | 76 | 66 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
19,728 | 13,634 | 2,970 | 2,604 | 597 | |||||||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Commercial
|
124 | 759 | 642 | 462 | 569 | |||||||||||||||
|
Real estate — Construction
|
13 | — | — | — | — | |||||||||||||||
|
Real estate — Term
|
53 | 47 | — | — | — | |||||||||||||||
|
Consumer
|
28 | 13 | 15 | 1 | 2 | |||||||||||||||
|
Equipment leases
|
54 | 79 | 131 | 247 | 225 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
272 | 898 | 788 | 710 | 796 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net charge-offs (recoveries)
|
19,456 | 12,736 | 2,182 | 1,894 | (199 | ) | ||||||||||||||
|
Provision for loan losses
|
42,022 | 26,415 | 13,805 | 3,060 | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Ending balance
|
$ | 67,931 | $ | 45,365 | $ | 31,686 | $ | 20,063 | $ | 18,897 | ||||||||||
|
Reserve for off-balance sheet credit losses:
|
||||||||||||||||||||
|
Beginning balance
|
$ | 1,470 | $ | 1,135 | $ | 940 | $ | — | $ | — | ||||||||||
|
Provision for off-balance sheet credit losses
|
1,478 | 335 | 195 | 940 | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Ending balance
|
$ | 2,948 | $ | 1,470 | $ | 1,135 | $ | 940 | $ | — | ||||||||||
|
Total provision for credit losses
|
$ | 43,500 | $ | 26,750 | $ | 14,000 | $ | 4,000 | $ | — | ||||||||||
|
Reserve for loan losses to loans held for investment(2)
|
1.52 | % | 1.16 | % | .95 | % | .77 | % | .91 | % | ||||||||||
|
Net charge-offs (recoveries) to average loans(2)
|
.46 | % | .35 | % | .07 | % | .08 | % | (.01 | )% | ||||||||||
|
Total provision for credit losses to average loans(2)
|
1.04 | % | .73 | % | .46 | % | .17 | % | .00 | % | ||||||||||
|
Recoveries to gross charge-offs
|
1.38 | % | 6.59 | % | 26.53 | % | 27.27 | % | 133.33 | % | ||||||||||
|
Reserve for loan losses as a multiple of net charge-offs
|
3.5 | x | 3.6 | x | 14.5 | x | 10.6 | x | N/M | |||||||||||
|
Reserve for off-balance sheet credit losses to off-balance sheet
credit commitments
|
.24 | % | .10 | % | .09 | % | .08 | % | — | |||||||||||
|
Combined reserves for credit losses to loans held for
investment(2)
|
1.59 | % | 1.16 | % | .95 | % | .77 | % | .91 | % | ||||||||||
|
Non-performing assets:(4)
|
||||||||||||||||||||
|
Non-accrual(1)
|
$ | 95,625 | $ | 47,499 | $ | 21,385 | $ | 9,088 | $ | 5,657 | ||||||||||
|
OREO(5)
|
27,264 | 25,904 | 2,671 | 882 | 158 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 122,889 | $ | 73,403 | $ | 24,056 | $ | 9,970 | $ | 5,815 | ||||||||||
|
Loans past due (90 days) and still accruing(3)
|
$ | 6,081 | $ | 4,115 | $ | 4,147 | $ | 2,142 | $ | 2,795 | ||||||||||
|
Reserve for loan losses to non-performing loans
|
.7 | x | 1.0 | x | 1.5 | x | 2.2 | x | 3.3x | |||||||||||
|
|
||||||||||||||||||||
39
Table of Contents
| (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 $3.6 million, $2.9 million and $1.1 million for the years ended December 31, 2009, 2008 and 2007, respectively. | |
| (2) | Excludes loans held for sale. | |
| (3) | At December 31, 2009, 2008 and 2007, loans past due 90 days and still accruing includes premium finance loans of $2.4 million, $2.1 million and $1.8 million, respectively. These loans are generally secured by obligations of insurance carriers to refund premiums on cancelled insurance policies. The refund of premiums from the insurance carriers can take 180 days or longer from the cancellation date. | |
| (4) | At December 31, 2009, 2008 and 2007, non-performing assets include $2.6 million, $4.4 million and $4.1 million, respectively, of mortgage warehouse loans which were transferred to the loans held for investment portfolio at lower of cost or market during the past eighteen months, and some were subsequently moved to OREO. | |
| (5) | At December 31, 2009, OREO balance is net of $6.6 million valuation allowance. |
Loan Loss
Reserve Allocation
| December 31 | ||||||||||||||||||||||||||||||||||||||||
|
(in thousands, except
|
2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||||||||||||||||||||||
| percentage data) | Reserve | % of Loans | Reserve | % of Loans | Reserve | % of Loans | Reserve | % of Loans | Reserve | % of Loans | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Loan category:
|
||||||||||||||||||||||||||||||||||||||||
|
Commercial
|
$ | 33,269 | 47 | % | $ | 23,348 | 50 | % | $ | 16,466 | 55 | % | $ | 8,992 | 54 | % | $ | 9,996 | 53 | % | ||||||||||||||||||||
|
Construction
|
10,974 | 13 | 7,563 | 15 | 5,032 | 16 | 4,081 | 18 | 2,346 | 18 | ||||||||||||||||||||||||||||||
|
Real estate(1)
|
14,874 | 37 | 10,518 | 32 | 4,736 | 26 | 2,910 | 25 | 3,095 | 27 | ||||||||||||||||||||||||||||||
|
Consumer
|
1,258 | 1 | 1,095 | 1 | 1,989 | 1 | 589 | 1 | 115 | 1 | ||||||||||||||||||||||||||||||
|
Equipment leases
|
2,960 | 2 | 1,790 | 2 | 723 | 2 | 482 | 2 | 395 | 1 | ||||||||||||||||||||||||||||||
|
Unallocated
|
4,596 | — | 1,051 | — | 2,740 | — | 3,009 | — | 2,950 | — | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 67,931 | 100 | % | $ | 45,365 | 100 | % | $ | 31,686 | 100 | % | $ | 20,063 | 100 | % | $ | 18,897 | 100 | % | ||||||||||||||||||||
| (1) | Includes loans held for sale. |
During 2009, the reserve allocated to all categories of loans
increased compared to 2008 primarily due to increases in the
level of allocations required by our loan loss reserve
methodology. Generally, loan loss reserve allocations between
categories are consistent with prior year. The percentage of the
reserve allocated to construction is a slightly higher
percentage in the current year even though the percentage of our
loans in that category has decreased from prior year. This
increase in construction reserve allocation is related to the
overall economic downturn and decreased values that have been
experienced with construction projects, most especially lot
development projects. This is also consistent with the increase
in nonperforming loans in this category we’ve experienced
in 2009.
Securities
Portfolio
Securities are identified as either
held-to-maturity
or
available-for-sale
based upon various factors, including asset/liability management
strategies, liquidity and profitability objectives, and
regulatory requirements.
Held-to-maturity
securities are carried at cost, adjusted for amortization of
premiums or accretion of discounts.
Available-for-sale
securities are securities that may be sold prior to maturity
based upon asset/liability management decisions. Securities
identified as
available-for-sale
are carried at fair value. Unrealized gains or losses on
available-for-sale
securities are recorded as accumulated other comprehensive
income (loss) in stockholders’ equity, net of taxes.
Amortization of premiums or accretion of discounts on
mortgage-backed securities is periodically adjusted for
estimated prepayments.
40
Table of Contents
During the year ended December 31, 2009, we maintained an
average securities portfolio of $314.8 million compared to
an average portfolio of $391.3 million for the same period
in 2008. The December 31, 2009 portfolio is primarily
comprised of mortgage-backed securities. Of the mortgage-backed
securities in our portfolio at December 31, 2009
substantially all are guaranteed by U.S. government
agencies. Our portfolio included no impaired securities.
Our net unrealized gain on the securities portfolio value
increased from a net gain of $2.9 million, which
represented 0.77% of the amortized cost, at December 31,
2008, to a net gain of $9.5 million, which represented
3.70% of the amortized cost, at December 31, 2009. Changes
in value reflect changes in market interest rates and the total
balance of securities.
During the year ended December 31, 2008, we maintained an
average securities portfolio of $391.3 million compared to
an average portfolio of $475.8 million for the same period
in 2007. The December 31, 2008 portfolio is primarily
comprised of mortgage-backed securities. The mortgage-backed
securities in our portfolio at December 31, 2008 primarily
consisted almost entirely of government agency mortgage-backed
securities.
Our net unrealized loss on the securities portfolio value
decreased from a net loss of $1.4 million, which
represented 0.29% of the amortized cost, at December 31,
2007, to a net gain of $2.9 million, which represented
0.77% of the amortized cost, at December 31, 2008. Changes
in value reflect changes in market interest rates and the total
balance of securities.
The average expected life of the mortgage-backed securities was
2.1 years at December 31, 2009 and 2.7 years at
December 31, 2008. 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, 2009, 2008 and 2007:
| At December 31 | ||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
|
Amortized
|
Amortized
|
Amortized
|
Fair
|
|||||||||||||||||||||
| (in thousands) | Cost | Fair Value | Cost | Fair Value | Cost | Value | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||||||||||
|
U.S. Treasuries
|
$ | — | $ | — | $ | 28,299 | $ | 28,296 | $ | 2,595 | $ | 2,595 | ||||||||||||
|
Mortgage-backed securities
|
201,824 | 209,987 | 288,701 | 291,716 | 358,164 | 356,412 | ||||||||||||||||||
|
Corporate securities
|
5,000 | 4,683 | 5,000 | 4,810 | 25,055 | 25,077 | ||||||||||||||||||
|
Municipals
|
42,314 | 43,826 | 46,370 | 46,531 | 48,149 | 48,498 | ||||||||||||||||||
|
Equity securities(1)
|
7,506 | 7,632 | 7,506 | 7,399 | 7,507 | 7,537 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
available-for-sale
securities
|
$ | 256,644 | $ | 266,128 | $ | 375,876 | $ | 378,752 | $ | 441,470 | $ | 440,119 | ||||||||||||
| (1) | Equity securities consist of Community Reinvestment Act funds. |
41
Table of Contents
The amortized cost and estimated fair value of securities are
presented below by contractual maturity:
| At December 31, 2009 | ||||||||||||||||||||
|
After One
|
After Five
|
|||||||||||||||||||
|
Less Than
|
Through
|
Through
|
After Ten
|
|||||||||||||||||
| (in thousands except percentage data) | One Year | Five Years | Ten Years | Years | Total | |||||||||||||||
|
|
||||||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||||||
|
Mortgage-backed securities (1):
|
||||||||||||||||||||
|
Amortized cost
|
$ | 23,359 | $ | 34,200 | $ | 68,930 | $ | 75,335 | $ | 201,824 | ||||||||||
|
Estimated fair value
|
23,719 | 35,143 | 72,477 | 78,648 | 209,987 | |||||||||||||||
|
Weighted average yield(3)
|
4.242 | % | 4.386 | % | 4.815 | % | 4.414 | % | 4.527 | % | ||||||||||
|
Corporate securities :
|
||||||||||||||||||||
|
Amortized cost
|
— | 5,000 | — | — | 5,000 | |||||||||||||||
|
Estimated fair value
|
— | 4,683 | — | — | 4,683 | |||||||||||||||
|
Weighted average yield(3)
|
— | 7.375 | % | — | — | 7.375 | % | |||||||||||||
|
Municipals :(2)
|
||||||||||||||||||||
|
Amortized cost
|
1,985 | 19,571 | 20,758 | — | 42,314 | |||||||||||||||
|
Estimated fair value
|
2,000 | 20,317 | 21,509 | — | 43,826 | |||||||||||||||
|
Weighted average yield(3)
|
7.391 | % | 8.166 | % | 8.723 | % | — | 8.403 | % | |||||||||||
|
Equity securities :
|
||||||||||||||||||||
|
Amortized cost
|
— | — | — | — | 7,506 | |||||||||||||||
|
Estimated fair value
|
— | — | — | — | 7,632 | |||||||||||||||
|
Total
available-for-sale
securities :
|
||||||||||||||||||||
|
Amortized cost
|
$ | 256,644 | ||||||||||||||||||
|
Estimated fair value
|
$ | 266,128 | ||||||||||||||||||
|
|
||||||||||||||||||||
| (1) | Actual maturities may differ significantly from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties. The average expected life of the mortgage-backed securities was 2.1 years at December 31, 2009. | |
| (2) | Yields have been adjusted to a tax equivalent basis assuming a 35% federal tax rate. | |
| (3) | Yields are calculated based on amortized cost. |
42
Table of Contents
The following table discloses, as of December 31, 2009 and
2008, 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 | ||||||||||||||||||||||
|
Unrealized
|
Unrealized
|
Unrealized
|
||||||||||||||||||||||
| Fair Value | Loss | Fair Value | Loss | Fair Value | Loss | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2009
|
||||||||||||||||||||||||
|
Mortgage-backed securities
|
$ | 452 | $ | (1 | ) | $ | 2,553 | $ | (28 | ) | $ | 3,005 | $ | (29 | ) | |||||||||
|
Corporate securities
|
— | — | 4,683 | (317 | ) | 4,683 | (317 | ) | ||||||||||||||||
|
Municipals
|
1,018 | (2 | ) | — | — | 1,018 | (2 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
| $ | 1,470 | $ | (3 | ) | $ | 7,236 | $ | (345 | ) | $ | 8,706 | $ | (348 | ) | ||||||||||
|
December 31, 2008
|
||||||||||||||||||||||||
|
U.S. Treasuries
|
$ | 24,996 | $ | (4 | ) | $ | — | $ | — | $ | 24,996 | $ | (4 | ) | ||||||||||
|
Mortgage-backed securities
|
106,167 | (1,121 | ) | 2,977 | (9 | ) | 109,144 | (1,130 | ) | |||||||||||||||
|
Corporate securities
|
4,810 | (190 | ) | — | — | 4,810 | (190 | ) | ||||||||||||||||
|
Municipals
|
10,817 | (209 | ) | — | — | 10,817 | (209 | ) | ||||||||||||||||
|
Equity securities
|
7,399 | (107 | ) | — | — | 7,399 | (107 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
| $ | 154,189 | $ | (1,631 | ) | $ | 2,977 | $ | (9 | ) | $ | 157,166 | $ | (1,640 | ) | ||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
We believe the investment securities in the table above are
within ranges customary for the banking industry. At
December 31, 2009, the number of investment positions in
this unrealized loss position totals 5. We do not believe these
unrealized losses are “other than temporary” as
(1) we do not have the intent to sell any of the securities
in the table above; and (2) it is not probable that we will
be unable to collect the amounts contractually due. The
unrealized losses noted are interest rate related, and losses
have decreased as rates have decreased in 2008 and 2009. We have
not identified any issues related to the ultimate repayment of
principal as a result of credit concerns on these securities.
Deposits
We compete for deposits by offering a broad range of products
and services to our customers. While this includes offering
competitive interest rates and fees, the primary means of
competing for deposits is convenience and service to our
customers. However, our strategy to provide service and
convenience to customers does not include a large branch
network. Our bank offers nine banking centers, courier services
and online banking. BankDirect, the Internet division of our
bank, serves its customers on a
24 hours-a-day/7 days-a-week
basis solely through Internet banking.
Average deposits for the year ended December 31, 2009
increased $437.7 million compared to the same period of
2008. Average demand deposits, interest bearing transaction and
savings increased by $231.3 million, $41.2 million and
$397.8 million, respectively, while time deposits
(including deposits in foreign branches) decreased
$232.6 million during the year ended December 31, 2009
as compared to the same period of 2008. The average cost of
deposits decreased in 2009 mainly due to decreasing market
interest rates during 2009.
Average deposits for the year ended December 31, 2008
increased $165.8 million compared to the same period of
2007. Average demand deposits, interest bearing transaction and
time deposits (including deposits in foreign branches) increased
by $66.3 million, $8.6 million and
$137.6 million, respectively, while savings deposits
decreased $46.7 million during the year ended
December 31, 2008 as compared to the same period of 2007.
The average cost of deposits decreased in 2008 mainly due to
decreasing market interest rates during 2008.
43
Table of Contents
Deposit
Analysis
| Average Balances | ||||||||||||
| (in thousands) | 2009 | 2008 | 2007 | |||||||||
|
|
||||||||||||
|
Non-interest bearing
|
$ | 760,776 | $ | 529,471 | $ | 463,142 | ||||||
|
Interest bearing transaction
|
147,961 | 106,720 | 98,159 | |||||||||
|
Savings
|
1,182,441 | 784,685 | 831,370 | |||||||||
|
Time deposits
|
1,188,964 | 1,086,252 | 702,248 | |||||||||
|
Deposits in foreign branches
|
411,116 | 746,399 | 992,837 | |||||||||
|
|
||||||||||||
|
Total average deposits
|
$ | 3,691,258 | $ | 3,253,527 | $ | 3,087,756 | ||||||
As with our loan portfolio, most of our deposits are from
businesses and individuals in Texas, particularly the Dallas
metropolitan area. As of December 31, 2009, approximately
75% of our deposits originated out of our Dallas metropolitan
banking centers. Uninsured deposits at December 31, 2009
were 55% of total deposits, compared to 40% of total deposits at
December 31, 2008 and 50% of total deposits at
December 31, 2007. The presentation for 2009, 2008 and 2007
does reflect combined ownership, but does not reflect all of the
account styling that would determine insurance based on FDIC
regulations.
At December 31, 2009, we had $381.1 million in
interest bearing time deposits of $100,000 or more in foreign
branches related to our Cayman Islands branch.
Maturity
of Domestic CDs and Other Time Deposits in Amounts of $100,000
or More
| December 31 | ||||||||||||
| (in thousands) | 2009 | 2008 | 2007 | |||||||||
|
|
||||||||||||
|
Months to maturity:
|
||||||||||||
|
3 or less
|
$ | 632,796 | $ | 1,000,893 | $ | 223,386 | ||||||
|
Over 3 through 6
|
132,865 | 204,982 | 70,111 | |||||||||
|
Over 6 through 12
|
120,561 | 80,161 | 159,139 | |||||||||
|
Over 12
|
26,541 | 32,066 | 72,138 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 912,763 | $ | 1,318,102 | $ | 524,774 | ||||||
Liquidity
and Capital Resources
In general terms, liquidity is a measurement of our ability to
meet our cash needs. Our objective in managing our liquidity is
to maintain our ability to meet loan commitments, purchase
securities or repay deposits and other liabilities in accordance
with their terms, without an adverse impact on our current or
future earnings. Our liquidity strategy is guided by policies,
which are formulated and monitored by our senior management and
our Balance Sheet Management Committee (“BSMC”), and
which take into account the marketability of assets, the sources
and stability of funding and the level of unfunded commitments.
We regularly evaluate all of our various funding sources with an
emphasis on accessibility, stability, reliability and
cost-effectiveness. For the years ended December 31, 2009
and 2008, our principal source of funding has been our customer
deposits, supplemented by short-term borrowings primarily from
federal funds purchased and Federal Home Loan Bank
(“FHLB”) borrowings.
Since early 2001, our liquidity needs have primarily been
fulfilled through growth in our core customer deposits and
supplemented with brokered deposits and borrowings as needed.
Our goal is to obtain as much of our funding as possible from
deposits of these core customers, which as of December 31,
2009, comprised $3,902.4 million, or 94.7%, of total
deposits, compared to $2,507.0 million, or 75.2%, of total
deposits, at December 31, 2008. On an average basis, for
the year ended December 31, 2009, deposits from core
customers comprised $3,163.8 million, or 85.7%, of total
annual average deposits. These deposits are generated
44
Table of Contents
principally through development of long-term relationships with
customers and stockholders and our retail network which is
mainly through BankDirect.
In addition to deposits from our core customers, we also have
access to incremental deposits through brokered retail
certificates of deposit, or CDs. These CDs are generally of
short maturities, 30 to 90 days, and are used to supplement
temporary differences in the growth in loans, including growth
in specific categories of loans, compared to customer deposits.
As of December 31, 2009, brokered retail CDs comprised
$218.3 million, or 5.3%, of total deposits. On an average
basis, for the year ended December 31, 2009, brokered
retail CDs comprised $527.5 million, or 14.3%, of total
annual deposits. We believe the Company has access to sources of
brokered deposits of not less than $3.0 billion.
Additionally, we have borrowing sources available to supplement
deposits and meet our funding needs. Such borrowings are
generally used to fund our loans held for sale, due to their
liquidity, short duration and interest spreads available. These
borrowing sources include federal funds purchased from our
downstream correspondent bank relationships (which consist of
banks that are smaller than our bank) and from our upstream
correspondent bank relationships (which consist of banks that
are larger than our bank), customer repurchase agreements,
treasury, tax and loan notes, and advances from the FHLB and the
Federal Reserve. The following table summarizes our borrowings:
| 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
|
Maximum
|
Maximum
|
Maximum
|
||||||||||||||||||||||||||||||||||
|
Outstanding
|
Outstanding
|
Outstanding
|
||||||||||||||||||||||||||||||||||
|
at any
|
at any
|
at any
|
||||||||||||||||||||||||||||||||||
| (in thousands) | Balance | Rate(1) | Month End | Balance | Rate(1) | Month End | Balance | Rate(1) | Month End | |||||||||||||||||||||||||||
|
Federal funds purchased
|
$ | 580,519 | .33 | % | $ | 350,155 | .47 | % | $ | 344,813 | 4.29 | % | ||||||||||||||||||||||||
|
Customer repurchase agreements
|
25,070 | .10 | % | 77,732 | .05 | % | 7,148 | 3.30 | % | |||||||||||||||||||||||||||
|
Treasury, tax and loan notes
|
5,940 | .00 | % | 2,720 | .00 | % | 6,890 | 4.00 | % | |||||||||||||||||||||||||||
|
FHLB borrowings
|
325,000 | .11 | % | 800,000 | .71 | % | 400,000 | 4.18 | % | |||||||||||||||||||||||||||
|
Other short-term borrowings
|
— | — | 10,000 | 1.19 | % | 25,000 | 5.82 | % | ||||||||||||||||||||||||||||
|
Long-term borrowings
|
— | — | 40,000 | 1.19 | % | — | — | |||||||||||||||||||||||||||||
|
TLGP borrowings
|
20,500 | .84 | % | — | — | — | — | |||||||||||||||||||||||||||||
|
Trust preferred subordinated debentures
|
113,406 | 3.19 | % | 113,406 | 4.40 | % | 113,406 | 6.77 | % | |||||||||||||||||||||||||||
|
Total borrowings
|
$ | 1,070,435 | $ | 1,753,181 | $ | 1,394,013 | $ | 1,280,606 | $ | 897,257 | $ | 783,851 | ||||||||||||||||||||||||
| (1) | Interest rate as of period end. |
The following table summarizes our other borrowing capacities in
excess of balances outstanding at December 31, 2009, 2008
and 2007:
| (in thousands) | 2009 | 2008 | 2007 | |||||||||
|
|
||||||||||||
|
FHLB borrowing capacity relating to loans
|
$ | 738,682 | $ | 139,000 | $ | 205,900 | ||||||
|
FHLB borrowing capacity relating to securities
|
57,101 | 62,420 | 231,000 | |||||||||
|
|
||||||||||||
|
Total FHLB borrowing capacity
|
$ | 795,783 | $ | 201,420 | $ | 436,900 | ||||||
|
Unused federal funds lines available from commercial banks
|
$ | 736,560 | $ | 573,500 | $ | 458,000 | ||||||
In connection with the FDIC’s Temporary Liability Guarantee
Program (“TLGP”), we had the capacity to issue up to
$1.1 billion in indebtedness which will be guaranteed by
the FDIC for a limited period of time to newly issued senior
unsecured debt and non-interest bearing deposits. The notes were
issued prior to October 31, 2009 and have maturities no
later than December 31, 2012. As of December 31, 2009,
$20.5 million of these notes were outstanding.
On September 27, 2007, we entered into a Credit Agreement
with KeyBank National Association. This Credit Agreement
permitted borrowings of up to $50 million until
September 24, 2008. At our option, the $50 million
balance was converted into a two-year term loan, which accrued
interest at a rate(s) of LIBOR plus 1%. The
45
Table of Contents
Credit Agreement was unsecured and proceeds were used for
general corporate purposes. At December 31, 2008, we had
drawn $50.0 million, $10.0 million of which was
scheduled to mature in 2009 and was included in other short-term
borrowings at December 31, 2008. The remaining
$40.0 million was scheduled to mature in September of 2010
and was, therefore, included in long-term borrowings. The entire
balance of the note was paid in full in March of 2009.
From November 2002 to September 2006 various Texas Capital
Statutory Trusts were created and subsequently issued fixed
and/or
floating rate Capital Securities in various private offerings
totaling $113.4 million. As of December 31, 2009, the
details of the trust preferred subordinated debentures are
summarized below:
|
Texas Capital
|
Texas Capital
|
Texas Capital
|
Texas Capital
|
Texas Capital
|
||||||
|
Bancshares
|
Bancshares
|
Bancshares
|
Bancshares
|
Bancshares
|
||||||
| (in thousands) | Statutory Trust I | Statutory Trust II | Statutory Trust III | Statutory Trust IV | Statutory Trust V | |||||
|
|
||||||||||
|
Date issued
|
November 19, 2002 | April 10, 2003 | October 6, 2005 | April 28, 2006 | September 29, 2006 | |||||
|
Capital securities issued
|
$10,310 | $10,310 | $25,774 | $25,774 | $41,238 | |||||
|
Floating or fixed rate securities
|
Floating | Floating | Fixed/Floating(1) | Floating | Floating | |||||
|
Interest rate on subordinated debentures
|
3 month LIBOR + 3.35% | 3 month LIBOR + 3.25% | 3 month LIBOR + 1.51% | 3 month LIBOR + 1.60% | 3 month LIBOR + 1.71% | |||||
|
Maturity date
|
November 2032 | April 2033 | December 2035 | June 2036 | September 2036 | |||||
| (1) | Interest rate is a fixed rate of 6.19% for five years through December 15, 2010, and a floating rate of interest for the remaining 25 years that resets quarterly to 1.51% above the three-month LIBOR. |
After deducting underwriter’s compensation and other
expenses of each offering, the net proceeds were available to
the Company to increase capital and for general corporate
purposes, including use in investment and lending activities.
Interest payments on all subordinated debentures are deductible
for federal income tax purposes. As of December 31, 2009,
the weighted average quarterly rate on the subordinated
debentures was 3.23%, compared to 3.73% average for all of 2009,
and 5.68% for all of 2008.
Our equity capital averaged $473.8 million for the year
ended December 31, 2009 as compared to $333.5 million
in 2008 and $272.3 million in 2007. We have not paid any
cash dividends on our common stock since we commenced operations
and have no plans to do so in the foreseeable future.
On September 10, 2008, we completed a sale of
4 million shares of our common stock in a private placement
to a number of institutional investors. The purchase price was
$14.50 per share, and net proceeds from the sale totaled
$55 million. The new capital is being used for general
corporate purposes, including capital for support of anticipated
growth of our bank.
On January 16, 2009, we completed the issuance of
$75 million of perpetual preferred stock and related
warrants under the U.S. Department of Treasury’s
voluntary Capital Purchase Program (“CPP” or “the
Program”). The preferred stock was repurchased in May 2009.
In connection with the repurchase, we recorded a
$3.9 million accelerated deemed dividend in the second
quarter of 2009 representing the unamortized difference between
the book value and the carrying value of the preferred stock
repurchased from the Treasury. The $3.9 million accelerated
deemed dividend, combined with the previously scheduled
preferred dividend of $523,000 for the second quarter of 2009
and the preferred dividend of $930,000 paid in the first quarter
of 2009, resulted in a total dividend and reduction of earnings
available to common stockholders of $5.4 million for the
year ended December 31, 2009. As of December 31, 2009,
the Treasury still has warrants to purchase 758,086 shares
at $14.84 per share. We have been notified by the Treasury that
they plan to sell our warrants at auction sometime in March 2010.
On May 8, 2009, we completed a sale of 4.6 million
shares of our common stock in a public offering. The purchase
price was $13.75 per share, and net proceeds from the sale
totaled $59.4 million. The new capital is being used for
general corporate purposes, including capital for support of
anticipated growth of our bank.
On January 27, 2010, we announced that we have entered into
an Equity Distribution Agreement with Morgan Stanley &
Co. Incorporated, pursuant to which we may, from time to time,
offer and sell shares of our common stock, having aggregate
gross sales proceeds of up to $40,000,000. Sales of the shares
are being made by means of brokers’ transactions on or
through the NASDAQ Global Select Market at market prices
prevailing at the time of the sale or as otherwise agreed to by
the Company and Morgan Stanley. As of
46
Table of Contents
February 17, 2010 we have sold 271,973 shares at an
average price of $16.88. Net proceeds on the sales are
approximately $4.5 million, after payment of a 1% sales
commission paid to Morgan Stanley, and are being used for
general corporate purposes. In addition to the 1% sales
commission, we paid Morgan Stanley a $400,000 program fee.
Our actual and minimum required capital amounts and actual
ratios are as follows:
| Regulatory Capital Adequacy | ||||||||||||||||
| December 31, 2009 | December 31, 2008 | |||||||||||||||
| (in thousands, except percentage data) | Amount | Ratio | Amount | Ratio | ||||||||||||
|
|
||||||||||||||||
|
Total capital (to risk-weighted assets):
|
||||||||||||||||
|
Company
|
||||||||||||||||
|
Actual
|
$ | 642,371 | 11.98 | % | $ | 533,781 | 10.92 | % | ||||||||
|
Minimum required
|
429,102 | 8.00 | % | 390,891 | 8.00 | % | ||||||||||
|
Excess above minimum
|
213,269 | 3.98 | % | 142,890 | 2.92 | % | ||||||||||
|
Bank
|
||||||||||||||||
|
Actual
|
$ | 555,635 | 10.36 | % | $ | 502,693 | 10.29 | % | ||||||||
|
To be well-capitalized
|
536,265 | 10.00 | % | 488,498 | 10.00 | % | ||||||||||
|
Minimum required
|
429,012 | 8.00 | % | 390,799 | 8.00 | % | ||||||||||
|
Excess above well-capitalized
|
19,370 | .36 | % | 14,195 | 0.29 | % | ||||||||||
|
Excess above minimum
|
126,623 | 2.36 | % | 111,894 | 2.29 | % | ||||||||||
|
Tier 1 capital (to risk-weighted assets):
|
||||||||||||||||
|
Company
|
||||||||||||||||
|
Actual
|
$ | 575,338 | 10.73 | % | $ | 486,946 | 9.97 | % | ||||||||
|
Minimum required
|
214,551 | 4.00 | % | 195,445 | 4.00 | % | ||||||||||
|
Excess above minimum
|
360,787 | 6.73 | % | 291,502 | 5.97 | % | ||||||||||
|
Bank
|
||||||||||||||||
|
Actual
|
$ | 488,602 | 9.11 | % | $ | 455,858 | 9.33 | % | ||||||||
|
To be well-capitalized
|
321,759 | 6.00 | % | 293,099 | 6.00 | % | ||||||||||
|
Minimum required
|
214,506 | 4.00 | % | 195,399 | 4.00 | % | ||||||||||
|
Excess above well-capitalized
|
166,843 | 3.11 | % | 162,759 | 3.33 | % | ||||||||||
|
Excess above minimum
|
274,096 | 5.11 | % | 260,459 | 5.33 | % | ||||||||||
|
Tier 1 capital (to average assets):
|
||||||||||||||||
|
Company
|
||||||||||||||||
|
Actual
|
$ | 575,338 | 10.54 | % | $ | 486,946 | 10.21 | % | ||||||||
|
Minimum required
|
218,381 | 4.00 | % | 190,782 | 4.00 | % | ||||||||||
|
Excess above minimum
|
356,957 | 6.54 | % | 296,164 | 6.21 | % | ||||||||||
|
Bank
|
||||||||||||||||
|
Actual
|
$ | 488,602 | 8.95 | % | $ | 455,858 | 9.56 | % | ||||||||
|
To be well-capitalized
|
272,920 | 5.00 | % | 238,420 | 5.00 | % | ||||||||||
|
Minimum required
|
218,336 | 4.00 | % | 190,736 | 4.00 | % | ||||||||||
|
Excess above well-capitalized
|
215,682 | 3.95 | % | 217,438 | 4.56 | % | ||||||||||
|
Excess above minimum
|
270,266 | 4.95 | % | 265,122 | 5.56 | % | ||||||||||
|
|
||||||||||||||||
47
Table of Contents
Commitments
and Contractual Obligations
The following table presents, as of December 31, 2009,
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.
|
Note
|
Within One
|
After One But
|
After Three But
|
After
|
||||||||||||||||||||
| (in thousands) | Reference | Year | Within Three Years | Within Five Years | Five Years | Total | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Deposits without a stated maturity(1)
|
6 | $ | 2,764,422 | $ | — | $ | — | $ | — | $ | 2,764,422 | |||||||||||||
|
Time deposits(1)
|
6 | 1,321,739 | 24,615 | 9,850 | 100 | 1,356,304 | ||||||||||||||||||
|
Federal funds purchased(1)
|
7 | 580,519 | — | — | — | 580,519 | ||||||||||||||||||
|
Customer repurchase agreements(1)
|
7 | 25,070 | — | — | — | 25,070 | ||||||||||||||||||
|
Treasury, tax and loan notes(1)
|
7 | 5,940 | — | — | — | 5,940 | ||||||||||||||||||
|
FHLB borrowings(1)
|
7 | 325,000 | — | — | — | 325,000 | ||||||||||||||||||
|
TLGP borrowings(1)
|
7 | 20,500 | — | — | — | 20,500 | ||||||||||||||||||
|
Operating lease obligations(1)
|
15 | 7,605 | 15,123 | 20,933 | 39,330 | 82,991 | ||||||||||||||||||
|
Trust preferred subordinated debentures(1)
|
7, 8 | — | — | — | 113,406 | 113,406 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total contractual obligations(1)
|
$ | 5,050,795 | $ | 39,738 | $ | 30,783 | $ | 152,836 | $ | 5,274,152 | ||||||||||||||
| (1) | Excludes interest. |
Off-Balance
Sheet Arrangements
The contractual amount of our financial instruments with
off-balance sheet risk expiring by period at December 31,
2009 is presented below:
|
After One
|
After Three
|
|||||||||||||||||||
|
Within One
|
But Within
|
But Within
|
After
|
|||||||||||||||||
| (in thousands) | Year | Three Years | Five Years | Five Years | Total | |||||||||||||||
|
|
||||||||||||||||||||
|
Commitments to extend credit
|
$ | 632,341 | $ | 471,393 | $ | 36,442 | $ | 3,251 | $ | 1,143,427 | ||||||||||
|
Standby and commercial letters of credit
|
56,702 | 9,615 | 68 | — | 66,385 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total financial instruments with off-balance sheet risk
|
$ | 689,043 | $ | 481,008 | $ | 36,510 | $ | 3,251 | $ | 1,209,812 | ||||||||||
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.
48
Table of Contents
We follow financial accounting and reporting policies that are
in accordance with accounting principles generally accepted in
the United States. The more significant of these policies are
summarized in Note 1 to the consolidated financial
statements. Not all these significant accounting policies
require management to make difficult, subjective or complex
judgments. However, the policy noted below could be deemed to
meet the SEC’s definition of critical accounting policies.
Management considers the policies related to the allowance for
loan losses as the most critical to the financial statement
presentation. The total allowance for loan losses includes
activity related to allowances calculated in accordance with
Accounting Standards Codification (“ASC”) 310,
Receivables
, and ASC 450,
Contingencies
. The
allowance for loan losses is established through a provision for
loan losses charged to current earnings. The amount maintained
in the allowance reflects management’s continuing
evaluation of the loan losses inherent in the loan portfolio.
The allowance for loan losses is comprised of specific reserves
assigned to certain classified loans and general reserves.
Factors contributing to the determination of specific reserves
include the credit-worthiness of the borrower, and more
specifically, changes in the expected future receipt of
principal and interest payments
and/or
in
the value of pledged collateral. A reserve is recorded when the
carrying amount of the loan exceeds the discounted estimated
cash flows using the loan’s initial effective interest rate
or the fair value of the collateral for certain collateral
dependent loans. For purposes of determining the general
reserve, the portfolio is segregated by product types in order
to recognize differing risk profiles among categories, and then
further segregated by credit grades. See “Summary of Loan
Loss Experience” for further discussion of the risk factors
considered by management in establishing the allowance for loan
losses.
New
Accounting Standards
See Note 22 — New Accounting Standards in the
accompanying notes to consolidated financial statements included
elsewhere in this report for details of recently issued
accounting pronouncements and their expected impact on our
financial statements.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
Market risk is a broad term for the risk of economic loss due to
adverse changes in the fair value of a financial instrument.
These changes may be the result of various factors, including
interest rates, foreign exchange rates, commodity prices, or
equity prices. Additionally, the financial instruments subject
to market risk can be classified either as held for trading
purposes or held for other than trading.
We are subject to market risk primarily through the effect of
changes in interest rates on our portfolio of assets held for
purposes other than trading. The effect of other changes, such
as foreign exchange rates, commodity prices,
and/or
equity prices do not pose significant market risk to us.
The responsibility for managing market risk rests with the 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.
Interest
Rate Risk Management
Our interest rate sensitivity is illustrated in the following
table. The table reflects rate-sensitive positions as of
December 31, 2009, 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
49
Table of Contents
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, 2009
December 31, 2009
|
0-3 mo
|
4-12 mo
|
1-3 yr
|
3+ yr
|
Total
|
||||||||||||||||
| (in thousands) | Balance | Balance | Balance | Balance | Balance | |||||||||||||||
|
|
||||||||||||||||||||
|
Securities(1)
|
$ | 41,587 | $ | 71,268 | $ | 61,537 | $ | 91,736 | $ | 266,128 | ||||||||||
|
Total variable loans
|
4,338,381 | 38,195 | 14,258 | 2,087 | 4,392,921 | |||||||||||||||
|
Total fixed loans
|
286,754 | 214,440 | 194,466 | 90,363 | 786,023 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total loans(2)
|
4,625,135 | 252,635 | 208,724 | 92,450 | 5,178,944 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total interest sensitive assets
|
$ | 4,666,722 | $ | 323,903 | $ | 270,261 | $ | 184,186 | $ | 5,445,072 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Liabilities:
|
||||||||||||||||||||
|
Interest bearing customer deposits
|
$ | 2,249,000 | $ | — | $ | — | $ | — | $ | 2,249,000 | ||||||||||
|
CDs & IRAs
|
438,925 | 280,459 | 24,965 | 9,600 | 753,949 | |||||||||||||||
|
Wholesale deposits
|
217,640 | 644 | — | — | 218,284 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total interest-bearing deposits
|
2,905,565 | 281,103 | 24,965 | 9,600 | 3,221,233 | |||||||||||||||
|
Repo, FF, FHLB borrowings
|
936,529 | 20,500 | — | — | 957,029 | |||||||||||||||
|
Trust preferred subordinated debentures
|
— | — | — | 113,406 | 113,406 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total borrowing
|
936,529 | 20,500 | — | 113,406 | 1,070,435 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total interest sensitive liabilities
|
$ | 3,842,094 | $ | 301,603 | $ | 24,965 | $ | 123,006 | $ | 4,291,668 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
GAP
|
$ | 824,629 | $ | 22,300 | $ | 245,296 | $ | 61,180 | $ | — | ||||||||||
|
Cumulative GAP
|
824,628 | 846,928 | 1,092,224 | 1,153,404 | 1,153,404 | |||||||||||||||
|
Demand deposits
|
$ | 899,492 | ||||||||||||||||||
|
Stockholders’ equity
|
481,360 | |||||||||||||||||||
|
Total
|
$ | 1,380,852 | ||||||||||||||||||
|
|
||||||||||||||||||||
| (1) | Securities based on fair market value. | |
| (2) | Loans include loans held for sale and are stated at gross. |
The table above sets forth the balances as of December 31,
2009 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
50
Table of Contents
are actively traded in the open market. The Federal
Reserve’s Federal Funds target affects short-term
borrowing; the prime lending rate and the LIBOR are the basis
for most of our variable-rate loan pricing. The
10-year
mortgage rate is also monitored because of its effect on
prepayment speeds for mortgage-backed securities. These are our
primary interest rate exposures. We are currently not using
derivatives to manage our interest rate exposure.
The two “shock test” scenarios assume a sustained
parallel 200 basis point increase or decrease,
respectively, in interest rates. As short-term rates continued
to fall during 2008 and 2009, 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
|
200 bp Increase
|
|||||||||||
| December 31, 2009 | December 31, 2008 | |||||||||||
|
|
||||||||||||
|
Change in net interest income
|
$ | 17,731 | $ | 17,255 | ||||||||
|
|
||||||||||||
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.
51
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Index to
Consolidated Financial Statements
|
Page
|
||||
| Reference | ||||
|
|
||||
| 53 | ||||
| 54 | ||||
| 55 | ||||
| 56 | ||||
| 57 | ||||
| 58 | ||||
|
|
||||
52
Table of Contents
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Texas Capital Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of
Texas Capital Bancshares, Inc. as of December 31, 2009 and
2008, and the related consolidated statements of operations,
stockholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2009. 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, 2009 and 2008, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended December 31, 2009, 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, 2009, based on criteria
established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organization of the Treadway
Commission and our report dated February 18, 2010,
expressed an unqualified opinion thereon.
Dallas, Texas
February 18, 2010
53
Table of Contents
| December 31 | ||||||||
| (in thousands except share data) | 2009 | 2008 | ||||||
|
|
||||||||
|
ASSETS
|
||||||||
|
Cash and due from banks
|
$ | 80,459 | $ | 77,887 | ||||
|
Federal funds sold
|
44,980 | 4,140 | ||||||
|
Securities,
available-for-sale
|
266,128 | 378,752 | ||||||
|
Loans held for sale
|
693,504 | 496,351 | ||||||
|
Loans held for sale from discontinued operations
|
586 | 648 | ||||||
|
Loans held for investment (net of unearned income)
|
4,457,293 | 4,027,871 | ||||||
|
Less: Allowance for loan losses
|
67,931 | 45,365 | ||||||
|
|
||||||||
|
Loans held for investment, net
|
4,389,362 | 3,982,506 | ||||||
|
Premises and equipment, net
|
11,189 | 9,467 | ||||||
|
Accrued interest receivable and other assets
|
202,890 | 184,242 | ||||||
|
Goodwill and other intangible assets, net
|
9,806 | 7,689 | ||||||
|
|
||||||||
|
Total assets
|
$ | 5,698,904 | $ | 5,141,682 | ||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Deposits:
|
||||||||
|
Non-interest bearing
|
$ | 899,492 | $ | 587,161 | ||||
|
Interest bearing
|
2,837,163 | 2,245,991 | ||||||
|
Interest bearing in foreign branches
|
384,070 | 500,035 | ||||||
|
|
||||||||
| 4,120,725 | 3,333,187 | |||||||
|
Accrued interest payable
|
2,468 | 6,421 | ||||||
|
Other liabilities
|
23,916 | 20,988 | ||||||
|
Federal funds purchased
|
580,519 | 350,155 | ||||||
|
Repurchase agreements
|
25,070 | 77,732 | ||||||
|
Other short-term borrowings
|
351,440 | 812,720 | ||||||
|
Long-term borrowings
|
— | 40,000 | ||||||
|
Trust preferred subordinated debentures
|
113,406 | 113,406 | ||||||
|
|
||||||||
|
Total liabilities
|
5,217,544 | 4,754,609 | ||||||
|
Stockholders’ equity:
|
||||||||
|
Preferred stock, $.01 par value, $1,000 liquidation value:
|
||||||||
|
Authorized shares — 10,000,000
|
||||||||
|
Issued shares — no shares issued at December 31,
2009 and 2008, respectively
|
— | — | ||||||
|
Common stock, $.01 par value:
|
||||||||
|
Authorized shares — 100,000,000
|
||||||||
|
Issued shares — 35,919,941 and 30,971,189 at
December 31, 2009 and 2008, respectively
|
359 | 310 | ||||||
|
Additional paid-in capital
|
326,224 | 255,051 | ||||||
|
Retained earnings
|
148,620 | 129,851 | ||||||
|
Treasury stock (shares at cost: 417 at December 31, 2009
and 84,691 at December 31, 2008
|
(8 | ) | (581 | ) | ||||
|
Deferred compensation
|
— | 573 | ||||||
|
Accumulated other comprehensive income, net of taxes
|
6,165 | 1,869 | ||||||
|
|
||||||||
|
Total stockholders’ equity
|
481,360 | 387,073 | ||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 5,698,904 | $ | 5,141,682 | ||||
See accompanying notes to consolidated financial statements
54
Table of Contents
Texas
Capital Bancshares, Inc.
| Year Ended December 31 | ||||||||||||
| (in thousands except per share data) | 2009 | 2008 | 2007 | |||||||||
|
|
||||||||||||
|
Interest income:
|
||||||||||||
|
Interest and fees on loans
|
$ | 229,500 | $ | 231,009 | $ | 267,171 | ||||||
|
Securities
|
13,578 | 17,722 | 21,975 | |||||||||
|
Federal funds sold
|
31 | 168 | 92 | |||||||||
|
Deposits in other banks
|
44 | 31 | 54 | |||||||||
|
|
||||||||||||
|
Total interest income
|
243,153 | 248,930 | 289,292 | |||||||||
|
Interest expense:
|
||||||||||||
|
Deposits
|
37,824 | 72,852 | 121,245 | |||||||||
|
Federal funds purchased
|
2,404 | 8,232 | 13,054 | |||||||||
|
Repurchase agreements
|
53 | 541 | 915 | |||||||||
|
Other borrowings
|
1,949 | 9,123 | 6,069 | |||||||||
|
Trust preferred subordinated debentures
|
4,232 | 6,445 | 8,257 | |||||||||
|
|
||||||||||||
|
Total interest expense
|
46,462 | 97,193 | 149,540 | |||||||||
|
|
||||||||||||
|
Net interest income
|
196,691 | 151,737 | 139,752 | |||||||||
|
Provision for credit losses
|
43,500 | 26,750 | 14,000 | |||||||||
|
|
||||||||||||
|
Net interest income after provision for credit losses
|
153,191 | 124,987 | 125,752 | |||||||||
|
Non-interest income:
|
||||||||||||
|
Service charges on deposit accounts
|
6,287 | 4,699 | 4,091 | |||||||||
|
Trust fee income
|
3,815 | 4,692 | 4,691 | |||||||||
|
Bank owned life insurance (BOLI) income
|
1,579 | 1,240 | 1,198 | |||||||||
|
Brokered loan fees
|
9,043 | 3,242 | 1,870 | |||||||||
|
Equipment rental income
|
5,557 | 5,995 | 6,138 | |||||||||
|
Other
|
2,979 | 2,602 | 2,639 | |||||||||
|
|
||||||||||||
|
Total non-interest income
|
29,260 | 22,470 | 20,627 | |||||||||
|
Non-interest expense :
|
||||||||||||
|
Salaries and employee benefits
|
73,419 | 61,438 | 56,608 | |||||||||
|
Net occupancy expense
|
12,291 | 9,631 | 8,430 | |||||||||
|
Leased equipment depreciation
|
4,319 | 4,667 | 4,958 | |||||||||
|
Marketing
|
3,034 | 2,729 | 3,004 | |||||||||
|
Legal and professional
|
11,846 | 9,622 | 7,245 | |||||||||
|
Communications and data processing
|
3,743 | 3,314 | 3,357 | |||||||||
|
FDIC insurance assessment
|
8,464 | 1,797 | 1,424 | |||||||||
|
Allowance and other carrying costs for OREO
|
10,345 | 1,541 | 133 | |||||||||
|
Other
|
18,081 | 14,912 | 13,447 | |||||||||
|
|
||||||||||||
|
Total non-interest expense
|
145,542 | 109,651 | 98,606 | |||||||||
|
|
||||||||||||
|
Income from continuing operations before income taxes
|
36,909 | 37,806 | 47,773 | |||||||||
|
Income tax expense
|
12,522 | 12,924 | 16,420 | |||||||||
|
|
||||||||||||
|
Income from continuing operations
|
24,387 | 24,882 | 31,353 | |||||||||
|
Loss from discontinued operations (after-tax)
|
(235 | ) | (616 | ) | (1,931 | ) | ||||||
|
|
||||||||||||
|
Net income
|
24,152 | 24,266 | 29,422 | |||||||||
|
Preferred stock dividends
|
5,383 | — | — | |||||||||
|
|
||||||||||||
|
Net income available to common shareholders
|
$ | 18,769 | $ | 24,266 | $ | 29,422 | ||||||
|
Basic earnings per share:
|
||||||||||||
|
Income from continuing operations
|
$ | .56 | $ | .89 | $ | 1.20 | ||||||
|
Net income
|
$ | .55 | $ | .87 | $ | 1.12 | ||||||
|
Diluted earnings per share:
|
||||||||||||
|
Income from continuing operations
|
$ | .55 | $ | .89 | $ | 1.18 | ||||||
|
Net income
|
$ | .55 | $ | .87 | $ | 1.10 | ||||||
See accompanying notes to consolidated financial statements
55
Table of Contents
Texas
Capital Bancshares, Inc.
Consolidated
Statements of Stockholders’ Equity
|
Accumulated
|
||||||||||||||||||||||||||||||||||||||||||||
|
Additional
|
Other
|
|||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock |
Paid-in
|
Retained
|
Treasury Stock |
Deferred
|
Comprehensive
|
||||||||||||||||||||||||||||||||||||||
| (in thousands except share data) | Shares | Amount | Shares | Amount | Capital | Earnings | Shares | Amount | Compensation | Income (loss) | Total | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
|
Balance at December 31, 2006
|
— | $ | — | 26,065,124 | $ | 261 | $ | 182,321 | $ | 76,163 | (84,274 | ) | $ | (573 | ) | $ | 573 | $ | (5,230 | ) | $ | 253,515 | ||||||||||||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Net income
|
— | — | — | — | — | 29,422 | — | — | — | — | 29,422 | |||||||||||||||||||||||||||||||||
|
Change in unrealized gain (loss) on
available-for-sale
securities, net of taxes of $2,343
|
— | — | — | — | — | — | — | — | — | 4,352 | 4,352 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
|
Total comprehensive income
|
33,774 | |||||||||||||||||||||||||||||||||||||||||||
|
Tax benefit related to exercise of stock options
|
— | — | — | — | 1,164 | — | — | — | — | — | 1,164 | |||||||||||||||||||||||||||||||||
|
Stock-based compensation expense recognized in earnings
|
— | — | — | — | 4,761 | — | — | — | — | — | 4,761 | |||||||||||||||||||||||||||||||||
|
Purchase of treasury stock
|
— | — | — | — | — | — | (417 | ) | (8 | ) | — | — | (8 | ) | ||||||||||||||||||||||||||||||
|
Issuance of common stock related to stock-based awards
|
— | — | 324,424 | 3 | 1,929 | — | — | — | — | — | 1,932 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
|
Balance at December 31, 2007
|
— | — | 26,389,548 | 264 | 190,175 | 105,585 | (84,691 | ) | (581 | ) | 573 | (878 | ) | 295,138 | ||||||||||||||||||||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Net income
|
— | — | — | — | — | 24,266 | — | — | — | — | 24,266 | |||||||||||||||||||||||||||||||||
|
Change in unrealized gain (loss) on
available-for-sale
securities, net of taxes of $1,479
|
— | — | — | — | — | — | — | — | — | 2,747 | 2,747 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
|
Total comprehensive income
|
27,013 | |||||||||||||||||||||||||||||||||||||||||||
|
Tax benefit related to exercise of stock options
|
— | — | — | — | 1,584 | — | — | — | — | — | 1,584 | |||||||||||||||||||||||||||||||||
|
Stock-based compensation expense recognized in earnings
|
— | — | — | — | 4,676 | — | — | — | — | — | 4,676 | |||||||||||||||||||||||||||||||||
|
Issuance of common stock related to stock-based awards
|
— | — | 581,641 | 6 | 3,663 | — | — | — | — | — | 3,669 | |||||||||||||||||||||||||||||||||
|
Issuance of common stock
|
— | — | 4,000,000 | 40 | 54,953 | — | — | — | — | — | 54,993 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
|
Balance at December 31, 2008
|
— | — | 30,971,189 | 310 | 255,051 | 129,851 | (84,691 | ) | (581 | ) | 573 | 1,869 | 387,073 | |||||||||||||||||||||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Net income
|
— | — | — | — | — | 24,152 | — | — | — | — | 24,152 | |||||||||||||||||||||||||||||||||
|
Change in unrealized gain (loss) on
available-for-sale
securities, net of taxes of $2,313
|
— | — | — | — | — | — | — | — | — | 4,296 | 4,296 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
|
Total comprehensive income
|
— | — | 28,448 | |||||||||||||||||||||||||||||||||||||||||
|
Tax benefit related to exercise of stock options
|
— | — | — | — | 75 | — | — | — | — | — | 75 | |||||||||||||||||||||||||||||||||
|
Stock-based compensation expense recognized in earnings
|
— | — | — | — | 5,959 | — | — | — | — | — | 5,959 | |||||||||||||||||||||||||||||||||
|
Deferred compensation
|
— | — | — | — | — | — | (84,274 | ) | 573 | (573 | ) | — | — | |||||||||||||||||||||||||||||||
|
Issuance of stock related to stock-based awards
|
— | — | 348,752 | 3 | 1,575 | — | — | — | — | — | 1,578 | |||||||||||||||||||||||||||||||||
|
Issuance of common stock
|
— | — | 4,600,000 | 46 | 59,400 | — | — | — | — | — | 59,446 | |||||||||||||||||||||||||||||||||
|
Issuance of preferred stock and related warrant
|
75,000 | 70,836 | — | — | 4,164 | — | — | — | — | — | 75,000 | |||||||||||||||||||||||||||||||||
|
Repurchase of preferred stock
|
(75,000 | ) | (71,069 | ) | — | — | — | (3,931 | ) | — | — | — | — | (75,000 | ) | |||||||||||||||||||||||||||||
|
Preferred stock dividend and accretion of preferred stock
discount
|
— | 233 | — | — | — | (1,452 | ) | — | — | — | — | (1,219 | ) | |||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
|
Balance at December 31, 2009
|
— | $ | — | 35,919,941 | $ | 359 | $ | 326,224 | $ | 148,620 | (417 | ) | $ | (8 | ) | $ | — | $ | 6,165 | $ | 481,360 | |||||||||||||||||||||||
See accompanying notes to consolidated financial statements
56
Table of Contents
| Year Ended December 31 | ||||||||||||
| (in thousands) | 2009 | 2008 | 2007 | |||||||||
|
|
||||||||||||
|
Operating activities
|
||||||||||||
|
Net income from continuing operations
|
$ | 24,387 | $ | 24,882 | $ | 31,353 | ||||||
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
||||||||||||
|
Provision for loan losses
|
43,500 | 26,750 | 14,000 | |||||||||
|
Deferred tax benefit
|
(8,775 | ) | (4,104 | ) | (3,508 | ) | ||||||
|
Depreciation and amortization
|
7,819 | 7,666 | 7,271 | |||||||||
|
Amortization and accretion on securities
|
228 | 280 | 320 | |||||||||
|
Bank owned life insurance (BOLI) income
|
(1,579 | ) | (1,240 | ) | (1,198 | ) | ||||||
|
Stock-based compensation expense
|
5,959 | 4,676 | 4,761 | |||||||||
|
Tax benefit from stock option exercises
|
75 | 1,584 | 1,164 | |||||||||
|
Excess tax benefits from stock-based compensation arrangements
|
(213 | ) | (4,527 | ) | (3,325 | ) | ||||||
|
Originations of loans held for sale
|
(16,582,314 | ) | (7,552,614 | ) | (3,966,644 | ) | ||||||
|
Proceeds from sales of loans held for sale
|
16,399,677 | 7,230,429 | 3,991,492 | |||||||||
|
Loss on sale of assets
|
1,273 | — | — | |||||||||
|
Changes in operating assets and liabilities:
|
||||||||||||
|
Accrued interest receivable and other assets
|
(28,894 | ) | (44,724 | ) | (24,898 | ) | ||||||
|
Accrued interest payable and other liabilities
|
(1,867 | ) | (4,218 | ) | (1,205 | ) | ||||||
|
|
||||||||||||
|
Net cash provided by (used in) operating activities of
continuing operations
|
(140,724 | ) | (315,160 | ) | 49,583 | |||||||
|
Net cash provided by (used in) operating activities of
discontinued operations
|
(186 | ) | (529 | ) | 20,778 | |||||||
|
|
||||||||||||
|
Net cash provided by (used in) operating activities
|
(140,910 | ) | (315,689 | ) | 70,361 | |||||||
|
Investing activities
|
||||||||||||
|
Purchases of
available-for-sale
securities
|
— | (40,219 | ) | (14,281 | ) | |||||||
|
Maturities and calls of
available-for-sale
securities
|
32,300 | 36,270 | 23,153 | |||||||||
|
Principal payments received on
available-for-sale
securities
|
86,704 | 69,263 | 77,475 | |||||||||
|
Net increase in loans held for investment
|
(466,304 | ) | (577,999 | ) | (733,751 | ) | ||||||
|
Purchase of premises and equipment, net
|
(4,550 | ) | (5,817 | ) | (1,798 | ) | ||||||
|
Sale of foreclosed assets
|
12,194 | — | — | |||||||||
|
|
||||||||||||
|
Net cash used in investing activities of continuing operations
|
(339,656 | ) | (518,502 | ) | (649,202 | ) | ||||||
|
Net cash used in investing activities of discontinued operations
|
— | — | — | |||||||||
|
|
||||||||||||
|
Net cash used in investing activities
|
(339,656 | ) | (518,502 | ) | (649,202 | ) | ||||||
|
Financing activities
|
||||||||||||
|
Net increase (decrease) in deposits
|
787,538 | 266,810 | (2,953 | ) | ||||||||
|
Proceeds from issuance of stock related to stock-based awards
|
1,578 | 3,669 | 1,932 | |||||||||
|
Proceeds from issuance of common stock
|
59,446 | 54,993 | — | |||||||||
|
Proceeds from issuance of preferred stock and related warrants
|
75,000 | — | — | |||||||||
|
Repurchase of preferred stock
|
(75,000 | ) | — | — | ||||||||
|
Dividends paid
|
(1,219 | ) | — | — | ||||||||
|
Net increase (decrease) in other borrowings
|
(553,942 | ) | 491,414 | 393,434 | ||||||||
|
Excess tax benefits from stock-based compensation arrangements
|
213 | 4,527 | 3,325 | |||||||||
|
Net federal funds purchased
|
230,364 | 5,342 | 178,858 | |||||||||
|
Purchase of treasury stock
|
— | — | (8 | ) | ||||||||
|
|
||||||||||||
|
Net cash provided by financing activities of continuing
operations
|
523,978 | 826,755 | 574,588 | |||||||||
|
Net cash provided by financing activities of discontinued
operations
|
— | — | — | |||||||||
|
|
||||||||||||
|
Net cash provided by financing activities
|
523,978 | 826,755 | 574,588 | |||||||||
|
|
||||||||||||
|
Net increase (decrease) in cash and cash equivalents
|
43,412 | (7,436 | ) | (4,253 | ) | |||||||
|
Cash and cash equivalents, beginning of year
|
82,027 | 89,463 | 93,716 | |||||||||
|
|
||||||||||||
|
Cash and cash equivalents, end of year
|
$ | 125,439 | $ | 82,027 | $ | 89,463 | ||||||
|
Supplemental disclosures of cash flow information:
|
||||||||||||
|
Cash paid during the year for interest
|
$ | 50,415 | $ | 96,402 | $ | 149,691 | ||||||
|
Cash paid during the year for income taxes
|
14,892 | 22,475 | 13,414 | |||||||||
|
Non-cash transactions:
|
||||||||||||
|
Transfers from loans/leases to OREO and other repossessed assets
|
23,466 | 23,232 | 983 | |||||||||
|
Transfers from loans/leases to other assets
|
— | — | 10,549 | |||||||||
See accompanying notes to consolidated financial statements
57
Table of Contents
| 1. | Operations and Summary of Significant Accounting Policies |
Organization
and Nature of Business
Texas Capital Bancshares, Inc. (“Texas Capital
Bancshares” or “the Company”), a Delaware
financial holding company, was incorporated in November 1996 and
commenced operations in March 1998. The consolidated financial
statements of the Company include the accounts of Texas Capital
Bancshares, Inc. and its wholly owned subsidiary, Texas Capital
Bank, National Association (“the Bank”). The Bank
currently provides commercial banking services to its customers
in Texas and concentrates on middle market commercial and high
net worth customers.
Basis of
Presentation
The accounting and reporting policies of Texas Capital
Bancshares, Inc. conform to accounting principles generally
accepted in the United States and to generally accepted
practices within the banking industry. Our consolidated
financial statements include the accounts of Texas Capital
Bancshares, Inc. and its subsidiary, the Bank. Certain prior
period balances have been reclassified to conform to the current
period presentation.
We have evaluated subsequent events for potential recognition
and/or
disclosure through February 18, 2010, the date the
consolidated financial statements were issued. See further
discussion of subsequent events in Note 21 —
Subsequent Events.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements. Actual results could differ from those
estimates. The allowance for possible loan losses, the fair
value of stock-based compensation awards, the fair values of
financial instruments and the status of contingencies are
particularly susceptible to significant change in the near term.
Cash and
Cash Equivalents
Cash equivalents include amounts due from banks and federal
funds sold.
Securities
Securities are classified as trading,
available-for-sale
or
held-to-maturity.
Management classifies securities at the time of purchase and
re-assesses such designation at each balance sheet date;
however, transfers between categories from this re-assessment
are rare.
Trading
Account
Securities acquired for resale in anticipation of short-term
market movements are classified as trading, with realized and
unrealized gains and losses recognized in income. To date, we
have not had any activity in our trading account.
Held-to-Maturity
and
Available-for-Sale
Debt securities are classified as
held-to-maturity
when we have the positive intent and ability to hold the
securities to maturity.
Held-to-maturity
securities are stated at amortized cost. Debt securities not
classified as
held-to-maturity
or trading and marketable equity securities not classified as
trading are classified as
available-for-sale.
Available-for-sale
securities are stated at fair value, with the unrealized gains
and losses reported in a separate component of accumulated other
comprehensive income (loss), net of tax. The amortized cost of
debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity, or in the case of
mortgage-backed securities, over the estimated life of the
security. Such amortization and accretion is
58
Table of Contents
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, 2009 and 2008.
Loans
Loans held for investment (which include equipment leases
accounted for as financing leases) are stated at the amount of
unpaid principal reduced by deferred income (net of costs).
Interest on loans is recognized using the simple-interest method
on the daily balances of the principal amounts outstanding. Loan
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.
We purchase participations in mortgage loans primarily for sale
in the secondary market through our mortgage warehouse division.
Accordingly, these loans are classified as held for sale and are
carried at the lower of cost or fair value, determined on an
aggregate basis. As a result of dislocations in the mortgage
industry starting in 2007, some loan participations may not be
sold within the normal time frames or at previously negotiated
prices. Due to market conditions, certain mortgage warehouse
loans have been transferred to our loans held for investment
portfolio, and such loans are transferred at a lower of cost or
market. Mortgage warehouse loans transferred to our loans held
for investment portfolio could require allocations of the
allowance for loan losses or be subject to charge off in the
event the loans become impaired.
Allowance
for Loan Losses
The allowance for loan losses is established through a provision
for loan losses charged against income. The allowance for loan
losses includes specific reserves for impaired loans and an
estimate of losses inherent in the loan portfolio at the balance
sheet date, but not yet identified with specific loans. Loans
deemed to be uncollectible are charged against the allowance
when management believes that the collectibility of the
principal is unlikely and subsequent recoveries, if any, are
credited to the allowance. Management’s periodic evaluation
of the adequacy of the allowance is based on an assessment of
the current loan portfolio, including known inherent risks,
adverse situations that may affect the borrowers’ ability
to repay, the estimated value of any underlying collateral and
current economic conditions.
Repossessed
Assets
Repossessed assets, which are included in other assets on the
balance sheet, consist of collateral that has been repossessed.
Collateral that has been repossessed is recorded at fair value
less selling costs prior to repossession. Write-downs are
provided for subsequent declines in value and are recorded in
other non-interest expense.
59
Table of Contents
Other
Real Estate Owned
OREO, which is included in other assets on the balance sheet,
consists of real estate that has been foreclosed. Real estate
that has been foreclosed is recorded at the lower of the amount
of the loan balance or the fair value of the real estate, less
selling costs prior to foreclosure, 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 and provision for losses 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. Goodwill and intangible assets with definite
useful lives are amortized on an accelerated basis over their
estimated life. Intangible assets are tested for impairment
annually or whenever events or changes in circumstances indicate
the carrying amount of the assets may not be recoverable from
future undiscounted cash flows. If impaired, the assets are
recorded at fair value.
Segment
Reporting
We have determined that all of our lending divisions and
subsidiaries meet the aggregation criteria of ASC 280,
Segment Reporting
, since all offer similar products and
services, operate with similar processes, and have similar
customers.
Stock-based
Compensation
On January 1, 2006, we changed our accounting policy
related to stock-based compensation in connection with the
adoption of ASC 718,
Compensation — Stock
Compensation
(“ASC 718”), which requires that
stock compensation transactions be recognized as compensation
expense in the statement of operations based on their fair
values on the measurement date, which is the date of the grant.
We transitioned to fair value based accounting for stock-based
compensation using a modified version of prospective application
(“modified prospective application”). Under modified
prospective application, as it is applicable to us, ASC 718
applies to new awards and to awards modified, repurchased or
cancelled after January 1, 2006. Additionally, compensation
expense for the portion of awards for which the requisite period
has not been rendered (generally referring to nonvested awards)
that are outstanding as of January 1, 2006 are being
recognized as the remaining requisite service is rendered during
and after the period of adoption of ASC 718.
The compensation expense for the earlier awards is based on the
same method and on the same grant date fair values previously
determined for the pro forma disclosures required for all
companies that did not previously adopt the fair value
accounting method for stock-based compensation.
60
Table of Contents
Accumulated
Other Comprehensive Income (Loss)
Unrealized gains or losses on our
available-for-sale
securities (after applicable income tax expense or benefit) are
included in accumulated other comprehensive income (loss), net.
Accumulated comprehensive income (loss), net for the year ended
December 31, 2009 and 2008 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
Fair values of financial instruments are estimated using
relevant market information and other assumptions. Fair value
estimates involve uncertainties and matters of significant
judgment regarding interest rates, credit risk, prepayments and
other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions
could significantly affect the estimates. Effective
January 1, 2008, we adopted the reporting requirements of
ASC Topic 820,
Fair Value Measurements and Disclosures
(“ASC 820”). The adoption of ASC 820 did not have
an impact on our financial statements except for the expanded
disclosures noted in Note 15 — Fair Value
Disclosures.
| 2. | Securities |
The following is a summary of securities (in thousands):
| December 31, 2009 | ||||||||||||||||
|
Gross
|
Gross
|
Estimated
|
||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
|
|
||||||||||||||||
|
Available-for-Sale
Securities:
|
||||||||||||||||
|
Mortgage-backed securities
|
$ | 201,824 | $ | 8,192 | $ | (29 | ) | $ | 209,987 | |||||||
|
Corporate securities
|
5,000 | — | (317 | ) | 4,683 | |||||||||||
|
Municipals
|
42,314 | 1,514 | (2 | ) | 43,826 | |||||||||||
|
Equity securities(1)
|
7,506 | 126 | — | 7,632 | ||||||||||||
|
|
||||||||||||||||
| $ | 256,644 | $ | 9,832 | $ | (348 | ) | $ | 266,128 | ||||||||
61
Table of Contents
| December 31, 2008 | ||||||||||||||||
|
Gross
|
Gross
|
Estimated
|
||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
|
|
||||||||||||||||
|
Available-for-Sale
Securities:
|
||||||||||||||||
|
U. S. Treasuries
|
$ | 28,299 | $ | 1 | $ | (4 | ) | $ | 28,296 | |||||||
|
Mortgage-backed securities
|
288,701 | 4,145 | (1,130 | ) | 291,716 | |||||||||||
|
Corporate securities
|
5,000 | — | (190 | ) | 4,810 | |||||||||||
|
Municipals
|
46,370 | 370 | (209 | ) | 46,531 | |||||||||||
|
Equity securities(1)
|
7,506 | — | (107 | ) | 7,399 | |||||||||||
|
|
||||||||||||||||
| $ | 375,876 | $ | 4,516 | $ | (1,640 | ) | $ | 378,752 | ||||||||
| (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):
| At December 31, 2009 | ||||||||||||||||||||
|
After One
|
After Five
|
|||||||||||||||||||
|
Less Than
|
Through
|
Through
|
After Ten
|
|||||||||||||||||
| One Year | Five Years | Ten Years | Years | Total | ||||||||||||||||
|
|
||||||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||||||
|
Mortgage-backed securities:(1)
|
||||||||||||||||||||
|
Amortized cost
|
$ | 23,359 | $ | 34,200 | $ | 68,930 | $ | 75,335 | $ | 201,824 | ||||||||||
|
Estimated fair value
|
23,719 | 35,143 | 72,477 | 78,648 | 209,987 | |||||||||||||||
|
Weighted average yield(3)
|
4.242 | % | 4.386 | % | 4.815 | % | 4.414 | % | 4.527 | % | ||||||||||
|
Corporate securities:
|
||||||||||||||||||||
|
Amortized cost
|
— | 5,000 | — | — | 5,000 | |||||||||||||||
|
Estimated fair value
|
— | 4,683 | — | — | 4,683 | |||||||||||||||
|
Weighted average yield(3)
|
— | 7.375 | % | — | — | 7.375 | % | |||||||||||||
|
Municipals:(2)
|
||||||||||||||||||||
|
Amortized cost
|
1,985 | 19,571 | 20,758 | — | 42,314 | |||||||||||||||
|
Estimated fair value
|
2,000 | 20,317 | 21,509 | — | 43,826 | |||||||||||||||
|
Weighted average yield(3)
|
7.391 | % | 8.166 | % | 8.723 | % | — | 8.403 | % | |||||||||||
|
Equity securities:
|
||||||||||||||||||||
|
Amortized cost
|
— | — | — | — | 7,506 | |||||||||||||||
|
Estimated fair value
|
— | — | — | — | 7,632 | |||||||||||||||
|
Total
available-for-sale
securities:
|
||||||||||||||||||||
|
Amortized cost
|
$ | 256,644 | ||||||||||||||||||
|
Estimated fair value
|
$ | 266,128 | ||||||||||||||||||
|
|
||||||||||||||||||||
| (1) | Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties. The average expected life of the mortgage-backed securities was 2.1 years at December 31, 2009. | |
| (2) | Yields have been adjusted to a tax equivalent basis assuming a 35% federal tax rate. | |
| (3) | Yields are calculated based on amortized cost. |
Securities with carrying values of approximately $152,888,000
and $292,731,000 were pledged to secure certain borrowings and
deposits at December 31, 2009 and 2008, respectively. See
Note 8 for discussion of
62
Table of Contents
securities securing borrowings. Of the pledged securities at
December 31, 2009 and 2008, approximately $116,923,000 and
$204,574,000, respectively, were pledged for certain deposits.
The following tables disclose, as of December 31, 2009 and
2008, 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 | ||||||||||||||||||||||
|
Unrealized
|
Unrealized
|
Unrealized
|
||||||||||||||||||||||
| Fair Value | Loss | Fair Value | Loss | Fair Value | Loss | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2009
|
||||||||||||||||||||||||
|
Mortgage-backed securities
|
$ | 452 | $ | (1 | ) | $ | 2,553 | $ | (28 | ) | $ | 3,005 | $ | (29 | ) | |||||||||
|
Corporate securities
|
— | — | 4,683 | (317 | ) | 4,683 | (317 | ) | ||||||||||||||||
|
Municipals
|
1,018 | (2 | ) | — | — | 1,018 | (2 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
| $ | 1,470 | $ | (3 | ) | $ | 7,236 | $ | (345 | ) | $ | 8,706 | $ | (348 | ) | ||||||||||
|
December 31, 2008
|
||||||||||||||||||||||||
|
U.S. Treasuries
|
$ | 24,996 | $ | (4 | ) | $ | — | $ | — | $ | 24,996 | $ | (4 | ) | ||||||||||
|
Mortgage-backed securities
|
106,167 | (1,121 | ) | 2,977 | (9 | ) | 109,144 | (1,130 | ) | |||||||||||||||
|
Corporate securities
|
4,810 | (190 | ) | — | — | 4,810 | (190 | ) | ||||||||||||||||
|
Municipals
|
10,817 | (209 | ) | — | — | 10,817 | (209 | ) | ||||||||||||||||
|
Equity securities
|
7,399 | (107 | ) | — | — | 7,399 | (107 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
| $ | 154,189 | $ | (1,631 | ) | $ | 2,977 | $ | (9 | ) | $ | 157,166 | $ | (1,640 | ) | ||||||||||
At December 31, 2009, the number of investment positions in
this unrealized loss position totals 5. We do not believe these
unrealized losses are “other than temporary” as
(1) we do not have the intent to sell any of the securities
in the table above; and (2) it is not probable that we will
be unable to collect the amounts contractually due. The
unrealized losses noted are interest rate related, and losses
have decreased as rates have decreased in 2008 and 2009. We have
not identified any issues related to the ultimate repayment of
principal as a result of credit concerns on these securities.
Unrealized gains or losses on our
available-for-sale
securities (after applicable income tax expense or benefit) are
included in accumulated other comprehensive income (loss), net.
We had comprehensive income of $28.4 million for the year
ended December 31, 2009 and comprehensive income of
$27.0 million for the year ended December 31, 2008.
Comprehensive income during the year ended December 31,
2009 included a net after-tax gain of $4.3 million, and
comprehensive income during the year ended December 31,
2008 included a net after-tax gain of $2.7 million due to
changes in the net unrealized gains/losses on securities
available-for-sale.
63
Table of Contents
| 3. | Loans and Allowance for Loan Losses |
Loans held for investment are summarized by category as follows
(in thousands):
| December 31 | ||||||||
| 2009 | 2008 | |||||||
|
|
||||||||
|
Commercial
|
$ | 2,457,533 | $ | 2,276,054 | ||||
|
Construction
|
669,426 | 667,437 | ||||||
|
Real estate
|
1,233,701 | 988,784 | ||||||
|
Consumer
|
25,065 | 32,671 | ||||||
|
Equipment leases
|
99,129 | 86,937 | ||||||
|
|
||||||||
|
Gross loans held for investment
|
4,484,854 | 4,051,883 | ||||||
|
Deferred income (net of direct origination costs)
|
(27,561 | ) | (24,012 | ) | ||||
|
Allowance for loan losses
|
(67,931 | ) | (45,365 | ) | ||||
|
|
||||||||
|
Total loans held for investment, net
|
$ | 4,389,362 | $ | 3,982,506 | ||||
The majority of the loan portfolio is comprised of loans to
businesses and individuals in Texas. This geographic
concentration subjects the loan portfolio to the general
economic conditions within this area. The risks created by this
concentration have been considered by management in the
determination of the adequacy of the allowance for loan losses.
Management believes the allowance for loan losses is adequate to
cover estimated losses on loans at each balance sheet date.
The changes in the allowance for loan losses are summarized as
follows (in thousands):
| Year Ended December 31 | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Balance, beginning of year
|
$ | 45,365 | $ | 31,686 | $ | 20,063 | ||||||
|
Provision for loan losses
|
42,022 | 26,415 | 13,805 | |||||||||
|
Loans charged off
|
(19,728 | ) | (13,634 | ) | (2,970 | ) | ||||||
|
Recoveries
|
272 | 898 | 788 | |||||||||
|
|
||||||||||||
|
Balance, end of year
|
$ | 67,931 | $ | 45,365 | $ | 31,686 | ||||||
The change in the allowance for off-balance sheet credit losses
is summarized as follows (in thousands):
| Year Ended December 31 | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Balance, beginning of year
|
$ | 1,470 | $ | 1,135 | $ | 940 | ||||||
|
Provision for off-balance sheet credit losses
|
1,478 | 335 | 195 | |||||||||
|
|
||||||||||||
|
Balance, end of year
|
$ | 2,948 | $ | 1,470 | $ | 1,135 | ||||||
|
Total provision for credit losses
|
$ | 43,500 | $ | 26,750 | $ | 14,000 | ||||||
During the normal course of business, the Company and subsidiary
may enter into transactions with related parties, including
their officers, employees, directors, significant stockholders
and their related affiliates. It is the Company’s policy
that all such transactions are on substantially the same terms
as those prevailing at the time for comparable transactions with
third parties. Loans to related parties, including officers and
directors, were approximately $14,158,000 and $15,295,000 at
December 31, 2009 and 2008, respectively. During the years
ended December 31, 2009 and 2008, total advances were
approximately $10,314,000 and $27,807,000 and total paydowns
were $11,451,000 and $27,594,000, respectively.
64
Table of Contents
| 4. | OREO and Valuation Allowance for Losses on OREO |
The table below presents a summary of the activity related to
OREO (in thousands):
| Year Ended December 31 | ||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||
|
|
||||||||||||||||
|
Beginning balance
|
$ | 25,904 | $ | 2,671 | $ | 882 | ||||||||||
|
Additions
|
23,466 | 28,835 | 2,582 | |||||||||||||
|
Sales
|
(14,265 | ) | (5,602 | ) | (793 | ) | ||||||||||
|
Valuation allowance for OREO
|
(6,619 | ) | — | — | ||||||||||||
|
Direct write-downs
|
(1,222 | ) | — | — | ||||||||||||
|
|
||||||||||||||||
|
Ending balance
|
$ | 27,264 | $ | 25,904 | $ | 2,671 | ||||||||||
| 5. | Goodwill and Other Intangible Assets |
In November 2009, we acquired another premium finance company
and recorded a total intangible asset of $2.3 million. Of
this total, $224,000 was allocated to goodwill,
$1.9 million to customer relationships and $162,000 to
trade name. The $1.9 million customer relationship
intangible will be amortized over 15 years and the $162,000
intangible related to the trade name will be amortized over
5 years.
Goodwill and other intangible assets at December 31, 2009
and December 31, 2008 are summarized as follows (in
thousands):
|
Gross Goodwill and
|
||||||||||||
|
Intangible
|
Accumulated
|
Net Goodwill and
|
||||||||||
| Assets | Amortization | Intangible Assets | ||||||||||
|
|
||||||||||||
|
December 31, 2009
|
||||||||||||
|
Goodwill
|
$ | 7,225 | $ | (374 | ) | $ | 6,851 | |||||
|
Intangible assets — customer relationships and
trademarks
|
3,705 | (750 | ) | 2,955 | ||||||||
|
|
||||||||||||
| $ | 10,930 | $ | (1,124 | ) | $ | 9,806 | ||||||
|
December 31, 2008
|
||||||||||||
|
Goodwill
|
$ | 7,001 | $ | (374 | ) | $ | 6,627 | |||||
|
Intangible assets — customer relationships and
trademarks
|
1,622 | (560 | ) | 1,062 | ||||||||
|
|
||||||||||||
| $ | 8,623 | $ | (934 | ) | $ | 7,689 | ||||||
Amortization expense related to intangible assets totaled
$189,000 in 2009 and $162,000 in 2008 and 2007. The estimated
aggregate future amortization expense for intangible assets
remaining as of December 31, 2009 is as follows:
|
2010
|
$ | 323 | ||
|
2011
|
323 | |||
|
2012
|
323 | |||
|
2013
|
323 | |||
|
2014
|
317 | |||
|
Thereafter
|
1,346 | |||
|
|
||||
| $ | 2,955 | |||
65
Table of Contents
| 6. | Premises and Equipment |
Premises and equipment at December 31, 2009 and 2008 are
summarized as follows (in thousands):
| December 31 | ||||||||
| 2009 | 2008 | |||||||
|
|
||||||||
|
Premises
|
$ | 9,765 | $ | 6,504 | ||||
|
Furniture and equipment
|
20,235 | 19,024 | ||||||
|
|
||||||||
| 30,000 | 25,528 | |||||||
|
Accumulated depreciation
|
(18,811 | ) | (16,061 | ) | ||||
|
|
||||||||
|
Total premises and equipment, net
|
$ | 11,189 | $ | 9,467 | ||||
Depreciation expense for the above premises and equipment was
approximately $3,311,000, $2,837,000 and $2,150,000 in 2009,
2008 and 2007, respectively.
| 7. | Deposits |
The scheduled maturities of interest bearing time deposits are
as follows at December 31, 2009 (in thousands):
|
2010
|
$ | 1,321,738 | ||
|
2011
|
19,545 | |||
|
2012
|
5,070 | |||
|
2013
|
351 | |||
|
2014
|
9,500 | |||
|
2015 and after
|
100 | |||
|
|
||||
| $ | 1,356,304 | |||
At December 31, 2009 and 2008, the Bank had approximately
$35,900,000 and $35,500,000, respectively, in deposits from
related parties, including directors, stockholders, and their
related affiliates on terms similar to those from third parties.
At December 31, 2009 and 2008, interest bearing time
deposits, including deposits in foreign branches, of $100,000 or
more were approximately $1,293,883,000 and $1,659,289,000,
respectively.
| 8. | Borrowing Arrangements |
The following table summarizes our borrowings at
December 31, 2009, 2008 and 2007 (in thousands):
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| Balance | Rate(4) | Balance | Rate(4) | Balance | Rate(4) | |||||||||||||||||||
|
Federal funds purchased
|
$ | 580,519 | .33 | % | $ | 350,155 | .47 | % | $ | 344,813 | 4.29 | % | ||||||||||||
|
Customer repurchase agreements(1)
|
25,070 | .10 | % | 77,732 | .05 | % | 7,148 | 3.30 | % | |||||||||||||||
|
Treasury, tax and loan notes(2)
|
5,940 | .00 | % | 2,720 | .00 | % | 6,890 | 4.00 | % | |||||||||||||||
|
FHLB borrowings(3)
|
325,000 | .11 | % | 800,000 | .71 | % | 400,000 | 4.18 | % | |||||||||||||||
|
Other short-term borrowings
|
— | — | 10,000 | 1.19 | % | 25,000 | 5.82 | % | ||||||||||||||||
|
Long-term borrowings
|
— | — | 40,000 | 1.19 | % | — | — | |||||||||||||||||
|
TLGP borrowings
|
20,500 | .84 | % | — | — | — | — | |||||||||||||||||
|
Trust preferred subordinated debentures
|
113,406 | 3.19 | % | 113,406 | 4.40 | % | 113,406 | 6.77 | % | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total borrowings
|
$ | 1,070,435 | $ | 1,394,013 | $ | 897,257 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Maximum outstanding at any month end
|
$ | 1,753,181 | $ | 1,280,606 | $ | 783,851 | ||||||||||||||||||
66
Table of Contents
| (1) | Securities pledged for customer repurchase agreements were $36.0 million, $88.2 million and $24.4 million at December 31, 2009, 2008 and 2007, respectively. | |
| (2) | Securities pledged for treasury, tax and loans notes were $11.3 million, $13.0 million and $7.1 million at December 31, 2009, 2008 and 2007, respectively. | |
| (3) | FHLB borrowings are collateralized by a blanket floating lien based on real estate loans and also certain pledged securities. | |
| (4) | Interest rate as of period end. |
The following table summarizes our other borrowing capacities in
addition to balances outstanding at December 31, 2009, 2008
and 2007 (in thousands):
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
FHLB borrowing capacity relating to loans
|
$ | 1,382,682 | $ | 139,000 | $ | 205,900 | ||||||
|
FHLB borrowing capacity relating to securities
|
57,101 | 62,420 | 231,000 | |||||||||
|
|
||||||||||||
|
Total FHLB borrowing capacity
|
$ | 1,439,783 | $ | 204,120 | $ | 436,900 | ||||||
|
Unused federal funds lines available from commercial banks
|
$ | 736,560 | $ | 573,500 | $ | 458,000 | ||||||
On September 27, 2007, we entered into a Credit Agreement
with KeyBank National Association. This Credit Agreement permits
revolving borrowings of up to $50 million and matured on
September 24, 2008. At our option, the unpaid principal
balance on the Credit Agreement as of September 24, 2008
was converted into a two-year term loan, which will accrue
interest at the same rate(s) as the revolving loans existing on
such date. The Credit Agreement permits multiple borrowings that
may bear interest at the prime rate minus 1.25% or the LIBOR
plus 1% at our election. The Credit Agreement is unsecured and
proceeds may be used for general corporate purposes. The Credit
Agreement contains customary financial covenants and
restrictions. At December 31, 2008, we had drawn
$50.0 million, $10.0 million of which matured in 2009
and was included in other short-term borrowings at
December 31, 2008. The remaining $40.0 million matured
in September of 2010 and was, therefore, included in long-term
borrowings. The entire note was paid in full in March of 2009.
The scheduled maturities of our borrowings at December 31,
2009, were as follows (in thousands):
|
After One
|
After Three
|
|||||||||||||||||||
|
Within One
|
But Within
|
But Within
|
After Five
|
|||||||||||||||||
| Year | Three Years | Five Years | Years | Total | ||||||||||||||||
|
|
||||||||||||||||||||
|
Federal funds purchased(1)
|
$ | 580,519 | $ | — | $ | — | $ | — | $ | 580,519 | ||||||||||
|
Customer repurchase agreements(1)
|
25,070 | — | — | — | 25,070 | |||||||||||||||
|
Treasury, tax and loan notes(1)
|
5,940 | — | — | — | 5,940 | |||||||||||||||
|
FHLB borrowings(1)
|
325,000 | — | — | — | 325,000 | |||||||||||||||
|
TLGP borrowings(1)
|
20,500 | — | — | — | 20,500 | |||||||||||||||
|
Trust preferred subordinated debentures(1)
|
— | — | — | 113,406 | 113,406 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total borrowings
|
$ | 957,029 | $ | — | $ | — | $ | 113,406 | $ | 1,070,435 | ||||||||||
| (1) | Excludes interest. |
| 9. | Trust Preferred Subordinated Debentures |
From November 2002 to September 2006 various Texas Capital
Statutory Trusts were created and subsequently issued fixed
and/or
floating rate Capital Securities in various private offerings
totaling $113.4 million.
67
Table of Contents
As of December 31, 2008, the details of the trust preferred
subordinated debentures are summarized below (in thousands):
|
Texas
|
Texas
|
Texas
|
Texas
|
Texas
|
||||||||||||||||
|
Capital
|
Capital
|
Capital
|
Capital
|
Capital
|
||||||||||||||||
|
Bancshares
|
Bancshares
|
Bancshares
|
Bancshares
|
Bancshares
|
||||||||||||||||
|
Statutory
|
Statutory
|
Statutory
|
Statutory
|
Statutory
|
||||||||||||||||
| Trust I | Trust II | Trust III | Trust IV | Trust V | ||||||||||||||||
|
|
||||||||||||||||||||
|
Date issued
|
November 19, 2002 | April 10, 2003 | October 6, 2005 | April 28, 2006 | September 29, 2006 | |||||||||||||||
|
Capital securities issued
|
$ | 10,310 | $ | 10,310 | $ | 25,774 | $ | 25,774 | $ | 41,238 | ||||||||||
|
Floating or fixed rate securities
|
Floating | Floating | Fixed/Floating(1 | ) | Floating | Floating | ||||||||||||||
|
Interest rate on
|
3 month LIBOR + | 3 month LIBOR + | 3 month LIBOR + | 3 month LIBOR + | ||||||||||||||||
|
subordinated debentures
|
3.35 | % | 3.25 | % | 3 month LIBOR + 1.51 | % | 1.60 | % | 1.71 | % | ||||||||||
|
Maturity date
|
November 2032 | April 2033 | December 2035 | June 2036 | September 2036 | |||||||||||||||
|
|
||||||||||||||||||||
| (1) | Interest rate is a fixed rate of 6.19% for five years through December 15, 2010, and a floating rate of interest for the remaining 25 years that resets quarterly to 1.51% above the three-month LIBOR. |
After deducting underwriter’s compensation and other
expenses of each offering, the net proceeds were available to
the Company to increase capital and for general corporate
purposes, including use in investment and lending activities.
Interest payments on all subordinated debentures are deductible
for federal income tax purposes.
| 10. | Income Taxes |
We have a gross deferred tax asset of $40.1 million at
December 31, 2009, 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.
At December 31, 2008, we had a gross deferred tax asset of
$26.7 million, which related primarily to our allowance for
loan losses, loan origination fees and stock compensation.
Income tax expense/(benefit) consists of the following for the
years ended (in thousands):
| Year Ended December 31 | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 20,955 | $ | 17,349 | $ | 18,643 | ||||||
|
State
|
219 | 221 | 269 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 21,174 | $ | 17,570 | $ | 18,912 | ||||||
|
Deferred:
|
||||||||||||
|
Federal
|
$ | (8,774 | ) | $ | (4,971 | ) | $ | (3,508 | ) | |||
|
State
|
— | — | — | |||||||||
|
|
||||||||||||
|
Total
|
$ | (8,774 | ) | $ | (4,971 | ) | $ | (3,508 | ) | |||
|
Total expense:
|
||||||||||||
|
Federal
|
$ | 12,181 | $ | 12,378 | $ | 15,135 | ||||||
|
State
|
219 | 221 | 269 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 12,400 | $ | 12,599 | $ | 15,404 | ||||||
68
Table of Contents
The following table shows the breakdown of total income tax
expense for continuing operations and
discontinued operations for the years ended December 31, 2009, 2008 and 2007 (in thousands):
discontinued operations for the years ended December 31, 2009, 2008 and 2007 (in thousands):
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Total expense:
|
||||||||||||
|
From continuing operations
|
$ | 12,522 | $ | 12,924 | $ | 16,420 | ||||||
|
From discontinued operations
|
(122 | ) | (325 | ) | (1,016 | ) | ||||||
|
|
||||||||||||
|
Total
|
$ | 12,400 | $ | 12,599 | $ | 15,404 | ||||||
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):
amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. Significant components of deferred tax assets and liabilities are as follows (in
thousands):
| December 31 | ||||||||
| 2009 | 2008 | |||||||
|
|
||||||||
|
Deferred tax assets:
|
||||||||
|
Allowance for credit losses
|
$ | 25,111 | $ | 16,602 | ||||
|
Organizational costs/intangibles
|
254 | 238 | ||||||
|
Loan origination fees
|
3,970 | 3,545 | ||||||
|
Stock compensation
|
4,412 | 3,235 | ||||||
|
Depreciation
|
— | 385 | ||||||
|
Mark to market on mortgage loans
|
547 | 561 | ||||||
|
Reserve for potential mortgage loan repurchases
|
446 | 818 | ||||||
|
Non-accrual interest
|
2,174 | 1,219 | ||||||
|
OREO valuation allowance
|
2,764 | — | ||||||
|
Other
|
421 | 107 | ||||||
|
|
||||||||
| 40,099 | 26,710 | |||||||
|
Deferred tax liabilities:
|
||||||||
|
Loan origination costs
|
(871 | ) | (909 | ) | ||||
|
FHLB stock dividends
|
(678 | ) | (675 | ) | ||||
|
Leases
|
(15,375 | ) | (10,982 | ) | ||||
|
Depreciation
|
(540 | ) | — | |||||
|
Unrealized gain on securities
|
(3,319 | ) | (1,006 | ) | ||||
|
Other
|
(28 | ) | (28 | ) | ||||
|
|
||||||||
| (20,811 | ) | (13,600 | ) | |||||
|
|
||||||||
|
Net deferred tax asset
|
$ | 19,288 | $ | 13,110 | ||||
We adopted the provisions of ASC
740-10,
Income Taxes — Accounting for Uncertainties in
Income Taxes
(“ASC
740-10”
)
,
effective January 1, 2007. ASC
740-10
prescribes a recognition threshold and a measurement attribute
for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. Benefits
from tax positions should be recognized in the financial
statements only when it is more likely than not that the tax
position will be sustained upon examination by the appropriate
taxing authority that would have full knowledge of all relevant
information. A tax position that meets the more-likely-than-not
recognition threshold is measured at the largest amount of
cumulative benefit that is greater than fifty percent likely of
being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition
threshold should be recognized in the first subsequent financial
reporting period in which that threshold is met. Previously
recognized tax positions that no longer meet the
more-likely-than-not recognition threshold should be
derecognized in the first subsequent financial reporting period
in which that threshold is no longer met. ASC
740-10
also
provides guidance on the accounting for and
69
Table of Contents
disclosure of unrecognized tax benefits, interest and penalties.
Adoption and subsequent application of ASC
740-10
did
not have a significant impact on our financial statements.
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 2006.
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:
| Year Ended December 31 | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Tax at U.S. statutory rate
|
35 | % | 35 | % | 35 | % | ||||||
|
State taxes
|
1 | % | 1 | % | 1 | % | ||||||
|
Non-deductible expenses
|
1 | % | 1 | % | 1 | % | ||||||
|
Non-taxable income
|
(3 | )% | (3 | )% | (2 | )% | ||||||
|
Other
|
— | — | (1 | )% | ||||||||
|
|
||||||||||||
|
Total
|
34 | % | 34 | % | 34 | % | ||||||
| 11. | Employee Benefits |
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 $627,000, $588,000 and
$323,000 for the years ended December 31, 2009, 2008 and
2007, 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
Employee Stock Purchase Plan was approved by stockholders at the
2006 annual meeting. As of December 31, 2009, 2008 and
2007, 53,281, 37,556 and 23,930 shares had been purchased
on behalf of the employees under the 2006 ESPP.
As of December 31, 2009, we have two stock option plans,
the 1999 Stock Omnibus Plan (“1999 Plan”) and the 2005
Long-Term Incentive Plan (“2005 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 the 2005 Plan, equity-based
compensation grants were made by the board of directors, or its
designated committee. Grants under the 2005 Plan are subject to
vesting requirements. Under the 2005 Plan, we may grant, among
other things, nonqualified stock options, incentive stock
options, restricted stock units (“RSUs”), stock
appreciation rights, or any combination thereof. The 2005 Plan
includes grants for employees and directors. Totals shares
authorized under the plan for awards is 1,500,000. Total shares
which may be issued under the 2005 Plan at December 31,
2009, 2008 and 2007 were 216,694, 442,505 and 510,749,
respectively.
The fair value of our stock option and stock appreciation right
(SAR) grants are estimated at the date of grant using the
Black-Scholes option pricing model. The Black-Scholes option
valuation model was 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.
70
Table of Contents
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:
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Risk-free rate
|
2.23 | % | 3.04 | % | 4.33 | % | ||||||
|
Dividend yield
|
0.00 | 0.00 | 0.00 | |||||||||
|
Market price volatility factor
|
.423 | .323 | .298 | |||||||||
|
Weighted-average expected life of options
|
5 years | 5 years | 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 2009, 2008 and 2007 is as follows (in thousands, except per
share data):
| December 31, 2009 | December 31, 2008 | December 31, 2007 | ||||||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||
|
Average
|
Average
|
Average
|
||||||||||||||||||||||
|
Exercise
|
Exercise
|
Exercise
|
||||||||||||||||||||||
| Options | Price | Options | Price | Options | Price | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Options outstanding at beginning of year
|
1,460,461 | $ | 11.54 | 1,983,352 | $ | 10.63 | 2,308,103 | $ | 10.51 | |||||||||||||||
|
Options granted
|
— | — | — | — | — | — | ||||||||||||||||||
|
Options exercised
|
(226,485 | ) | 7.69 | (496,051 | ) | 7.55 | (239,751 | ) | 7.99 | |||||||||||||||
|
Options forfeited
|
(66,240 | ) | 15.35 | (26,840 | ) | 17.95 | (85,000 | ) | 15.45 | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Options outstanding at year-end
|
1,167,736 | $ | 12.07 | 1,460,461 | $ | 11.54 | 1,983,352 | $ | 10.63 | |||||||||||||||
|
Options vested and exercisable at year-end
|
1,131,486 | $ | 11.76 | 1,337,461 | $ | 10.79 | 1,600,431 | $ | 9.52 | |||||||||||||||
|
Intrinsic value of options vested and exercisable
|
$ | 2,490,378 | $ | 3,433,347 | $ | 13,971,000 | ||||||||||||||||||
|
Weighted average remaining contractual life of options vested
and exercisable
|
3.52 | 4.13 | 4.33 | |||||||||||||||||||||
|
Fair value of shares vested during year
|
$ | 245,422 | $ | 492,638 | $ | 969,187 | ||||||||||||||||||
|
Intrinsic value of options exercised
|
$ | 1,608,048 | $ | 4,551,326 | $ | 3,325,000 | ||||||||||||||||||
|
Weighted average remaining contractual life of options currently
outstanding in years:
|
3.58 | 4.29 | 4.73 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
We expensed approximately $629,000, $1,152,000 and $1,401,000 in
2009, 2008 and 2007, respectively, related to stock option
awards. Expenses are calculated utilizing the straight-line
method. No stock options were granted in 2009.
In connection with the 2005 Long-term Incentive Plan, stock
appreciation rights were issued in 2009, 2008 and 2007. These
rights are service-based and generally vest over a period of
five years. Of the SARs granted in 2006, 300,312 were
Performance Stock Appreciation Rights (PSARs) which were
cancelled on December 31, 2008 as company performance
targets were not met.
71
Table of Contents
| December 31,2009 | December 31, 2008 | December 31, 2007 | ||||||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||
|
Average
|
Average
|
Average
|
||||||||||||||||||||||
|
Exercise
|
SARs/
|
Exercise
|
SARs/
|
Exercise
|
||||||||||||||||||||
| SARs | Price | PSARs | Price | PSARs | Price | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
SARs outstanding at beginning of year
|
1,007,579 | $ | 16.66 | 1,203,087 | $ | 18.24 | 1,083,054 | $ | 21.56 | |||||||||||||||
|
SARs granted
|
246,500 | 14.93 | 142,000 | 17.46 | 186,000 | 21.39 | ||||||||||||||||||
|
SARs exercised
|
— | — | — | — | — | — | ||||||||||||||||||
|
SARs forfeited
|
(47,341 | ) | 20.51 | (337,508 | ) | 22.62 | (65,967 | ) | 21.27 | |||||||||||||||
|
|
||||||||||||||||||||||||
|
SARs outstanding at year-end
|
1,206,738 | $ | 16.16 | 1,007,579 | $ | 16.66 | 1,203,087 | $ | 18.24 | |||||||||||||||
|
SARs vested at year-end
|
491,254 | $ | 20.92 | 315,293 | $ | 21.14 | 207,617 | $ | 21.72 | |||||||||||||||
|
Weighted average remaining contractual life of SARs vested
|
6.85 | 7.73 | 8.51 | |||||||||||||||||||||
|
Compensation expense
|
$ | 1,709,000 | $ | 1,127,000 | $ | 1,275,000 | ||||||||||||||||||
|
Weighted average fair value of SARs granted during 2009, 2008
and 2007
|
$ | 5.93 | $ | 5.93 | $ | 7.36 | ||||||||||||||||||
|
Fair value of shares vested during the year
|
$ | 1,278,207 | $ | 1,255,341 | $ | 1,389,543 | ||||||||||||||||||
|
Weighted average remaining contractual life of SARs currently
outstanding in years
|
5.61 | 6.73 | 8.71 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||
As of December 31, 2009, 2008 and 2007, the intrinsic value
of SARs vested was negative as the December 31, 2009, 2008
and 2007 market prices were lower than the grant price of the
SARs.
The following table summarizes the status of and changes in our
nonvested restricted stock units (in thousands, except per share
data):
| Non-Vested Stock Awards Outstanding | ||||||||
|
Weighted-
|
||||||||
|
Average
|
||||||||
|
Number of
|
Grant-Date
|
|||||||
| Shares | Fair Value | |||||||
|
|
||||||||
|
Balance, January 1, 2007
|
411,568 | $ | 20.52 | |||||
|
Granted
|
205,550 | 19.90 | ||||||
|
Vested and issued
|
(87,503 | ) | 20.49 | |||||
|
Forfeited
|
(3,365 | ) | 22.65 | |||||
|
Cancelled
|
— | — | ||||||
|
|
||||||||
|
Balance, December 31, 2007
|
526,200 | 20.27 | ||||||
|
Granted
|
205,150 | 18.00 | ||||||
|
Vested and issued
|
(91,354 | ) | 20.51 | |||||
|
Forfeited
|
(13,748 | ) | 20.23 | |||||
|
Cancelled
|
— | — | ||||||
|
|
||||||||
|
Balance, December 31, 2008
|
626,248 | 19.49 | ||||||
|
Granted
|
257,210 | 12.81 | ||||||
|
Vested and issued
|
(134,570 | ) | 19.59 | |||||
|
Forfeited
|
(34,489 | ) | 19.98 | |||||
|
Cancelled
|
— | — | ||||||
|
|
||||||||
|
Balance, December 31, 2009
|
714,399 | $ | 17.04 | |||||
The RSUs granted during 2009, 2008 and 2007 generally vest over
four to five years. Compensation cost for restricted stock units
was $3,623,000, $2,434,000 and $2,084,000 for years ended
December 31, 2009, 2008 and
72
Table of Contents
2007, respectively. The weighted average remaining contractual
life of RSUs currently outstanding is 2.94 years.
Total compensation cost for all share-based arrangements, net of
taxes, was $3,904,000, $3,063,000 and $3,119,000 for the years
ended December 31, 2009, 2008 and 2007, respectively.
Unrecognized stock-based compensation expense related to
unvested options issued prior to adoption of ASC 718 is
$219,000, pre-tax. The weighted average period over which this
unrecognized expense is expected to be recognized was
1.0 years. Unrecognized stock-based compensation expense
related to SAR grants issued during 2007, 2008 and 2009 is
$4.4 million. At December 31, 2009, the weighted
average period over which this unrecognized expense is expected
to be recognized was 2.0 years. Unrecognized stock-based
compensation expense related to RSU grants during 2007, 2008 and
2009 is $9.5 million. At December 31, 2009, the
weighted average period over which this unrecognized expense is
expected to be recognized was 1.9 years.
Cash flows from financing activities included $213,000,
$4,527,000 and $3,325,000 in cash inflows from excess tax
benefits related to stock compensation in 2009, 2008 and 2007,
respectively. The tax benefit realized from stock options
exercised is $75,000 $1,584,000 and $1,164,000 in 2009, 2008 and
2007, respectively.
Upon share option exercise, new shares are issued as opposed to
treasury shares.
In 1999, we entered into a deferred compensation agreement with
one of our executive officers. The agreement allows the employee
to elect to defer up to 100% of his compensation on an annual
basis. All deferred compensation is invested in the
Company’s common stock held in a rabbi trust. The stock is
held in the name of the trustee, and the principal and earnings
of the trust are held separate and apart from other funds of the
Company, and are used exclusively for the uses and purposes of
the deferred compensation agreement. The accounts of the trust
have been consolidated with the accounts of the Company. During
2009, under the terms of the agreement, the stock was released
from the trust and issued to the executive.
| 12. | Financial Instruments with Off-Balance Sheet Risk |
The Bank is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of
credit which involve varying degrees of credit risk in excess of
the amount recognized in the consolidated balance sheets. The
Bank’s exposure to credit loss in the event of
non-performance by the other party to the financial instrument
for commitments to extend credit and standby letters of credit
is represented by the contractual amount of these instruments.
The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet
instruments. The amount of collateral obtained, if deemed
necessary, is based on management’s credit evaluation of
the borrower.
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments may expire
without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank
evaluates each customer’s credit-worthiness on a
case-by-case
basis.
Standby letters of credit are conditional commitments issued by
the Bank to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public
and private borrowing arrangements. The credit risk involved in
issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
At December 31, 2009 and 2008, commitments to extend credit
and standby and commercial letters of credit were as follows (in
thousands):
| December 31 | ||||||||
| 2009 | 2008 | |||||||
|
|
||||||||
|
Financial instruments whose contract amounts represent credit
risk:
|
||||||||
|
Commitments to extend credit
|
$ | 1,143,427 | $ | 1,404,964 | ||||
|
Standby and commercial letters of credit
|
66,385 | 70,103 | ||||||
73
Table of Contents
| 13. | Regulatory Restrictions |
The Company and the Bank are subject to various regulatory
capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can
initiate certain mandatory (and possibly additional
discretionary) actions by regulators that, if undertaken, could
have a direct material effect on the Company’s and the
Bank’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the
Company’s and the Bank’s assets, liabilities, and
certain off-balance sheet items as calculated under regulatory
accounting practices. The Company’s and the Bank’s
capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Company and the Bank to maintain
minimum amounts and ratios (set forth in the table below) of
total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management
believes, as of December 31, 2009, that the Company and the
Bank meet all capital adequacy requirements to which they are
subject.
Financial institutions are categorized as well capitalized or
adequately capitalized, based on minimum total risk-based,
Tier I risk-based and Tier I leverage ratios as set
forth in the tables below. As shown below, the Bank’s
capital ratios exceed the regulatory definition of well
capitalized as of December 31, 2009 and 2008. As of
June 30, 2009, the most recent notification from the OCC
categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. There have been no
conditions or events since the notification that management
believes have changed the Bank’s category. Based upon the
information in its most recently filed call report, the Bank
continues to meet the capital ratios necessary to be well
capitalized under the regulatory framework for prompt corrective
action and continues to meet the capital ratios necessary to be
well capitalized under the regulatory framework for prompt
corrective action.
|
To Be Well Capitalized
|
||||||||||||||||||||||||
|
For Capital
|
Under Prompt Corrective
|
|||||||||||||||||||||||
| Actual | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||
| (in thousands except percentage data) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
As of December 31, 2009:
|
||||||||||||||||||||||||
|
Total capital (to risk-weighted assets):
|
||||||||||||||||||||||||
|
Company
|
$ | 642,371 | 11.98% | $ | 429,102 | 8.00% | N/A | N/A | ||||||||||||||||
|
Bank
|
555,635 | 10.36% | 429,012 | 8.00% | $ | 536,265 | 10.00 | % | ||||||||||||||||
|
Tier 1 capital (to risk-weighted assets):
|
||||||||||||||||||||||||
|
Company
|
$ | 575,338 | 10.73% | $ | 214,551 | 4.00% | N/A | N/A | ||||||||||||||||
|
Bank
|
488,602 | 9.11% | 214,506 | 4.00% | $ | 321,759 | 6.00 | % | ||||||||||||||||
|
Tier 1 capital (to average assets):
|
||||||||||||||||||||||||
|
Company
|
$ | 575,338 | 10.54% | $ | 218,381 | 4.00% | N/A | N/A | ||||||||||||||||
|
Bank
|
488,602 | 8.95% | 218,336 | 4.00% | $ | 272,920 | 5.00 | % | ||||||||||||||||
|
As of December 31, 2008:
|
||||||||||||||||||||||||
|
Total capital (to risk-weighted assets):
|
||||||||||||||||||||||||
|
Company
|
$ | 533,781 | 10.92% | $ | 390,890 | 8.00% | N/A | N/A | ||||||||||||||||
|
Bank
|
502,693 | 10.29% | 390,799 | 8.00% | $ | 488,498 | 10.00 | % | ||||||||||||||||
|
Tier 1 capital (to risk-weighted assets):
|
||||||||||||||||||||||||
|
Company
|
$ | 486,946 | 9.97% | $ | 195,445 | 4.00% | N/A | N/A | ||||||||||||||||
|
Bank
|
455,858 | 9.33% | 195,399 | 4.00% | $ | 293,099 | 6.00 | % | ||||||||||||||||
|
Tier 1 capital (to average assets):
|
||||||||||||||||||||||||
|
Company
|
$ | 486,946 | 10.21% | $ | 190,782 | 4.00% | N/A | N/A | ||||||||||||||||
|
Bank
|
455,858 | 9.56% | 190,736 | 4.00% | $ | 238,420 | 5.00 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||
74
Table of Contents
Dividends that may be paid by subsidiary banks are routinely
restricted by various regulatory authorities. The amount that
can be paid in any calendar year without prior approval of the
Bank’s regulatory agencies cannot exceed the lesser of net
profits (as defined) for that year plus the net profits for the
preceding two calendar years, or retained earnings. No dividends
were declared or paid on common stock during 2009, 2008 or 2007.
The required balance at the Federal Reserve at December 31,
2009 and 2008 was approximately $9,595,000 and $13,137,000,
respectively.
| 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 | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Numerator:
|
||||||||||||
|
Net income from continuing operations
|
$ | 24,387 | $ | 24,882 | $ | 31,353 | ||||||
|
Preferred stock dividends
|
5,383 | — | — | |||||||||
|
|
||||||||||||
|
Net income from continuing operations available to common
shareholders
|
19,004 | 24,882 | 31,353 | |||||||||
|
Loss from discontinued operations
|
(235 | ) | (616 | ) | (1,931 | ) | ||||||
|
|
||||||||||||
|
Net income
|
$ | 18,769 | $ | 24,266 | $ | 29,422 | ||||||
|
Denominator:
|
||||||||||||
|
Denominator for basic earnings per share-weighted average shares
|
34,113,285 | 27,952,973 | 26,187,084 | |||||||||
|
Effect of employee stock options(1)
|
278,882 | 95,490 | 491,487 | |||||||||
|
Effect of warrants to purchase common stock
|
18,287 | — | — | |||||||||
|
Denominator for dilutive earnings per share-adjusted weighted
average shares and assumed conversions
|
34,410,454 | 28,048,463 | 26,678,571 | |||||||||
|
Basic earning per share from continuing operations
|
$ | .56 | $ | .89 | $ | 1.20 | ||||||
|
Basic earning per share
|
$ | .55 | $ | .87 | $ | 1.12 | ||||||
|
Diluted earnings per share from continuing operations
|
$ | .55 | $ | .89 | $ | 1.18 | ||||||
|
Diluted earnings per share
|
$ | .55 | $ | .87 | $ | 1.10 | ||||||
| (1) | Stock options outstanding of 1,669,686, 1,761,281 and 944,170 in 2009, 2008 and 2007, 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 |
Effective January 1, 2008, we adopted ASC 820, which
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
75
Table of Contents
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 securities, corporate securities, municipal bonds, and Community Reinvestment Act funds. This category includes derivative assets and liabilities where values are based on internal cash flow models supported by market data inputs | |
| Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair values requires significant management judgment or estimation. This category also includes impaired loans and OREO where collateral values have been based on third party appraisals; however, due to current economic conditions, comparative sales data typically used in appraisals may be unavailable or more subjective due to lack of market activity. Additionally, this category includes certain mortgage loans that were transferred from loans held for sale to loans held for investment at a lower of cost or fair value. |
Assets and liabilities measured at fair value at
December 31, 2009 are as follows (in thousands):
| Fair Value Measurements Using | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
|
|
||||||||||||
|
Available for sale securities:(1)
|
||||||||||||
|
Mortgage-backed securities
|
$ | — | $ | 209,987 | $ | — | ||||||
|
Corporate securities
|
— | 4,683 | — | |||||||||
|
Municipals
|
— | 43,826 | — | |||||||||
|
Other
|
— | 7,632 | — | |||||||||
|
Loans (2)(4)
|
— | — | 64,921 | |||||||||
|
OREO (3)(4)
|
— | — | 27,264 | |||||||||
|
Derivative asset
|
— | 1,837 | — | |||||||||
|
Derivative liability
|
— | (1,837 | ) | — | ||||||||
|
|
||||||||||||
| (1) | Securities are measured at fair value on a recurring basis, generally monthly. | |
| (2) | Includes certain mortgage loans that have been transferred to loans held for investment from loans held for sale at the lower of cost or market. Also, includes impaired loans that have been measured for impairment at the fair value of the loan’s collateral. | |
| (3) | OREO is transferred from loans to OREO at fair value less selling costs. | |
| (4) | Fair value of loans and OREO is measured on a nonrecurring basis, generally annually or more often as warranted by market and economic conditions |
Level 3
Valuations
Financial instruments are considered Level 3 when their
values are determined using pricing models, discounted cash flow
methodologies or similar techniques and at least one significant
model assumption or
76
Table of Contents
input is unobservable. Level 3 financial instruments also
include those for which the determination of fair value requires
significant management judgment or estimation. Currently, we
measure fair value for certain loans on a nonrecurring basis as
described below.
Loans
During the year ended December 31, 2009,
certain impaired loans were remeasured and reported at fair
value through a specific valuation allowance allocation of the
allowance for possible loan losses based upon the fair value of
the underlying collateral. The $64.9 million total above
includes impaired loans at December 31, 2009 with a
carrying value of $77.5 million that were reduced by
specific valuation allowance allocations totaling $18.4 for a
total reported fair value of $59.1 million based on
collateral valuations utilizing Level 3 valuation inputs.
Fair values were based on third party appraisals; however, based
on the current economic conditions, comparative sales data
typically used in the appraisals may be unavailable or more
subjective due to the lack of real estate market activity. Also
included in this total are $6.8 million in mortgage
warehouse loans that were reduced by specific valuation
allowance allocations totaling $1.0 million, for a total
reported fair value of $5.8 million. Certain mortgage loans
that are transferred from loans held for sale to loans held for
investment are valued based on third party broker pricing. As
the dollar amount and number of loans being valued is very
small, a comprehensive market analysis is not obtained or
considered necessary. Instead, we conduct a general polling of
one or more mortgage brokers for indications of general market
prices for the types of mortgage loans being valued, and we
consider values based on recent experience in selling loans of
like terms and comparable quality. The total also includes
impaired loans that have been measured for impairment at the
fair value of the loan’s collateral based on a third party
real estate appraisal.
OREO
Certain foreclosed assets, upon initial recognition,
were valued based on third party appraisals. At
December 31, 2009, OREO with a carrying value of
$33.9 million was reduced by specific valuation allowance
allocations totaling $6.6 million for a total reported fair
value of $27.3 million based on valuations utilizing
Level 3 valuation inputs. Fair values were based on third
party appraisals; however, based on the current economic
conditions, comparative sales data typically used in the
appraisals may be unavailable or more subjective due to the lack
of real estate market activity.
Generally accepted accounting principles require disclosure of
fair value information about financial 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, 2009 | December 31, 2008 | |||||||||||||||
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|||||||||||||
| Amount | Fair Value | Amount | Fair Value | |||||||||||||
|
|
||||||||||||||||
|
Cash and cash equivalents
|
$ | 125,439 | $ | 125,439 | $ | 82,027 | $ | 82,027 | ||||||||
|
Securities,
available-for-sale
|
266,128 | 266,128 | 378,752 | 378,752 | ||||||||||||
|
Loans held for sale
|
693,504 | 693,504 | 496,351 | 496,351 | ||||||||||||
|
Loans held for sale from discontinued operations
|
586 | 586 | 648 | 648 | ||||||||||||
|
Loans held for investment, net
|
4,389,362 | 4,542,572 | 3,982,506 | 3,996,738 | ||||||||||||
|
Derivative asset
|
1,837 | 1,837 | 2,767 | 2,767 | ||||||||||||
|
Deposits
|
4,120,725 | 4,121,993 | 3,333,187 | 3,337,887 | ||||||||||||
|
Federal funds purchased
|
580,519 | 580,519 | 350,155 | 350,155 | ||||||||||||
|
Borrowings
|
376,510 | 376,510 | 930,452 | 930,452 | ||||||||||||
|
Trust preferred subordinated debentures
|
113,406 | 113,876 | 113,406 | 114,157 | ||||||||||||
|
Derivative liability
|
1,837 | 1,837 | 2,767 | 2,767 | ||||||||||||
|
|
||||||||||||||||
77
Table of Contents
The following methods and assumptions were used by the Company
in estimating its fair value disclosures for financial
instruments:
Cash
and cash equivalents
The carrying amounts reported in the consolidated balance sheet
for cash and cash equivalents approximate their fair value.
Securities
The fair value of investment securities is based on prices
obtained from independent pricing services which are based on
quoted market prices for the same or similar securities.
Loans,
net
For variable-rate loans that reprice frequently with no
significant change in credit risk, fair values are generally
based on carrying values. The fair value for all other loans is
estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The carrying amount of
accrued interest approximates its fair value. The carrying
amount of loans held for sale approximates fair value.
Derivatives
The estimated fair value of the interest rate swaps are based on
internal cash flow models supported by market data inputs.
Deposits
The carrying amounts for variable-rate money market accounts
approximate their fair value. Fixed-term certificates of deposit
fair values are estimated using a discounted cash flow
calculation that applies interest rates currently being offered
on certificates to a schedule of aggregated expected monthly
maturities.
Federal
funds purchased, other borrowings and trust preferred
subordinated debentures
The carrying value reported in the consolidated balance sheet
for federal funds purchased and short-term borrowings
approximates their fair value. The fair value of term borrowings
and trust preferred subordinated debentures is estimated using a
discounted cash flow calculation that applies interest rates
currently being offered on similar borrowings.
Off-balance
sheet instruments
Fair values for our off-balance sheet instruments which consist
of lending commitments and standby letters of credit are based
on fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and
the counterparties’ credit standing. Management believes
that the fair value of these off-balance sheet instruments is
not significant.
| 16. | Commitments and Contingencies |
We lease various premises under operating leases with various
expiration dates. Rent expense incurred under operating leases
amounted to approximately $6,968,000, $4,981,000 and $4,874,000
for the years ended December 31, 2009, 2008 and 2007,
respectively.
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Minimum future lease payments under operating leases are as
follows (in thousands):
|
Minimum
|
||||
| Year Ending December 31, | Payments | |||
|
|
||||
|
2010
|
$ | 7,605 | ||
|
2011
|
7,550 | |||
|
2012
|
7,573 | |||
|
2013
|
7,294 | |||
|
2014
|
7,054 | |||
|
2015 and thereafter
|
45,915 | |||
|
|
||||
| $ | 82,991 | |||
| 17. | Parent Company Only |
Summarized financial information for Texas Capital Bancshares,
Inc. — Parent Company Only follows (in thousands):
| December 31 | ||||||||
| Balance Sheets | 2009 | 2008 | ||||||
|
|
||||||||
|
Assets
|
||||||||
|
Cash and cash equivalents
|
$ | 80,033 | $ | 74,873 | ||||
|
Investment in subsidiaries
|
507,930 | 469,391 | ||||||
|
Other assets
|
7,363 | 7,352 | ||||||
|
Total assets
|
$ | 595,326 | $ | 551,616 | ||||
|
Liabilities and Stockholders’ Equity
|
||||||||
|
Other liabilities
|
$ | 460 | $ | 1,037 | ||||
|
Other short-term borrowings
|
— | 10,000 | ||||||
|
Long-term borrowings
|
— | 40,000 | ||||||
|
Trust preferred subordinated debentures
|
113,406 | 113,406 | ||||||
|
|
||||||||
|
Total liabilities
|
113,866 | 164,443 | ||||||
|
Common stock
|
359 | 310 | ||||||
|
Additional paid-in capital
|
326,224 | 255,051 | ||||||
|
Retained earnings
|
148,720 | 129,951 | ||||||
|
Treasury stock
|
(8 | ) | (8 | ) | ||||
|
Accumulated other comprehensive income
|
6,165 | 1,869 | ||||||
|
Total stockholders’ equity
|
481,460 | 387,173 | ||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 595,326 | $ | 551,616 | ||||
79
Table of Contents
Statements
of Earnings
| Year Ended December 31 | ||||||||||||
| (In thousands) | 2009 | 2008 | 2007 | |||||||||
|
|
||||||||||||
|
Dividend income
|
$ | 127 | $ | 193 | $ | 245 | ||||||
|
Other income
|
441 | 125 | 125 | |||||||||
|
Total income
|
568 | 318 | 370 | |||||||||
|
Interest expense
|
4,353 | 7,662 | 8,387 | |||||||||
|
Salaries and employee benefits
|
669 | 501 | 455 | |||||||||
|
Legal and professional
|
1,425 | 1,597 | 1,218 | |||||||||
|
Other non-interest expense
|
392 | 329 | 382 | |||||||||
|
|
||||||||||||
|
Total expense
|
6,839 | 10,089 | 10,442 | |||||||||
|
|
||||||||||||
|
Loss before income taxes and equity in undistributed income of
subsidiary
|
(6,271 | ) | (9,771 | ) | (10,072 | ) | ||||||
|
Income tax benefit
|
(2,139 | ) | (3,375 | ) | (3,463 | ) | ||||||
|
Loss before equity in undistributed income of subsidiary
|
(4,132 | ) | (6,396 | ) | (6,609 | ) | ||||||
|
|
||||||||||||
|
Equity in undistributed income of subsidiary
|
28,284 | 30,662 | 36,031 | |||||||||
|
|
||||||||||||
|
Net income
|
$ | 24,152 | $ | 24,266 | $ | 29,422 | ||||||
80
Table of Contents
Statements
of Cash Flows
| Year Ended December 31 | ||||||||||||
| (in thousands) | 2009 | 2008 | 2007 | |||||||||
|
|
||||||||||||
|
Operating Activities
|
||||||||||||
|
Net income
|
$ | 24,152 | $ | 24,266 | $ | 29,422 | ||||||
|
Adjustments to reconcile net income to net cash used in
operating activities:
|
||||||||||||
|
Equity in undistributed income of subsidiary
|
(28,284 | ) | (30,662 | ) | (36,031 | ) | ||||||
|
Increase in other assets
|
(11 | ) | (657 | ) | (114 | ) | ||||||
|
Tax benefit from stock option exercises
|
75 | 1,584 | 1,164 | |||||||||
|
Excess tax benefits from stock-based compensation arrangements
|
(213 | ) | (4,527 | ) | (3,325 | ) | ||||||
|
Increase (decrease) in other liabilities
|
(577 | ) | 320 | (45 | ) | |||||||
|
|
||||||||||||
|
Net cash used in operating activities of continuing operations
|
(4,858 | ) | (9,676 | ) | (8,929 | ) | ||||||
|
Investing Activity
|
||||||||||||
|
Investment in subsidiaries
|
— | (25,000 | ) | (30,000 | ) | |||||||
|
Net cash used in investing activity
|
— | (25,000 | ) | (30,000 | ) | |||||||
|
Financing Activities
|
||||||||||||
|
Sale of common stock
|
61,024 | 58,662 | 1,932 | |||||||||
|
Proceeds from issuance of preferred stock and related warrants
|
75,000 | — | — | |||||||||
|
Repurchase of preferred stock
|
(75,000 | ) | — | — | ||||||||
|
Preferred dividends paid
|
(1,219 | ) | — | — | ||||||||
|
Net other borrowings
|
(50,000 | ) | 25,000 | 25,000 | ||||||||
|
Excess tax benefits from stock-based compensation arrangements
|
213 | 4,527 | 3,325 | |||||||||
|
Purchase of treasury stock
|
— | — | (8 | ) | ||||||||
|
Net cash provided by financing activities
|
10,018 | 88,189 | 30,249 | |||||||||
|
|
||||||||||||
|
Net increase (decrease) in cash and cash equivalents
|
5,160 | 53,513 | (8,680 | ) | ||||||||
|
|
||||||||||||
|
Cash and cash equivalents at beginning of year
|
74,873 | 21,360 | 30,040 | |||||||||
|
|
||||||||||||
|
Cash and cash equivalents at end of year
|
$ | 80,033 | $ | 74,873 | $ | 21,360 | ||||||
| 18. | Related Party Transactions |
See Notes 3 and 7 for a description of loans and deposits
with related parties.
| 19. | Sale of Discontinued Operation — Residential Mortgage Lending and TexCap Insurance Services |
Subsequent to the end of the first quarter of 2007, Texas
Capital Bank and the purchaser of its residential mortgage loan
division (RML) agreed to terminate and settle the contractual
arrangements related to the sale of the division, which had been
completed as of the end of the third quarter of 2006. Historical
operating results of RML are reflected as discontinued
operations in the financial statement.
During 2009, the loss from discontinued operations from RML was
$235,000, net of taxes. The 2009 losses are primarily related to
continuing legal and salary expenses incurred in dealing with
the remaining loans and
81
Table of Contents
requests from investors related to the repurchase of previously
sold loans. We still have approximately $586,000 in loans held
for sale from discontinued operations that are carried at
estimated market value at December 31, 2009, which is less
than the original cost. We plan to sell these loans, but timing
and price to be realized cannot be determined at this time due
to market conditions. In addition, we continue to address
requests from investors related to repurchasing loans previously
sold. While the balances as of December 31, 2009 include a
liability for exposure to additional contingencies, including
risk of having to repurchase loans previously sold, we recognize
that market conditions may result in additional exposure to loss
and the extension of time necessary to complete the discontinued
mortgage operation.
On March 30, 2007, Texas Capital Bank completed the sale of
its TexCap Insurance Services subsidiary; the sale is,
accordingly, reported as a discontinued operation. Historical
operating results of TexCap and the net after-tax gain of
$1.09 million from the sale are reflected as discontinued
operations in the financial statements and schedules. All prior
periods have been restated to reflect the change. Except as
otherwise noted, all amounts and disclosures throughout this
document reflect only the Company’s continuing operations.
The results of operations of the discontinued components are
presented separately in the accompanying consolidated statements
of income for 2009, 2008 and 2007, net of tax, following income
from continuing operations. Details are presented in the
following tables (in thousands):
| Year Ended December 31, 2009 | ||||||||||||
| RML | TexCap | Total | ||||||||||
|
|
||||||||||||
|
Revenues
|
$ | 64 | $ | — | $ | 64 | ||||||
|
Expenses
|
421 | — | 421 | |||||||||
|
Income (loss) before income taxes
|
(357 | ) | — | (357 | ) | |||||||
|
Income tax expense (benefit)
|
(122 | ) | — | (122 | ) | |||||||
|
|
||||||||||||
|
Income (loss) from discontinued operations
|
$ | (235 | ) | $ | — | $ | (235 | ) | ||||
| Year Ended December 31, 2008 | ||||||||||||
| RML | TexCap | Total | ||||||||||
|
|
||||||||||||
|
Revenues
|
$ | 105 | $ | — | $ | 105 | ||||||
|
Expenses
|
1,046 | — | 1,046 | |||||||||
|
Income (loss) before income taxes
|
(941 | ) | — | (941 | ) | |||||||
|
Income tax expense (benefit)
|
$ | (325 | ) | $ | — | $ | (325 | ) | ||||
|
|
||||||||||||
|
Income (loss) from discontinued operations
|
$ | (616 | ) | $ | — | $ | (616 | ) | ||||
| Year Ended December 31, 2007 | ||||||||||||
| RML | TexCap | Total | ||||||||||
|
|
||||||||||||
|
Revenues
|
$ | (369 | ) | $ | 424 | $ | 55 | |||||
|
Expenses
|
3,645 | 1,018 | 4,663 | |||||||||
|
Gain on disposal
|
— | 1,662 | 1,662 | |||||||||
|
Income (loss) before income taxes
|
(4,014 | ) | 1,068 | (2,946 | ) | |||||||
|
Income tax expense (benefit)
|
(1,379 | ) | 364 | (1,015 | ) | |||||||
|
|
||||||||||||
|
Income (loss) from discontinued operations
|
$ | (2,635 | ) | $ | 704 | $ | (1,931 | ) | ||||
82
Table of Contents
| 20. | Derivative Financial Instruments |
The fair value of derivative positions outstanding is included
in other assets and other liabilities in the accompanying
consolidated balance sheets.
During 2009 and 2008, 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, 2009
presented in the following table (in thousands):
| Notional Amount | Estimated Fair Value | |||||||
|
|
||||||||
|
Non-hedging interest rate derivative:
|
||||||||
|
Commercial loan/lease interest rate swaps
|
$ | 159,183 | $ | 1,837 | ||||
|
Commercial loan/lease interest rate swaps
|
(159,183 | ) | (1,837 | ) | ||||
|
|
||||||||
The weighted-average receive and pay interest rates for interest
rate swaps outstanding at December 31, 2009 were as follows:
| Weighted-Average | ||||||||
| Interest Rate Received | Interest Rate Paid | |||||||
|
|
||||||||
|
Non-hedging interest rate swaps
|
4.75 | % | 1.88 | % | ||||
|
|
||||||||
Our credit exposure on interest rate swaps is limited to the net
favorable value and interest payments of all swaps by each
counterparty. In such cases collateral may be required from the
counterparties involved if the net value of the swaps exceeds a
nominal amount considered to be immaterial. Our credit exposure,
net of any collateral pledged, relating to interest rate swaps
was approximately $1.8 million at December 31, 2009,
all of which relates to bank customers. Collateral levels are
monitored and adjusted on a regular basis for changes in
interest rate swap values.
| 21. | Subsequent Event |
On January 27, 2010, we announced that we have entered into
an Equity Distribution Agreement with Morgan Stanley &
Co. Incorporated, pursuant to which we may, from time to time,
offer and sell shares of our common stock, having aggregate
gross sales proceeds of up to $40,000,000. Sales of the shares
are being made by means of brokers’ transactions on or
through the NASDAQ Global Select Market at market prices
prevailing at the time of the sale or as otherwise agreed to by
the Company and Morgan Stanley. As of February 17, 2010 we
have sold 271,973 shares at an average price of $16.88. Net
proceeds on the sales are approximately $4.5 million, after
payment of a 1% sales commission paid to Morgan Stanley, and are
being used for general corporate purposes. In addition to the 1%
sales commission, we paid Morgan Stanley a $400,000 program fee.
| 22. | New Accounting Standards |
FASB ASC 105 Generally Accepted Accounting Principles
(“ASC 105”) establishes the Financial Accounting
Standards Board (“FASB”) Accounting Standards
Codification (the “Codification”) as the source of
83
Table of Contents
authoritative accounting principles recognized by the FASB to be
applied by non-governmental entities in the preparation of
financial statements in conformity with generally accepted
accounting principles. Rules and interpretive releases of the
SEC under authority of federal securities laws are also sources
of authoritative guidance for SEC registrants. All guidance
contained in the Codification carries an equal level of
authority. All non-grandfathered, non-SEC accounting literature
not included in the Codification is superseded and deemed
non-authoritative. ASC 105 was adopted on September 15,
2009, and did not have a significant impact on our financial
statements.
FASB ASC 810 Consolidation
(“ASC 810”) became
effective for us on January 1, 2009, and was amended to
change how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. The determination of
whether a company is required to consolidate an entity is based
on, among other things, an entity’s purpose and design and
a company’s ability to direct the activities of the entity
that most significantly impact the entity’s economic
performance. The new authoritative accounting guidance requires
additional disclosures about the reporting entity’s
involvement with variable-interest entities and any significant
changes in risk exposure due to that involvement as well as its
affect on the entity’s financial statements. The new
authoritative accounting guidance under ASC 810 will be
effective January 1, 2010 and is not expected to have a
significant impact on our financial statements.
FASB ASC 860 Transfers and Servicing
(“ASC
860”) was amended to enhance reporting about transfers of
financial assets, including securitizations, and where companies
have continuing exposure to the risks related to transferred
financial assets. The new authoritative accounting guidance
eliminates the concept of a “qualifying special-purpose
entity” and changes the requirements for derecognizing
financial assets. The new authoritative accounting guidance also
requires additional disclosures about all continuing
involvements with transferred financial assets including
information about gains and losses resulting from transfers
during the period. The new authoritative accounting guidance
under ASC 860 will be effective January 1, 2010 and is not
expected to have a significant impact on our financial
statements.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
We have established and maintain disclosure controls and other
procedures that are designed to ensure that material information
relating to us and our subsidiaries required to be disclosed by
us in the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized, and
reported within the time periods specified in the SEC’s
rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. For the period
covered in this report, we carried out an evaluation, under the
supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on that evaluation of
these disclosure controls and procedures, the Chief Executive
Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of
December 31, 2009.
The Chief Executive Officer and Chief Financial Officer have
also concluded that there were no changes in our internal
control over financial reporting identified in connection with
the evaluation described in the preceding paragraph that
occurred during the fiscal quarter ended December 31, 2009,
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
84
Table of Contents
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, 2009, 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, 2009, based on those criteria.
Ernst & Young LLP, the independent registered public
accounting firm that audited the consolidated financial
statements of the Company included in this Annual Report on
Form 10-K,
has issued an attestation report on the effectiveness of the
Company’s internal control over financial reporting as of
December 31, 2009. The report, which expresses an
unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting as of
December 31, 2009, is included in this Item under the
heading “Report of Independent Registered Public Accounting
Firm.”
85
Table of Contents
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Texas Capital Bancshares, Inc.
We have audited Texas Capital Bancshares, Inc.’s internal
control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
Texas Capital Bancshares, Inc.’s management is responsible
for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the
accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion
on the company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Texas Capital Bancshares, Inc. maintained, in
all material respects, effective internal control over financial
reporting as of December 31, 2009, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
2009 consolidated financial statements of Texas Capital
Bancshares, Inc. and our report dated February 18, 2010
expressed an unqualified opinion thereon.
Dallas, Texas
February 18, 2010
86
Table of Contents
| 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 18, 2010, which proxy materials will be filed
with the SEC no later than April 8, 2010.
| 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 18, 2010, which proxy materials will be filed
with the SEC no later than April 8, 2010.
| 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 18, 2010, which proxy materials will be filed
with the SEC no later than April 8, 2010.
| 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 18, 2010, which proxy materials will be filed
with the SEC no later than April 8, 2010.
| 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 18, 2010, which proxy materials will be filed
with the SEC no later than April 8, 2010.
| ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a)
Documents filed as part of this report
(1) All financial statements
Independent Registered Public Accounting Firms’ Report of
Ernst & Young LLP
(2)
All financial statements required by Item 8
Independent Registered Public Accounting Firms’ Report of
Ernst & Young LLP
| (3) | Exhibits |
| 2 | .1 | Agreement and Plan to Consolidate Texas Capital Bank with and into Resource Bank, National Association and under the Title of “Texas Capital Bank, National Association,” which is incorporated by reference to Exhibit 2.1 to our registration statement on Form 10 dated August 24, 2001 | ||
| 2 | .2 | Amendment to Agreement and Plan to Consolidate, which is incorporated by reference to Exhibit 2.2 to our registration statement on Form 10 dated August 24, 2001 | ||
| 3 | .1 | Certificate of Incorporation, which is incorporated by reference to Exhibit 3.1 to our registration statement on Form 10 dated August 24, 2001 | ||
| 3 | .2 | Certificate of Amendment of Certificate of Incorporation, which is incorporated by reference to Exhibit 3.2 to our registration statement on Form 10 dated August 24, 2001 | ||
| 3 | .3 | Certificate of Amendment of Certificate of Incorporation, which is incorporated by reference to Exhibit 3.3 to our registration statement on Form 10 dated August 24, 2001 | ||
| 3 | .4 | Certificate of Amendment of Certificate of Incorporation, which is incorporated by reference to Exhibit 3.4 to our registration statement on Form 10 dated August 24, 2001 |
87
Table of Contents
| 3 | .5 | Amended and Restated Bylaws of Texas Capital Bancshares, Inc. which is incorporated by reference to Exhibit 3.5 to our registration statement on Form 10 dated August 24 ,2001 | ||
| 3 | .6 | 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 | ||
| 4 | .1 | Texas Capital Bancshares, Inc. 1999 Omnibus Stock Plan, which is incorporated by reference to Exhibit 4.1 to our registration statement on Form 10 dated August 24, 2001 + | ||
| 4 | .2 | 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 + | ||
| 4 | .3 | 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 + | ||
| 4 | .4 | 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 | ||
| 4 | .5 | 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 | ||
| 4 | .6 | 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 | ||
| 4 | .7 | Indenture dated November 19, 2002 which is incorporated by reference to our Current Report on Form 8-K dated December 4, 2002 | ||
| 4 | .8 | 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 | ||
| 4 | .9 | 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 | ||
| 4 | .10 | 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 | ||
| 4 | .11 | 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 | ||
| 4 | .12 | Indenture between Texas Capital Bancshares, Inc. and Wilmington Trust Company, dated April 10, 2003, which is incorporated by reference to our Current Report on Form 8-K dated June 11, 2003 | ||
| 4 | .13 | Guarantee Agreement between Texas Capital Bancshares, Inc. and Wilmington Trust Company, dated April 10, 2003, which is incorporated by reference to our Current Report on Form 8-K dated June 11, 2003 | ||
| 4 | .14 | Amended and Restated Declaration of Trust for Texas Capital Statutory Trust III by and among Wilmington Trust Company, as Institutional Trustee and Delaware Trustee, Texas Capital Bancshares, Inc. as Sponsor, and the Administrators named therein, dated as of October 6, 2005, which is incorporated by reference to our Current Report on Form 8-K dated October 13, 2005 | ||
| 4 | .15 | Indenture between Texas Capital Bancshares, Inc., as Issuer, and Wilmington Trust Company, as Trustee, for Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures, dated as of October 6, 2005, which is incorporated by reference to our Current Report on Form 8-K dated October 13, 2005 | ||
| 4 | .16 | Guarantee Agreement between Texas Capital Bancshares, Inc. and Wilmington Trust Company, dated as of October 6, 2005, which is incorporated by reference to our Current Report on Form 8-K dated October 13, 2005 | ||
| 4 | .17 | 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 |
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| 4 | .18 | Indenture between Texas Capital Bancshares, Inc., as Issuer, and Wilmington Trust Company, as Trustee, for Floating Rate Junior Subordinated Deferrable Interest Debentures dated as of April 28, 2006, which is incorporated by reference to our Current Report on Form 8-K dated May 3, 2006 | ||
| 4 | .19 | Guarantee Agreement between Texas Capital Bancshares, Inc. and Wilmington Trust Company, dated as of April 28, 2006, which is incorporated by reference to our Current Report on Form 8-K dated May 3, 2006 | ||
| 4 | .20 | 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 | ||
| 4 | .21 | Junior Subordinated Indenture between Texas Capital Bancshares, Inc. and Wilmington Trust Company, as Trustee, for Floating Rate Junior Subordinated Note dated as of September 29, 2006, which is incorporated by reference to our Current Report on Form 8-K dated October 5, 2006 | ||
| 4 | .22 | Guarantee Agreement between Texas Capital Bancshares, Inc. and Wilmington Trust Company, dated as of September 29, 2006, which is incorporated by reference to our Current Report on Form 8-K dated October 5, 2006 | ||
| 10 | .1 | Deferred Compensation Agreement, which is incorporated by reference to Exhibit 10.2 to our registration statement on Form 10-K dated August 24, 2001 + | ||
| 10 | .2 | 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. + | ||
| 10 | .3 | Chairman Emeritus and Consulting Agreement between Joseph M. Grant and Texas Capital Bancshares, Inc., dated April 8, 2008, which is incorporated by reference to our Form 10-Q dated May 2, 2008.+ | ||
| 10 | .4 | 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 + | ||
| 10 | .5 | Executive Employment Agreement between C. Keith Cargill and Texas Capital Bancshares, Inc. dated December 31, 2008, which is incorporated by reference to our Current Report on Form 8-K dated January 6, 2009 + | ||
| 10 | .6 | Executive Employment Agreement between Peter B. Bartholow and Texas Capital Bancshares, Inc. dated December 31, 2008, which is incorporated by reference to our Current Report on Form 8-K dated January 6, 2009 + | ||
| 10 | .7 | Officer Indemnity Agreement dated December 20, 2004, by and between Texas Capital Bancshares, Inc. and George F. Jones, Jr., which is incorporated by reference to our Current Report on Form 8-K dated December 23, 2004 + | ||
| 10 | .8 | Officer Indemnity Agreement dated December 20, 2004, by and between Texas Capital Bancshares, Inc. and C. Keith Cargill, which is incorporated by reference to our Current Report on Form 8-K dated December 23, 2004 + | ||
| 10 | .9 | Officer Indemnity Agreement dated December 20, 2004, by and between Texas Capital Bancshares, Inc. and Peter B. Bartholow, which is incorporated by reference to our Current Report on Form 8-K dated December 23, 2004 + | ||
| 10 | .10 | Texas Capital Bancshares, Inc. 1999 Omnibus Stock Plan, which is incorporated by reference to Exhibit 4.1 to our registration statement on Form 10 dated August 24, 2001 + | ||
| 10 | .11 | Texas Capital Bancshares, Inc. 2006 Employee Stock Purchase Plan, which is incorporated by reference to our registration statement on Form S-8 dated February 3, 2006 + | ||
| 10 | .12 | Texas Capital Bancshares, Inc. 2005 Long-Term Incentive Plan, which is incorporated by reference to our registration statement on Form S-8 dated June 3, 2005 + |
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| 10 | .13 | Credit Agreement between Texas Capital Bancshares, Inc. and KeyBank National Association, dated as of September 27, 2007, which is incorporated by reference to our Current Report on Form 8-K dated October 1, 2007 | ||
| 10 | .14 | Letter Agreement between Texas Capital Bancshares, Inc. and the United States Department of the Treasury dated as of January 16, 2009, which is incorporated by reference to our Current Report on Form 8-K dated January 16, 2009 | ||
| 21 | Subsidiaries of the Registrant* | |||
| 23 | .1 | Consent of Ernst & Young LLP* | ||
| 31 | .1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act* | ||
| 31 | .2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act* | ||
| 32 | .1 | Section 1350 Certification of Chief Executive Officer* | ||
| 32 | .2 | Section 1350 Certification of Chief Financial Officer* |
| * | Filed herewith | |
| + | Management contract or compensatory plan arrangement |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned
thereunto duly authorized.
TEXAS CAPITAL BANCSHARES, INC.
| By: |
/s/
GEORGE
F. JONES , JR.
|
George F. Jones, Jr.
President and Chief Executive Officer
Date: February 18, 2010
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.
/s/
JAMES
R. HOLLAND, JR.
James R. Holland, Jr.
Chairman of the Board and Director
Date: February 18, 2010
/s/
GEORGE
F. JONES, JR.
George F. Jones, Jr.
President, Chief Executive Officer and Director
(principal executive officer)
Date: February 18, 2010
/s/
PETER
BARTHOLOW
Peter Bartholow
Executive Vice President, Chief Financial Officer and Director
(principal financial officer)
Date: February 18, 2010
/s/
JULIE
ANDERSON
Julie Anderson
Controller
(principal accounting officer)
Date: February 18, 2010
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/s/
JAMES
H. BROWNING
James H. Browning
Director
Date: February 18, 2010
/s/
JOSEPH
M. GRANT
Joseph M. Grant
Director
Date: February 18, 2010
/s/
FREDERICK
B. HEGI, JR.
Frederick B. Hegi, Jr.
Director
Date: February 18, 2010
/s/
LARRY
L. HELM
Larry L. Helm
Director
Date: February 18, 2010
/s/
WALTER
W. MCALLISTER III
Walter W. McAllister III
Director
Date: February 18, 2010
/s/
LEE
ROY MITCHELL
Lee Roy Mitchell
Director
Date: February 18, 2010
/s/
ELYSIA
H. RAGUSA
Elysia H. Ragusa
Director
Date: February 18, 2010
/s/
STEVEN
P. ROSENBERG
Steven P. Rosenberg
Director
Date: February 18, 2010
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/s/
ROBERT
W. STALLINGS
Robert W. Stallings
Director
Date: February 18, 2010
/s/
IAN
J. TURPIN
Ian J. Turpin
Director
Date: February 18, 2010
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TABLE OF CONTENTS
Item 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission Of Matters To A Vote Of Security HoldersItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuerpurchases Of Equity SecuritiesItem 6. Selected Consolidated Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosure About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesItem 15. Exhibits, Financial Statement Schedules