UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K



ý☒	Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the fiscal year ended December 31, ~~2017~~2019



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

For the transition period from to

Commission file number 001-34657

TEXAS CAPITAL BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)



Delaware		75-2679109
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)



2000 McKinney Avenue
Suite 700
	Dallas ~~Texas, U.S.A.~~	TX	USA	75201
(Address of principal executive ~~officers)~~				offices)	(Zip Code)

~~214/~~214/932-6600

(Registrant’s telephone number, including area code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities registered under Section 12(b) of the Exchange Act:

~~Common stock, par value $0.01 per share~~

~~(Title of class)~~

~~6.50% Non-Cumulative Perpetual Preferred Stock Series A, par value $0.01 per share~~

~~(Title of class)~~

~~Warrants to Purchase Common Stock (expiring January 16, 2019), par value $0.01 per share~~

~~(Title of class)~~

~~The Nasdaq Stock Market LLC~~

~~(Name of Exchange on Which Registered)~~



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	TCBI	Nasdaq Stock Market
6.5% Non-Cumulative Perpetual Preferred Stock Series A, par value $0.01 per share	TCBIP	Nasdaq Stock Market

Securities registered under Section 12(g) of the Exchange Act: ~~NONE~~None

Indicate by check mark if the issuer is a well-known seasoned issuer pursuant to Section 13 or Section 15(d) of the Securities Act. Yesý☒ No ¨☐

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 ¨☐Noý☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesý☒ No ¨☐

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See ~~definition~~definitions of “large accelerated filer,” “accelerated ~~filer”~~filer,” “smaller reporting company” and ~~“smaller reporting~~“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large Accelerated Filer	x	Accelerated Filer¨		~~Non-Accelerated Filer~~ ¨ ☐
Non-Accelerated Filer¨	☐	Smaller Reporting Company		☐
Emerging Growth Company	☐		~~(Do not check if a smaller reporting company)~~

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of June ~~30, 2017,~~28, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the shares of common stock held by non-affiliates, based on the closing price per share of the registrant’s common stock as reported on The Nasdaq Global Select Market, was approximately ~~$3,820,741,000.~~$3,070,019,000. There were ~~49,650,549~~50,345,627 shares of the registrant’s common stock outstanding on February ~~13, 2018.~~

~~Documents Incorporated by Reference~~

Portions of the registrant’s Proxy Statement relating to the 2018 Annual Meeting of Stockholders, which will be filed no later than March 8, 2018, are incorporated by reference into Part III of this Form 10-K.11, 2020.

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PART I
Item 1.	Business	3
Item 1A.	Risk Factors	1314
Item 1B.	Unresolved Staff Comments	2430
Item 2.	Properties	2430
Item 3.	Legal Proceedings	2430
Item 4.	Mine Safety Disclosures	2530

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	2531
Item 6.	Selected Consolidated Financial Data	2732
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3034
Item 7A.	Quantitative and Qualitative Disclosure About Market Risk	5054
Item 8.	Financial Statements and Supplementary Data	5357
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosures	9799
Item 9A.	Controls and Procedures	9799
Item 9B.	Other Information	99102

PART III
Item 10.	Directors, Executive Officers and Corporate Governance	99102
Item 11.	Executive Compensation	99102
Item 12.	Security Ownership of Certain Beneficial Owners and Management And Related Stockholder Matters	99102
Item 13.	Certain Relationships and Related Transactions, and Director Independence	99102
Item 14.	Principal Accounting Fees and Services	99102

PART IV
Item 15.	Exhibits, Financial Statement Schedules	99102

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ITEM 1.	BUSINESS

Background

The disclosures set forth in this item are qualified by Item 1A. Risk Factors and the section captioned “Forward-Looking ~~Statements”~~Statements,” “Additional Information about the Merger and Where to Find It” and “Participants in the Solicitation” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and other cautionary statements set forth elsewhere in this report.

Texas Capital Bancshares, Inc. (“~~we”, “us”~~we,” “us,” “TCBI” or the “Company”), a Delaware corporation organized in 1996, is the parent of Texas Capital Bank, National Association (the “Bank”). The Company is a registered bank holding company and a financial holding company.

The Bank is headquartered in Dallas, with primary banking offices in Austin, Dallas, Fort Worth, Houston and San Antonio, the five largest metropolitan areas of Texas. Substantially all of our business activities are conducted through the Bank. We have focused on organic growth, maintenance of credit quality and recruiting and retaining experienced bankers with strong personal and professional relationships in their communities.

We serve the needs of commercial businesses and successful professionals and entrepreneurs located in Texas as well as operate several lines of business serving a regional or national clientele of commercial borrowers. We are primarily a secured lender, with athe majority of our loans held for investment, excluding mortgage finance loans and other national lines of business, being made to businesses headquartered or with operations in Texas. ~~At the same time our~~Our national lines of business ~~continue to~~ provide specialized lending products to businesses throughout the United States. We have benefitted from the success of our business model since inception, producing strong loan and deposit growth and favorable loss experience amidst a challenging environment for banking nationally.

Merger with Independent Bank Group, Inc.

On December 9, 2019, the Company entered into an Agreement and Plan of Merger, which we refer to as the merger agreement, with Independent Bank Group, Inc. ("IBTX") under which the companies will combine in an all-stock merger of equals, with IBTX as the surviving entity, which we refer to as the merger. Immediately following the merger, the Bank will merge with and into IBTX’s wholly owned subsidiary, Independent Bank, with Independent Bank as the surviving bank. The name of the surviving entity will be Independent Bank Group, Inc. and the name of the surviving bank will be Texas Capital Bank. The surviving bank will be operated under the name Independent Financial in Colorado and under the name Texas Capital Bank in Texas. The surviving entity will trade under the Independent Bank Group ticker symbol "IBTX" on the Nasdaq Global Select Market.

The merger agreement was unanimously approved by each company's board of directors. The merger is expected to close in mid-2020, subject to satisfaction of customary closing conditions, including receipt of customary regulatory approvals and approval of the merger agreement by the stockholders of TCBI and IBTX, respectively.

Under the terms of the merger agreement, at the effective time of the merger, each share of common stock, par value $0.01 per share, of TCBI outstanding immediately prior to the effective time, other than certain shares held by TCBI or IBTX, will be converted into the right to receive the merger consideration of 1.0311 shares of common stock, par value $0.01 per share, of IBTX. Holders of TCBI common stock will receive cash in lieu of fractional shares.

At the effective time of the merger, (i) each outstanding share of 6.50% Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share, of TCBI, which we refer to as TCBI preferred stock, will be automatically converted into the right to receive one share of a newly issued series of IBTX preferred stock having substantially the same terms as such share of TCBI preferred stock, which we refer to as IBTX Series B preferred stock (taking into account that TCBI will not be the surviving entity in the merger and any adjustment to the right of optional redemption by IBTX that is reasonably necessary to obtain Tier 1 Capital treatment of the IBTX Series B preferred stock from the Board of Governors of the Federal Reserve System, which we refer to as the Federal Reserve, for such preferred stock), and (ii) unless otherwise agreed between TCBI and IBTX, each outstanding TCBI equity award under TCBI’s equity compensation plans outstanding at the time the merger agreement was signed will vest and be converted into the right to receive the merger consideration (or, in the case of cash-settled TCBI equity awards, an amount in cash determined based on the value of the merger consideration) in respect of each share of TCBI common stock underlying such TCBI equity award (and in the case of TCBI stock appreciation rights, less the applicable exercise price). Any performance goals applicable to such TCBI equity awards will be deemed satisfied at the effective time of the merger based on the greater of target and actual performance.

The merger agreement also provides, among other things, that as of the effective time, David R. Brooks, the current IBTX Chairman, President and Chief Executive Officer, will be the Chairman, President and Chief Executive Officer of the surviving entity and surviving bank and that Larry L. Helm, the current TCBI Chairman, will serve as the lead independent director of the surviving entity. The merger agreement also provides that, as of the effective time, Keith Cargill, the President and Chief

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Executive Officer, will serve as Special Advisor to the Chairman, President and Chief Executive Officer of the surviving entity and surviving bank. The board of directors of IBTX following the merger will be comprised of 13 directors, of which seven will be former members of the board of directors of TCBI and six will be former members of the board of directors of IBTX.

The merger agreement contains customary representations and warranties from both TCBI and IBTX, and each party has agreed to customary covenants, including, among others, covenants relating to (1) the conduct of its business during the interim period between the execution of the merger agreement and the effective time of the merger, (2) its obligation to call a meeting of its stockholders to adopt the merger agreement, and, subject to certain exceptions, to recommend that its stockholders adopt the merger agreement, and (3) its non-solicitation obligations related to alternative acquisition proposals.

The completion of the merger is subject to customary conditions, including (1) adoption of the merger agreement by TCBI's stockholders and by IBTX’s shareholders, (2) authorization for listing on the Nasdaq Global Select Market of the shares of IBTX common stock and IBTX Series B preferred stock to be issued in the merger, subject to official notice of issuance, (3) the receipt of required regulatory approvals, including the approval of the Federal Reserve, the Federal Deposit Insurance Corporation (“FDIC”), the Texas Commissioner of Banks and the Texas Department of Banking, (4) effectiveness of the registration statement on Form S-4 for the IBTX common stock and IBTX Series B preferred stock to be issued in the merger, and (5) the absence of any order, injunction, decree or other legal restraint preventing the completion of the merger or making the completion of the merger illegal. Each party’s obligation to complete the merger is also subject to certain additional customary conditions, including (a) subject to certain exceptions, the accuracy of the representations and warranties of the other party, (b) performance in all material respects by the other party of its obligations under the merger agreement and (c) receipt by such party of an opinion from its counsel to the effect that the merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.

The merger agreement provides certain termination rights for both TCBI and IBTX and further provides that a termination fee of $115.0 million may be payable by the party, terminating, or causing the termination of, the merger agreement under certain circumstances.

The foregoing description of the merger agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the merger agreement, which is attached as Exhibit 2.1 to the Form 8-K filed by the Company on December 13, 2019. The merger agreement should not be read alone, but should instead be read in conjunction with the other information regarding TCBI, IBTX, their respective affiliates and their respective businesses, the merger agreement and the merger contained in, or incorporated by reference into, the Registration Statement on Form S-4 filed by IBTX with the Securities and Exchange Commission, which we refer to as the SEC, that includes a joint proxy statement of IBTX and TCBI and a prospectus of IBTX, as well as in the Annual Reports on Forms 10-K, the Quarterly Reports on Forms 10-Q and other filings that each of IBTX and TCBI has made with the SEC.

Please refer to Item 1A, “Risk Factors-Merger-Related Risks,” for a discussion of certain risks related to the proposed Merger.

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 2013 through 2017 (in thousands):~~

for the past five years:


	December 31,										December 31,
	2017		2016		2015		2014		2013
(in thousands)											2019		2018		2017		2016		2015
Loans held for sale	$	1,011,004	$	968,929	$	86,075	$	—	$	—	$	2,577,134	$	1,969,474	$	1,011,004	$	968,929	$	86,075
Loans held for investment, mortgage finance	5,308,160		4,497,338		4,966,276		4,102,125		2,784,265		8,169,849		5,877,524		5,308,160		4,497,338		4,966,276
Loans held for investment, net	15,366,252		13,001,011		11,745,674		10,154,887		8,486,603		16,476,413		16,690,550		15,366,252		13,001,011		11,745,674
Assets	25,075,645		21,697,134		18,903,821		15,900,034		11,717,174		32,548,069		28,257,767		25,075,645		21,697,134		18,903,821
Demand deposits	7,812,660		7,994,201		6,386,911		5,011,619		3,347,567		9,438,459		7,317,161		7,812,660		7,994,201		6,386,911
Total deposits	19,123,180		17,016,831		15,084,619		12,673,300		9,257,379		26,478,593		20,606,113		19,123,180		17,016,831		15,084,619
Stockholders’ equity	2,202,721		2,009,557		1,623,533		1,484,190		1,096,350		2,832,258		2,500,394		2,202,721		2,009,557		1,623,533

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The following table provides information about the growth of our loans held for investment ("LHI") portfolio by type of loan ~~from 2013 through 2017 (in thousands):~~

for the past five years:

December 31,
2017 2016 2015 2014 2013
Commercial $ 9,189,811
$ 7,291,545
$ 6,672,631
$ 5,869,219
$ 5,020,565
Total real estate 5,960,785
5,560,909
4,990,914
4,223,532
3,409,427
Construction 2,166,208
2,098,706
1,851,717
1,416,405
1,262,905
Real estate term 3,794,577
3,462,203
3,139,197
2,807,127
2,146,522
Mortgage finance 5,308,160
4,497,338
4,966,276
4,102,125
2,784,265
Equipment leases 264,903
185,529
113,996
99,495
93,160
Consumer 48,684
34,587
25,323
19,699
15,350

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	December 31,
(in thousands)	2019		2018		2017		2016		2015
Commercial	$	10,230,828	$	10,373,288	$	9,189,811	$	7,291,545	$	6,672,631
Total real estate	6,008,040		6,050,083		5,960,785		5,560,909		4,990,914
Construction	2,563,339		2,120,966		2,166,208		2,098,706		1,851,717
Real estate term	3,444,701		3,929,117		3,794,577		3,462,203		3,139,197
Mortgage finance	8,169,849		5,877,524		5,308,160		4,497,338		4,966,276
Equipment leases	256,462		312,191		264,903		185,529		113,996
Consumer	71,463		63,438		48,684		34,587		25,323

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~~non-bank lenders, commercial finance and ~~loan associations, credit unions,~~leasing companies, consumer finance companies, financial technology, or fintech, companies, securities firms, insurance ~~companies, commercial finance and leasing~~ companies, full service brokerage firms and discount brokerage ~~firms.~~firms, credit unions and savings and loan associations. We believe that many middle market companies and successful professionals and entrepreneurs are interested in banking with a company headquartered in, and with decision-making authority based in, Texas and with established Texas bankers who have the expertise to act as trusted advisors to customers with regard to their 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 than our competitors. By providing effective service to these customers, we believe we will be able to establish long-term relationships and provide multiple products to our customers, thereby enhancing our profitability.

National Lines of Business

While the Texas market continues to be central to the growth and success of our company, we have developed several lines of business, including mortgage finance, mortgage correspondent aggregation ("MCA"), homebuilder finance, insurance premium finance, lender finance, ~~public finance~~asset-based lending and ~~asset-based lending,~~escrow services, that offer specialized loan and deposit products to businesses ~~municipalities and governmental and tax-exempt entities~~ regionally and throughout the nation. We believe this helps us mitigate our geographic concentration risk in Texas. We continue to seek opportunities to develop additional lines of business that leverage our capabilities and are consistent with our business strategy. WeMost recently, we launched Bask Bank, an all-digital branch of our ~~MCA business in 2015 and asset-based lending and public finance businesses in 2016.~~Bank that offers depositors American Airlines AAdvantage® miles instead of interest.

Business Strategy

Drawing on the business and community ties of our management and their banking experience, our strategy ishas been to ~~continue growing~~grow an independent bank that ~~focuses~~has focused primarily on middle market business customers and successful professionals and entrepreneurs in each of the five major metropolitan markets of Texas as well as our national lines of business. To achieve this, we ~~seek to implement~~have employed the following strategies:

~~targeting~~offering a premier and differentiated banking experience to middle market businesses and successful professionals and ~~entrepreneurs;~~entrepreneurs who value a broad relationship with our Bank;

growing our loan and deposit base in our existing markets by hiring additional experienced bankers in our different lines of business;

developing lines of business that leverage our strengths and complement our existing lines of business;

continuing our emphasis on credit policy to maintain credit quality consistent with long-term objectives;

leveraging our existing infrastructure with improvements in technology and processes to gain efficiencies to support a larger volume of business;

maintaining effective internal approval processes for capital and operating expenditures;

continuing our extensive use of outsourcing to provide cost-effective and more efficient operational support and service levels consistent with large-bank operations; and

extending our reach within our target markets and lines of business through service innovation and service excellence.

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The merger with IBTX is intended to augment our strategy by delivering:

enhanced scale to drive growth and improve profitability, creating the largest Texas-headquartered bank by Texas deposits, with a significant presence in Colorado, and providing a strong foundation to better manage risk and serve clients across business lines through further investment in technology;

a more diversified mix of business supported by a full-service financial institution with extensive strategic and client coverage, including enhancing the revenue mix by diversifying each company’s client base, business lines and loan and funding concentrations;

a strengthened core deposits franchise, allowing for a more stable source of funds and increased optionality to compete in a dynamic market environment;

presence in attractive, fast growing Texas markets that constitute five of the top 10 fastest growing MSAs in the United States;

an experienced combined management team having a strong track record of organic growth and high performance, including significant experience successfully executing and integrating transformative transactions;

strong cultures of collaboration and entrepreneurial spirit supporting the delivery of premier and differentiated client experiences; and

commitment to our important community relationships built over decades, continuing our investments in local programs and communities.

Products and Services

We offer a variety of loan, deposit account and other financial products and services to our customers.

Business Customers. We offer a full range of products and services oriented to the needs of our business customers, including:

commercial loans for general corporate purposes including financing for working capital, internal growth, acquisitions and financing for business insurance premiums;

real estate term and construction loans;

mortgage warehouse lending;

mortgage correspondent aggregation;

equipment finance and leasing;

~~medium- and long-term tax-exempt loans for municipalities and other governmental and tax-exempt entities;~~

treasury management services, including online banking and debit and credit card services;

escrow services; and

letters of credit.

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Individual Customers. We also provide complete banking services for our individual customers, including:

personal wealth management and trust services;

certificates of deposit and IRAs;

interest-bearing and non-interest-bearing checking accounts;

traditional money market and savings accounts;

loans, both secured and unsecured; ~~and~~

online and mobile ~~banking.~~banking; and

Bask Bank, an all-digital branch offering depositors American Airlines AAdvantage® miles instead of interest.

Lending Activities

We target our lending to middle market businesses and successful professionals and entrepreneurs that meet our credit standards. The credit standards are set by our standing Credit Policy Committee with the assistance of our Bank’s Chief Credit 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 Texas President/~~Chief Lending Officer,~~Vice Chairman, our Bank's Chief Risk Officer and our Bank’s Chief Credit Officer, and is subject to oversight by the ~~Credit~~ Risk Committee of the Company's board of directors. We believe we maintain an appropriately diversified loan portfolio. Credit policies and underwriting guidelines are tailored to address the unique risks associated with each industry represented in the portfolio.

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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 our business objectives in the markets we serve and are an important part of our risk mitigation. We believe that our Bank is differentiated from its competitors by its focus on and targeted marketing to our core customers and by its ability to fit its products to the individual needs of our customers.

We generally extend variable rate loans in which the interest rate fluctuates with a specified reference rate such as the United States prime rate or the London Interbank Offered Rate (LIBOR) and frequently provide for a minimum floor rate. 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. In 2017, the U.K. Financial Conduct Authority announced that it would no longer compel banks to submit rates for the calculation of LIBOR after 2021. The impact of alternatives to LIBOR on the valuations, pricing and operation of our financial instruments is not yet known. We have established a working group, consisting of key stakeholders from throughout our Bank, to monitor developments relating to LIBOR uncertainty and changes and to guide our Bank's response.

Deposit Products

We offer a variety of deposit products and services to our ~~core~~ customers ~~upon~~with terms, including interest rates, which are competitive with other banks. Our business deposit products include commercial checking accounts, lockbox accounts, cash concentration accounts and other treasury management services, including online banking. Our treasury management online system offers information services, wire transfer initiation, ACH initiation, account transfer and service integration. Our consumer deposit products include checking accounts, savings accounts, money market accounts and certificates of deposit. We also allow our consumer deposit customers to access their accounts, transfer funds, pay bills and perform other account functions through online and mobile banking.

Wealth Management and Trust

Our wealth management and trust services include wealth strategy, financial planning, 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. Our wealth management and trust services are primarily focused on serving the needs of our banking clients and depend on close cooperation and support between our banking relationship managers and our investment management professionals.

Employees

As of December 31, ~~2017,~~2019, we had ~~1,564~~1,738 full-time employees. None of our employees is represented by a collective bargaining agreement and we consider our relations with our employees to be good.

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Regulation and Supervision

General. We and our Bank are subject to extensive federal and state laws and regulations that impose specific requirements on us and provide regulatory oversight of virtually all aspects of our operations. These laws and regulations generally are intended for the protection of depositors, the deposit insurance fund ("DIF") of the ~~Federal Deposit Insurance Corporation (“FDIC”)~~FDIC and the stability of the U.S. banking system as a whole, rather than for the protection of our stockholders and creditors.

The following discussion summarizes certain laws, regulations and policies to which we and our Bank are subject. It does not address all applicable laws, regulations and policies that affect us currently or might affect us in the future. This discussion is qualified in its entirety by reference to the full texts of the laws, regulations and policies described.

The Company’s activities are governed by the Bank Holding Company Act of 1956, as amended (“BHCA”). We are subject to regulation, supervision and examination by the ~~Board of Governors of the~~ Federal Reserve ~~System (the “Federal Reserve”)~~ pursuant to the BHCA. We file quarterly reports and other information with the Federal Reserve. We file reports with the ~~Securities and Exchange Commission (“SEC”)~~SEC and are subject to its regulation with respect to our securities, financial reporting and certain governance matters. Our securities are listed on the Nasdaq Global Select Market, and we are subject to Nasdaq rules for listed companies.

Our Bank is organized as a national banking association under the National Bank Act, and is subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (the “OCC”), the FDIC and the Consumer Financial Protection Bureau (“CFPB”) as well as being subject to regulation by certain other federal and state agencies. The OCC has primary supervisory responsibility for our Bank and performs a continuous program of examinations concerning safety and

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soundness, the quality of management and oversight by our board of directors, information technology and compliance with applicable laws and regulations. Our Bank files quarterly reports of condition and income with the FDIC, which provides insurance for certain of our Bank’s deposits.

Bank Holding Company Regulation. The BHCA limits our business to banking, managing or controlling banks and other activities that the Federal Reserve has determined to be closely related to banking. We have elected to register with the Federal Reserve as a financial holding company. This authorizes us to engage in any activity that is either (i) financial in nature or incidental to such financial activity, as determined by the Federal Reserve, or (ii) complementary to a financial activity, so long as the activity does not pose a substantial risk to the safety and soundness of our Bank or the financial system generally, as determined by the Federal Reserve. Examples of non-banking activities that are financial in nature include securities underwriting and dealing, insurance underwriting, providing investment and financial advice, leasing personal property and making merchant banking investments.

We are not at this time exercising ~~this authority~~the powers authorized for a financial holding company at the parent company level.

We, through our Bank, engage in traditional banking activities that are deemed financial in nature. In order for us to undertake new activities permitted by the BHCA, we and our Bank must be considered "well capitalized" (as defined below) and well managed, our Bank must have received a rating of at least ~~satisfactory~~"satisfactory" in its most recent examination under the Community Reinvestment Act and we must notify the Federal Reserve within thirty days of engaging in the new activity. We do not currently expect to engage in any non-banking activities at the holding company level.

Under Federal Reserve policy, now codified by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), we are expected to act as a source of financial and managerial strength to our Bank and commit resources to its support. Such support may be required at times when, absent this Federal Reserve policy, a holding company may not be inclined to provide it. We could in certain circumstances be required to guarantee the capital plan of our Bank if it became undercapitalized.

It is the policy of the Federal Reserve that financial holding companies may pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that financial holding companies may not pay cash dividends in an amount that would undermine the holding company’s ability to serve as a source of strength to its banking subsidiary.

With certain limited exceptions, the BHCA and the Change in Bank Control Act, together with regulations promulgated thereunder, 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.

If, in the opinion of the applicable federal bank regulatory authorities, a depository institution or holding company is engaged in or is about to engage in an unsafe or unsound practice (which could include the payment of ~~dividends)~~dividends or repurchase or redemptions of securities), such authority may require, generally after notice and hearing, that such institution or holding company cease and desist such practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s or holding company’s capital base to an inadequate level would be such an unsafe or unsound banking practice. Moreover, the Federal Reserve and the FDIC have

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issued policy statements providing that financial holding companies and insured depository institutions generally should only pay dividends out of current operating earnings. Federal Reserve regulations require that the Company provide prior notice to or obtain the prior approval of the Federal Reserve for redemptions or repurchases of its equity securities, and prohibit such actions if they would deplete the Company's capital or impair its ability to serve as a source of strength for our Bank.

Regulation of Our Bank by the OCC. National banks the size of our Bank are subject to continuous regulation, supervision and examination by the OCC. The OCC regulates or monitors all areas of a national bank’s operations, including security devices and procedures, adequacy of capitalization and loss reserves, accounting treatment and impact on capital determinations, loans, investments, borrowings, deposits, liquidity, mergers, issuances of securities, payment of dividends, interest rate risk management, establishment of branches, corporate reorganizations, maintenance of books and records, and adequacy of staff training to carry on safe and sound lending and deposit gathering practices. The OCC requires national banks to maintain specified capital ratios and imposes limitations on their aggregate investment in real estate, bank premises and furniture and fixtures. National banks are required by the OCC to file quarterly reports of their financial condition and results of operations and to obtain an annual audit of their financial statements in compliance with minimum standards and procedures prescribed by the OCC.

Regulation of Our Bank by the CFPB. The CFPB has regulation, supervision and examination authority over our Bank with respect to substantially all federal statutes and regulations protecting the interests of consumers of financial services, including but not limited to the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Truth in

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Savings Act, the Right to Financial Privacy Act and the Electronic Funds Transfer Act and their respective related regulations. Penalties for violating these laws and regulations could subject our Bank to lawsuits and administrative penalties, including civil monetary penalties, payments to affected consumers and orders to halt or materially change our consumer banking activities. The CFPB has broad authority to pursue enforcement actions, including investigations, civil actions and cease and desist proceedings, and can refer civil and criminal findings to the Department of Justice for prosecution. The Bank is also subject to other federal and state consumer protection laws and regulations that, among other things, prohibit unfair, deceptive and abusive, corrupt or fraudulent business practices, untrue or misleading advertising and unfair competition.

Capital Adequacy Requirements. Federal banking regulators have adopted a system using risk-based capital guidelines to evaluate the capital adequacy of banks and bank holding companies that is based upon the 1988 capital accord of the Bank for International Settlements’ Basel Committee on Banking Supervision (the “Basel Committee”), a committee of central banks and bank regulators from the major industrialized countries that coordinates international standards for bank regulation. Under the guidelines, specific categories of assets and off-balance-sheet activities such as letters of credit are assigned risk weights, based generally on the perceived credit or other risks associated with the asset. Off-balance-sheet activities are assigned a credit conversion factor based on the perceived likelihood that they will become on-balance-sheet assets. These risk weights are multiplied by corresponding asset balances to determine a “risk weighted” asset base which is then measured against various ~~measures~~forms of capital to produce capital ratios.

An organization’s capital is classified in one of two tiers, Core Capital, or Tier 1, and Supplementary Capital, or Tier 2. Tier 1 capital includes common stock, retained earnings, qualifying non-cumulative perpetual preferred stock, minority interests in the equity of consolidated subsidiaries, a limited amount of qualifying trust preferred securities and qualifying cumulative perpetual preferred stock at the holding company level, less goodwill and most intangible assets. Tier 2 capital includes perpetual preferred stock and trust preferred securities not meeting the Tier 1 definition, mandatory convertible debt securities, subordinated debt, and allowances for loan and lease losses. Each category is subject to a number of regulatory definitional and qualifying requirements.

The Basel Committee in 2010 released a set of international recommendations for strengthening the regulation, supervision and risk management of banking organizations, known as Basel III. In July 2013, the Federal Reserve published final rules for the adoption of the Basel III regulatory capital framework (the “Basel III Capital Rules”). The Basel III Capital Rules became effective for us on January 1, 2015, with certain transition provisions phasing in over a period ~~ending~~that ended on January 1, 2019.

The Basel III Capital Rules, among other things, (i) specify a capital measure called “Common Equity Tier 1” (“CET1”), (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) require that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) define the scope of the deductions/adjustments to the capital measures. Our Series A 6.5% Non-Cumulative Perpetual Preferred Stock constitutes Additional Tier 1 capital and our subordinated notes constitute Tier 2 capital.

The Basel III Capital Rules set the risk-based capital requirement and the total risk-based capital requirement to a minimum of 6.0% and 8.0%, respectively, plus a capital conservation buffer of 2.5% producing targeted ratios of 8.5% and 10.5%, respectively, ~~when~~which were fully phased-in ~~in 2019.~~as of January 1, 2019 and for subsequent years. The leverage ratio requirement under the Basel III Capital Rules is ~~5.0%~~4.0%. In order to be well capitalized under the rules now in effect, our Bank must maintain a CET1, ~~capital ratio,~~ Tier 1 ~~capital ratio~~ and total capital ~~ratio~~ratios that isare equal to or greater than ~~6.5%~~7.0%, ~~8.0%~~8.5% and ~~10.0%~~10.5%, ~~respectively.~~respectively, and a leverage ratio equal to or greater than 5.0%. See “Selected Consolidated Financial Data - Capital and Liquidity Ratios.”

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Additionally, the Basel III Capital Rules specify a capital conservation buffer with respect to each of the CET1, Tier 1 and total capital to risk-weighted assets ratios, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. The 2.5% capital conservation buffer ~~is subject to~~was implemented over a three year phase-in period that began on January 1, 2016 and ~~will be fully phased-in~~concluded on January 1, ~~2019 at 2.5%. The required phase-in capital conservation buffer during 2017 was 1.25%.~~2019. A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers.

We have met the capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis since we commenced filing applicable reports with the FDIC and OCC. At December 31, ~~2017~~2019 our Bank's CET1 ratio was ~~8.28%~~8.96% and its total risk-based capital ratio was ~~10.67%~~10.92% and, as a result, it is currently classified as "well capitalized" for purposes of the OCC's prompt corrective action regulations.

Because we had less than $15 billion in total consolidated assets as of December 31, 2009, we are allowed to continue to classify our trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1 capital. We have elected to exclude the effects of accumulated other comprehensive income items included in stockholders’ equity from the determination of capital ratios under the Basel III Capital Rules.

Regulators may change capital and liquidity requirements, including previous interpretations of practices related to risk weights, which could require an increase to the allocation of capital to assets held by our Bank. Regulators could also require us to make retroactive adjustments to financial statements to reflect such changes. A regulatory capital ratio or category may not

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constitute an accurate representation of the Bank’s overall financial condition or prospects. Our regulatory capital status is addressed in more detail under the heading “Liquidity and Capital Resources” within Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 14 - Regulatory Restrictions in the accompanying notes to the consolidated financial statements included elsewhere in this report.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) established a system of prompt corrective action regulations and policies to resolve the problems of undercapitalized insured depository institutions. Under this system, insured depository institutions are ranked in one of five capital categories as described below. Regulators are required to take mandatory supervisory actions and are authorized to take other discretionary actions of increasing severity with respect to insured depository institutions in the three undercapitalized categories. The five capital categories for insured depository institutions under the prompt corrective action regulations consist of:

Well capitalized - equals or exceeds a 10% total risk-based capital ratio, 8% Tier 1 risk-based capital ratio, and 5% leverage ratio and is not subject to any written agreement, order or directive requiring it to maintain a specific level for any capital measure;

Adequately capitalized - equals or exceeds an 8% total risk-based capital ratio, 6% Tier 1 risk-based capital ratio, and 4% leverage ratio;

Undercapitalized - total risk-based capital ratio of less than 8%, or a Tier 1 risk-based ratio of less than 6%, or a leverage ratio of less than 4%;

Significantly undercapitalized - total risk-based capital ratio of less than 6%, or a Tier 1 risk-based capital ratio of less than 4%, or a leverage ratio of less than 3%; and

Critically ~~undercapitalized-a~~undercapitalized - a ratio of tangible equity to total assets equal to or less than 2%.

The prompt corrective action regulations provide that an institution may be downgraded to the next lower category if its regulator determines, after notice and opportunity for hearing or response, that the institution is in an unsafe or unsound condition or has received and not corrected a less-than-satisfactory rating for any of the categories of asset quality, management, earnings or liquidity in its most recent examination.

Federal bank regulatory agencies are required to implement arrangements for prompt corrective action for institutions failing to meet minimum requirements to be at least adequately capitalized. FDICIA imposes an increasingly stringent array of restrictions, requirements and prohibitions as an organization’s capital levels deteriorate. A bank rated "adequately capitalized" or below may not accept, renew or roll over brokered deposits. 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 generally must appoint a receiver or conservator (the FDIC) if the capital deficiency is not corrected promptly.

Under the Federal Deposit Insurance Act (“FDIA”), “critically undercapitalized” banks may not, beginning 60 days after becoming critically undercapitalized, make any payment of principal or interest on their subordinated debt (subject to certain limited exceptions). In addition, under Section 18(i) of the FDIA, banks are required to obtain the advance consent of the FDIC to retire any part of their subordinated notes. Under the FDIA, a bank may not pay interest on its subordinated notes if such interest is required to be paid only out of net profits, or distribute any of its capital assets, while it remains in default on any assessment due to the FDIC.

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Federal bank regulators may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve and OCC guidelines provide that banking organizations experiencing significant growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Concentration of credit risks, interest rate risk (imbalances in rates, maturities or sensitivities) and risks arising from non-traditional activities, as well as an institution’s ability to manage these risks, are important factors taken into account by regulatory agencies in assessing an organization’s overall capital adequacy.

The OCC and the Federal Reserve also use a leverage ratio as an additional tool to evaluate the capital adequacy of banking organizations. The leverage ratio is a company’s Tier 1 capital divided by its average total consolidated assets. A minimum leverage ratio of 3.0% is required for banks and bank holding companies that either have the highest supervisory rating or have implemented the appropriate federal regulatory authority’s risk-adjusted measure for market risk. All other banks and bank holding companies are required to maintain a minimum leverage ratio of 4.0%, unless a different minimum is specified by an appropriate regulatory authority. In order to be considered well capitalized the leverage ratio must be at least 5.0%.

Our Bank’s leverage ratio was ~~8.59%~~8.2% at December 31, ~~2017~~2019 and, as a result, it is currently classified as “well capitalized” for purposes of the OCC’s prompt corrective action regulations.

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The risk-based and leverage capital ratios established by federal banking regulators are minimum supervisory ratios generally applicable to banking organizations that meet specified criteria, assuming that they otherwise have received the highest regulatory ratings in their most recent examinations. Banking organizations not meeting these criteria are expected to operate with capital positions in excess of the minimum ratios. Regulators can, from time to time, change their policies or interpretations of banking practices to require changes in risk weights assigned to our Bank's assets or changes in the factors considered in order to evaluate capital adequacy, which may require our Bank to obtain additional capital to support existing asset levels or future growth or reduce asset balances in order to meet minimum acceptable capital ratios.

Liquidity Requirements. U.S. bank regulators in September 2014 issued a final rule implementing the Basel III liquidity framework for certain U.S. banks - generally those having more than $50 billion of assets or whose primary federal banking regulator determines compliance with the liquidity framework is appropriate based on the organization's size, level of complexity, risk profile, scope of operations, U.S. or non-U.S. affiliations or risk to the financial system. One of the liquidity tests included in the new rule, referred to as the liquidity coverage ratio (“LCR”), is designed to ensure that a banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario.

The other test, referred to as the net stable funding ratio (“NSFR”), is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements encourage the covered banking entities to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets, and also to increase the use of long-term debt as a funding source.

While the LCR and NSFR tests are not currently applicable to our Bank, ~~these~~and the proposed rules would increase substantially the $50 billion asset threshold, other relevant measures of liquidity are monitored by management and ~~along with other relevant measures of liquidity,~~ are reported to our board of directors. Regulators may change capital and liquidity requirements, including previous interpretations of practices related to risk weights, which could require an increase in liquid assets or in the necessary capital to support the assets held by our Bank. Regulators could also require us to make retroactive adjustments to financial statements and reported capital ratios to reflect such changes.

Stress Testing. Pursuant to the Dodd-Frank Act and regulations published by the Federal Reserve and OCC, ~~institutions with average total consolidated assets greater than $10 billion are~~we were required to conduct an annual “stress test” of capital and consolidated earnings and losses under a base case and two severely adverse stress scenarios provided by bank regulatory ~~agencies. We became subject~~agencies during the years 2016 to 2018. In response to this requirement ~~in 2014 and have~~we developed dedicated staffing, economic models, policies and procedures to implement stress testing on an annual basis, ~~using scenarios released by the agencies each year.~~

~~Commencing in 2016,~~ the results of which were furnished to regulators and published on our website, as well as conducting stress tests for internal use based upon economic scenarios we developed. The Economic Growth, Regulatory Relief and Consumer Protection Act (the “Regulatory Relief Act”) enacted in 2018, which amended portions of the Dodd-Frank Act, and subsequently adopted enabling regulations terminated our stress testing requirements. We continue to perform certain stress tests internally and have been reported to the OCC and Federal Reserve in July of each year and public disclosure of our summary stress test results has been made in October of each year. The published results of our stress testing are available in the Investor Relations section of our website at ~~www.texascapitalbank.com~~ under the caption “Financial Information.” Results of stress test calculations are anticipated to become an important factor considered by banking regulators in evaluating a range of banking practices. We incorporateincorporated the economic models and information developed through our stress testing program into our risk management and business, capital and liquidity planning ~~activities.~~activities, which are subject to continuing regulatory oversight.

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Gramm-Leach-Bliley Financial Modernization Act of 1999 ("Gramm-Leach-Bliley Act"). The Gramm-Leach-Bliley Act:

allows bank holding companies meeting management, capital and Community Reinvestment Act standards to engage in a substantially broader range of non-banking activities than was permissible prior to enactment, including insurance underwriting and making merchant banking investments in commercial and financial companies;

allows insurers and other financial services companies to acquire banks;

removes various restrictions that applied to bank holding company ownership of securities firms and mutual fund advisory companies; ~~and~~

establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities ~~operations.~~operations; and

directs bank regulators to prescribe standards for the security of consumer information.

The Gramm-Leach-Bliley Act also modifies other current financial laws, including laws related to financial privacy.

Privacy and Data Security. The financial privacy provisions of the Gramm-Leach-Bliley Act generally prohibit financial institutions, including ~~us,~~our Bank, from disclosing non-public personal financial information to non-affiliated third parties unless customers have the opportunity to “opt out” of the ~~disclosure.~~disclosure and have not elected to do so. Our Bank is required to comply with state laws regarding consumer privacy if they are more protective than the Gramm-Leach-Bliley Act. An increasing number of state laws and regulations have been enacted in recent years to implement privacy and cybersecurity standards and regulations, including data breach notification and data privacy requirements. Other nations in which our customers do business, such as the European Union, have adopted similar requirements. This trend of state-level and international activity is expected to continue to expand, requiring continual monitoring of developments in the states and nations in which our customers are located and ongoing investments in our information systems and compliance capabilities.

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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, making investments and providing community development services to low- and moderate-income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings. In order for a financial holding company to commence new activity permitted by the BHCA, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the CRA. Our Bank's strategic focus on serving commercial customers in regional and national markets from a limited number of branches makes it more challenging for us to satisfy CRA requirements as compared to banks of comparable size that focus on providing retail banking services in markets where they maintain a network of full-service branches.

The USA Patriot Act, the International Money Laundering Abatement and Financial Anti-Terrorism Act and the Bank Secrecy Act. A major focus of U.S. government policy regarding financial institutions in recent years has been combating money laundering, terrorist financing and other illegal payments. The USA Patriot Act of 2001 and the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 substantially broadened the scope of United States anti-money laundering laws and penalties, specifically related to the Bank Secrecy Act of 1970, and expanded the extra-territorial jurisdiction of the U.S. government in this area. Regulations issued under these laws impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and other suspicious activity and to verify the identity of their ~~customers.~~customers and apply additional scrutiny to customers considered to present greater than normal risk. 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 have expended, and expect to 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.

Office of Foreign Assets Control. The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) is responsible for administering and enforcing economic and trade sanctions against specified foreign parties, including countries and regimes, foreign individuals and other foreign organizations and entities. OFAC publishes lists of prohibited parties that are regularly consulted by our Bank in the conduct of its business in order to assure compliance. We are responsible for, among other things, blocking accounts of, and transactions with, prohibited parties identified by OFAC, avoiding unlicensed trade and financial transactions with such parties and reporting blocked transactions after their occurrence. Failure to comply with OFAC requirements could have serious legal, financial and reputational consequences for our Bank.

Safe and Sound Banking Practices; Enforcement. Banks and bank holding companies are prohibited from engaging in unsafe and unsound banking practices. Bank regulators have broad authority to prohibit and penalize activities of bank holding companies and their subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws, regulations or written directives of or agreements with regulators. Regulators have considerable discretion in identifying what they deem to be unsafe and unsound practices and in pursuing enforcement actions in response to them.

The FDIA requires federal bank regulatory agencies to prescribe, by regulation or guideline, operational and managerial standards for all insured depository institutions that relate to, among other things: (i) internal controls, information systems and audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate exposure; (v) asset growth and quality; and (vi) compensation and benefits. Federal banking agencies have adopted regulations and Interagency Guidelines Prescribing Standards for Safety and Soundness to implement these requirements, which regulators use to identify and address problems at insured depository institutions before capital becomes impaired. If a regulator determines that a bank fails to meet any standards prescribed by the guidelines, the bank may be required to submit an acceptable plan to achieve compliance, and agree

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to specific deadlines for the submission to and review by the regulator of reports confirming progress in implementing the safety and soundness compliance plan. Failure to implement such a plan may result in an enforcement action against the bank.

Enforcement actions against us, our Bank and our officers and directors may include the issuance of a written directive, the issuance of a cease-and-desist order that can be judicially enforced, the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against officers or other institution-affiliated parties, the imposition of restrictions and sanctions under prompt corrective action regulations, the termination of deposit insurance (in the case of our Bank) and the appointment of a conservator or receiver for our Bank. Civil money penalties can be as high as $1.0 million for each day a violation continues.

Transactions with Affiliates and Insiders. Our Bank is subject to Section 23A of the Federal Reserve Act which places limits on, among other covered transactions, the amount of loans or extensions of credit to affiliates that may be made by our Bank. Extensions of credit to affiliates must be adequately collateralized by specified amounts and types of collateral. Section 23A also limits the amount of loans or advances by our Bank to third party borrowers which are collateralized by our securities or obligations or those of our subsidiaries. Our Bank also is subject to Section 23B of the Federal Reserve Act, which, among

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other things, prohibits an institution from engaging in transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with non-affiliates.

We are subject to restrictions on extensions of credit to executive officers, directors, principal stockholders and their related interests. These restrictions are contained in the Federal Reserve Act and Federal Reserve Regulation O and apply to all insured institutions as well as their subsidiaries and holding companies. These restrictions include limits on loans to one borrower and conditions that must be met before such loans can be made. There is also an aggregate limitation on all loans to insiders and their related interests, which cannot exceed the institution’s total unimpaired capital and surplus, unless the FDIC determines that a lesser amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions. Additional restrictions on transactions with affiliates and insiders are discussed in the Dodd-Frank Act section below.

Restrictions on Payment of Dividends ~~and Repurchases.~~by Our Bank. The sole source of funding of our parent company financial obligations has consisted of proceeds of capital markets transactions and cash payments from our Bank for debt service and dividend payments with respect to our Bank's preferred stock issued to the Company. We may in the future seek to rely upon receipt of dividends paid by our Bank to meet our financial obligations. Our Bank is subject to statutory dividend restrictions. Under such restrictions, national banks may not, without the prior approval of the OCC, declare dividends in excess of the sum of the current year’s net profits plus the retained net profits from the prior two years, less any required transfers to surplus. The Basel III Capital Rules further limit the amount of dividends that may be paid by our Bank. In addition, under the FDICIA, our Bank may not pay any dividend if it is undercapitalized or if payment would cause it to become undercapitalized.

Limits on Compensation. The Federal Reserve, OCC and FDIC in 2010 issued comprehensive final guidance on incentive compensation policies for executive management of banks and bank holding companies. This guidance was intended to ensure that the incentive compensation policies of banking organizations do not undermine their safety and soundness by encouraging excessive risk-taking. The objective of the guidance is to assure that incentive compensation arrangements (i) provide incentives that do not encourage excessive risk-taking, (ii) are compatible with effective internal controls and risk management and (iii) are supported by strong corporate governance, including oversight by the board of directors. In 2016, the Federal Reserve and the FDIC proposed rules that would, depending upon the assets of the institution, directly regulate incentive compensation arrangements and would require enhanced oversight and recordkeeping. As of December 31, ~~2017,~~2019, these rules have not been implemented.

Deposit Insurance. Our Bank’s deposits are insured by the FDIC up to limits established by applicable law, currently $250,000 per depositor. The FDIC determines quarterly deposit insurance assessments consisting of a percentage of an assessment base equal to our Bank’s average consolidated total assets less average tangible equity capital and the assignment of one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. The FDIC has the discretion to adjust an institution’s risk rating. For 2019, minimum and maximum assessment rates (inclusive of possible adjustments) for institutions the size of our Bank ranged from 1.5 to 40 basis points. As a “large” institution for purposes of determining FDIC insurance assessments, our Bank was until December 31, 2018, subject to additional surcharges to rebuild the DIF to a reserve ratio (DIF balance divided by total insured deposits) equal to 1.35%.

The Dodd-Frank Act. The Dodd-Frank Act became law in 2010 and has had a broad impact on the financial services industry, imposing significant regulatory and compliance changes. A significant volume of financial services regulations required by the Dodd-Frank Act have not yet been finalized by banking regulators, Congress continues to consider legislation that would make significant changes to the law and courts are addressing significant litigation arising under the Act, making it difficult to predict the ultimate effect of the Dodd-Frank Act on our business. The following discussion provides a brief summary of certain provisions of the Dodd-Frank Act that may have an effect on us.

The Dodd-Frank Act significantly reduces the ability of national banks to rely upon federal preemption of state consumer financial laws and permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations. Although the OCC, as the primary regulator of national banks, has the ability to make preemption determinations where certain conditions are met, the broad rollback of federal preemption has the potential to create a patchwork of federal and state compliance obligations and enforcement. This may result in significant state regulatory requirements applicable to us and certain of our lending activities, with potentially significant changes in our operations and increases in our compliance costs.

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The Dodd-Frank Act made permanent the general $250,000 insurance limit for insured deposits. Amendments to the FDIA also revised the assessment base against which an insured depository institution’s deposit insurance premiums paid to the DIF are calculated. The assessment base now consists of average consolidated total assets less average tangible equity capital and an amount the FDIC determines is necessary to establish assessments consistent with the risk=based assessment system found in the FDIA, which assigns insured institutions to risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. As of July 1, 2017, minimum and maximum assessment rates (inclusive of possible adjustments) for institutions the size of our Bank range from 3 to 30 basis points of average consolidated total assets less average tangible capital. Additionally, the Dodd-Frank Act made changes to the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits, and eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. These changes contributed to an increase in the FDIC deposit insurance premiums paid by us in 2016 and 2017 and may contribute to increasing and less predictable deposit insurance expense in future years.

The Dodd-Frank Act generally enhances the restrictions on transactions with affiliates under Sections 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered credit transactions must be satisfied. Insider transaction limitations are expanded through the strengthening of restrictions on loans to insiders and the expansion of the types of transactions subject to the various limits, including derivatives transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions. Restrictions are also placed on certain asset sales to and from an insider to an institution,

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including requirements that such sales be on market terms and, in certain circumstances, approved by the institution’s board of directors.

The Dodd-Frank Act increases the risk of “secondary actor liability” for lenders that provide financing or other services to customers offering financial products or services to consumers, as our Bank does in our mortgage finance, mortgage correspondent aggregation and lender finance lines of business. The Dodd-Frank Act can impose liability on a service provider for knowingly or recklessly providing substantial assistance to a customer found to have engaged in unfair, deceptive or abusive practices that injure a consumer. This exposure contributes to increased compliance and other costs in connection with the administration of credit extended to entities engaged in providing financial products and services to consumers.

The Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent compliance, capital, liquidity and leverage requirements or otherwise adversely affect our business. These developments may also require us to invest significant management attention and resources to evaluate and make changes to our business as necessary to comply with new and changing statutory and regulatory requirements.

The Volcker Rule. The Dodd-Frank Act amended the BHCA to require the federal financial regulatory agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading in designated types of financial instruments and from investing in and sponsoring certain hedge funds and private equity funds. The Volcker Rule has not had a material effect on our operations since we do not engage in the businesses prohibited by the Volcker Rule. Unanticipated effects of the Volcker Rule’s provisions or future interpretations may have an adverse effect on our business or services provided to our Bank by other financial institutions.

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 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~~we file electronically with the SEC.

We make available, free of charge through our website, our reports on Forms 10-K, 10-Q and 8-K, and amendments to those reports, as soon as reasonably practicable after such reports are filed with or furnished to the SEC. Additionally, we have adopted and posted on our website a code of ethics that applies to our principal executive officer, principal financial officer and principal accounting officer. The address for our website is www.texascapitalbank.com. Any amendments to, or waivers from, our code of ethics applicable to our executive officers will be posted on our website within four days of such amendment or waiver. We will provide a printed copy of any of the aforementioned documents to any requesting stockholder.

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ITEM 1A.	RISK FACTORS

Our business is subject to risk. The following discussion, along with management’s discussion and analysis and our financial statements and footnotes, sets forth the most significant risks and uncertainties that we believe could adversely affect our business, financial condition or results of operations. Additional risks and uncertainties that management is not aware of or that management currently deems immaterial may also have a material adverse effect on our business, financial condition or results of operations. There is no assurance that this discussion covers all potential risks that we face. The occurrence of the described risks could cause our results to differ materially from those described in our forward-looking statements included elsewhere in this report or in our other filings with the SEC and could have a material adverse impact on our business, financial condition or results of operations.

Merger-Related Risks

The consummation of the merger is contingent upon the satisfaction of a number of conditions, including shareholder and regulatory approvals, that may be outside of TCBI’s or IBTX’s control and that TCBI and IBTX may be unable to satisfy or obtain or which may delay the consummation of the merger or result in the imposition of conditions that could reduce the anticipated benefits from the merger or cause the parties to abandon the merger.

We face risks and uncertainties related to the proposed merger with Independent Bank Group, Inc. Before the transactions contemplated in the merger agreement with IBTX can be completed, approvals must be obtained from regulatory authorities, including the Federal Reserve, the FDIC and the Texas Department of Banking, and from our stockholders, and all conditions to the closing of the transaction included in the merger agreement must have been satisfied or waived. The required regulatory approvals may impose additional conditions, limitations, obligations or costs on the surviving entity, place restrictions on the conduct of the business of the surviving entity or require changes to the terms of the transactions contemplated by the merger agreement. There can be no assurance that our or IBTX’s regulators will not impose any such additional conditions, limitations, obligations or restrictions, or that they will not have the effect of delaying or preventing the completion of the merger, imposing

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additional material costs on or materially limiting the revenues of the surviving entity following the merger or otherwise reducing the anticipated benefits of the merger.

Uncertainties about the effects of the merger may impair our ability to attract, retain and motivate key personnel until the merger is consummated and for a period of time thereafter, and could cause customers and others who work with us to seek to change their existing business relationships with us. It is not unusual for competitors to use mergers as an opportunity to target the merging parties’ customers and to hire certain of their employees. Employee retention may be particularly challenging during the pendency of the merger, as employees may experience uncertainty about their roles with the surviving entity following the merger.

The merger agreement contains provisions that restrict each company's ability to, among other things, initiate, solicit, knowingly encourage or knowingly facilitate, inquiries or proposals with respect to, or, subject to certain exceptions generally related to its board of directors’ exercise of fiduciary duties, engage in any negotiations concerning, or provide any confidential information relating to, any alternative acquisition proposals. These provisions, which include a $115.0 million termination fee payable under certain circumstances, may discourage any potential competing acquirer having an interest in acquiring us from proposing a transaction, or may result in the offer of a lower per share price to acquire us than might otherwise have been proposed.

We may fail to realize all of the anticipated benefits of the merger, or those benefits may take longer to realize than expected. We may also encounter significant difficulties in integrating with IBTX. We and IBTX have operated, and until the completion of the merger will continue to operate, independently, subject to terms of the merger agreement imposing specific limitations on certain actions of each party without the consent of the other party. A significant portion of the anticipated benefit of the merger is attributable to anticipated cost savings from the integration of the two companies and elimination of duplicated costs and business functions. There is no assurance that our businesses can be integrated successfully or that the expected cost reductions can be realized. The integration process may result in the loss of key employees of each company, the loss of customers, the disruption of each company’s ongoing business, inconsistencies in standards, controls, policies and procedures, unexpected integration issues, higher than expected integration costs and an overall post-completion integration process that takes longer than originally anticipated. If we experience difficulties in the integration process, including those listed in the prior sentence, we may fail to realize the anticipated benefits of the merger in a timely manner or at all. The success of the merger will depend on, among other things, the ability of the surviving entity following the merger to operate its businesses in a manner that facilitates growth and realizes cost savings.

The merger agreement may be terminated in accordance with its terms and the merger may not be completed. The merger agreement is subject to a number of conditions which must be fulfilled in order to complete the merger, including the approval of the merger agreement by TCBI’s stockholders and by IBTX’s shareholders; the receipt of authorization for listing on the Nasdaq of the shares of IBTX common stock and IBTX Series B preferred stock to be issued in the merger; the receipt of all required regulatory approvals; the effectiveness of the registration statement on Form S-4 for the IBTX common stock and IBTX preferred stock to be issued in the merger; the absence of any order, injunction, decree or other legal restraint preventing the completion of the merger or making the completion of the merger illegal; subject to certain exceptions, the accuracy of the representations and warranties under the merger agreement; our and IBTX’s performance in all material respects of our and their respective obligations under the merger agreement; and each of our and IBTX’s receipt of a tax opinion to the effect that the merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.The conditions to the closing of the merger included in the merger agreement may not be fulfilled in a timely manner or at all, and, accordingly, the merger may be delayed or may not be completed.

We and IBTX may elect to terminate the merger agreement under certain circumstances. Among other situations, if the merger is not completed by December 31, 2020, either we or IBTX may choose not to proceed with the merger (unless the failure of the closing to occur by such date was due to the failure of the party seeking to terminate the merger agreement to perform or observe the obligations, covenants and agreements of such party set forth in the merger agreement). We and IBTX can also mutually decide to terminate the merger agreement at any time. If the merger agreement is terminated, under certain circumstances, we may be required to pay a termination fee of $115.0 million to IBTX.

The value to be recognized by our stockholders from the merger is subject to material uncertainties. The merger agreement provides that upon the closing of the merger our stockholders will receive 1.0311 shares of IBTX common stock for each share of our common stock that they own at that time. The exchange rate for the conversion of our common stock into IBTX common stock was set in early December 2019 based upon information available to the boards of directors and financial advisors of each company at that time. The market price of our common stock and of IBTX common stock is subject to substantial fluctuations in response to variety of factors that are inherently unpredictable and outside of our control, including changes in our and IBTX’s business, operations and prospects, and regulatory considerations, the historical and anticipated future financial results of our respective banking operations and general market and economic developments affecting Texas, United States and international businesses and financial markets. The substantial differences between our business and the business of IBTX will subject our stockholders to new and different risks than those with which they are familiar. A period of

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months may transpire between the date that our stockholders are asked to approve the merger and the date that the merger is consummated, during which time the value of the merger consideration received by our stockholders will continue to fluctuate. As a result, at the time of our special meeting of stockholders to vote to approve the merger agreement, our stockholders will not until the closing of the merger know the precise value of the merger consideration they will receive, which could be materially different than the market value at the time of the merger vote and the market value at the time the exchange ratio was set.

Failure to complete the proposed merger with IBTX could negatively impact our business, financial results and stock price. If the proposed merger is not completed for any reason, our ongoing business may be adversely affected and, without realizing any of the benefits of having completed the merger, we would be subject to a number of related risks, including the following:

we may be required, under certain circumstances, to pay IBTX a termination fee of $115.0 million under the merger agreement, which may adversely affect the price of our common stock;

we will have incurred substantial expenses and will be required to pay significant costs relating to the merger, whether or not it is completed, such as legal, accounting, due diligence, financial advisor and printing fees;

the merger agreement places certain restrictions on the conduct of our business prior to completion of the merger, which may adversely affect our ability to execute certain of our business strategies and cause certain other initiatives to be delayed or abandoned;

matters relating to the merger require substantial commitments of time and resources by our management team that could have been and could be devoted to the pursuit of other opportunities beneficial to us as an independent company; and

we may be subject to negative reactions from the financial markets and from our customers and employees that could materially affect our business, financial results and stock price; the market price of our common stock could decline to the extent that current market prices of our common stock reflect a market assumption that the merger will be completed.

Litigation could prevent or delay the closing of the proposed merger or otherwise negatively impact our business and operations. We may be subject to legal proceedings related to the agreed terms of the proposed merger, the manner in which the merger was considered and approved by our board of directors or any failure to complete the merger or perform our obligations under the merger agreement. Such litigation could delay or block the consummation of the merger, have an adverse effect on our financial condition and impose material costs on us or the surviving entity. Any delay in completing the merger could cause us not to realize, or to be delayed in realizing, some or all of the benefits that we expect to achieve if the merger is successfully completed within its expected time frame.

Our future results will suffer if we do not effectively manage our expanded operations following the merger. Following the merger, the size of our business will increase significantly beyond its current size. The future success of the surviving entity depends, in part, upon the ability to manage this expanded business, which will pose substantial challenges for management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. There can be no assurances the surviving entity will be successful or that it will realize the expected operating efficiencies, cost savings and other benefits currently anticipated from the merger.

Risk Factors Associated With Our Business

We must effectively manage our credit risk. The risk of non-payment of loans is inherent in commercial banking. Increased credit risk may result from many factors, including:

Adverse changes in local, U.S. and global economic and industry conditions;

Declines in the value of collateral, including asset values that are directly or indirectly related to external factors such as commodity prices, real estate values or interest rates;

Concentrations of credit associated with specific loan categories, industries or collateral types; and

Exposures to individual borrowers and to groups of entities that may be affiliated on some basis that individually and/or collectively represent a larger percentage of our total loans or capital than might be considered common at other banks of similar size.

We rely heavily on information provided by third parties when originating and monitoring loans. If this information is intentionally or negligently misrepresented and we do not detect such misrepresentations, the credit risk associated with the transaction may be increased. Although we attempt to manage our credit risk by carefully monitoring the concentration of our loans within specific loan categories and industries and through prudent loan approval and monitoring practices in all categories of our lending, we cannot assure you that our approval and monitoring procedures will reduce these lending risks. Our significant number of large credit relationships (above $20 million) could exacerbate credit problems precipitated by a

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regional or national economic downturn. Competitive pressures could erode underwriting standards, leading to a decline in general credit quality and increases in credit defaults and non-performing asset levels. If our credit administration personnel, policies and procedures are not able to adequately adapt to changes in economic, competitive or other conditions that affect customers and the quality of the loan portfolio, we may incur increased losses that could adversely affect our financial results and lead to increased regulatory scrutiny, restrictions on our lending activity or financial penalties.

A significant portion of our assets consists of commercial loans. We generally invest a greater proportion of our assets in commercial loans to business customers than other banking institutions of our size, and our business plan calls for continued efforts to increase our assets invested in these loans. At December 31, ~~2017,~~2019, approximately ~~45%~~42% of our LHI portfolio was comprised of commercial loans. Commercial loans may involve a higher degree of credit risk than other types of loans due, in part, to their larger average size, the effects of changing economic conditions on the businesses of our commercial loan customers, the dependence of borrowers on operating cash flow to service debt and our reliance upon collateral which may not be readily marketable. Due to the greater proportion of these commercial loans in our portfolio and because the balances of these loans are, on average, larger than other categories of loans, losses incurred on a relatively small number of commercial loans could have a materially adverse impact on our results of operations and financial condition.

A significant portion of our loans are secured by commercial and residential real estate. At December 31, ~~2017,~~2019, approximately ~~54%~~57% of our loans held for investment portfolio was comprised of loans with real estate as the primary component of collateral. Our real estate lending activities, and our exposure to fluctuations in real estate collateral values, are significant and ~~expected to~~may increase as our assets increase. The market value of real estate can fluctuate significantly in a relatively short period of time as a result of market conditions in the geographic area in which the real estate is located, in response to factors such as economic downturns, changes in the economic health of industries heavily concentrated in a particular area and in response to changes in market interest rates, which influence capitalization rates used to value revenue-generating commercial real estate. If the value of real estate serving as collateral for our loans declines materially, a significant part of our loan portfolio could become under-collateralized and losses incurred upon borrower defaults would increase. Conditions in certain segments of the real estate industry, including homebuilding, lot development and mortgage lending, may have an effect on values of real estate pledged as collateral for our loans. The inability of purchasers of real estate, including residential real estate, to obtain financing may weaken the financial condition of our borrowers who are dependent on the sale or refinancing of property to repay their loans. Changes in the economic health of certain industries can have a significant impact on other sectors or industries which are directly or indirectly associated with those industries, and may impact the value of real estate in areas where such industries are concentrated.

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Our future profitability depends, to a significant extent, upon our middle market business customers. Our future profitability depends, to a significant extent, upon revenue we receive from middle market business customers, and their ability to continue to meet their loan obligations. Adverse economic conditions or other factors affecting this market segment, and our failure to timely identify and react to unexpected economic downturns, may have a greater adverse effect on us than on other financial institutions that have a more diversified customer base. Additionally, our inability to grow our middle market business customer base in a highly competitive market could affect our future growth and profitability.

The full impact of the Tax Cuts and Jobs Act (the "Tax Act") on us and our customers is unknown at present, creating uncertainty and risk related to our customers' future demand for credit and our future results. Increased economic activity expected to result from the decrease in tax rates on businesses generally could spur additional economic activity that would encourage additional borrowing. At the same time, some customers may elect to use their additional cash flow from lower taxes to fund their existing levels of activity, decreasing borrowing needs. The elimination of the federal income tax deductibility of business interest expense for a significant number of our customers effectively increases the cost of borrowing and makes equity or hybrid funding relatively more attractive. This could have a long-term negative impact on business customer borrowing. We are anticipating a significant increase in our after-tax net income available to stockholders in 2018 and future years as a result of the decrease in our effective tax rate. Some or all of this benefit could be lost to the extent that the banks and financial services companies we compete with elect to lower interest rates and fees and we are forced to respond in order to remain competitive. There is no assurance that presently anticipated benefits of the Tax Act for the Company will be realized.

We must maintain an appropriate allowance for loan losses. Our experience in the banking industry indicates that some portion of our loans will become delinquent, and some may only be partially repaid or may never be repaid at all. We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense each quarter, that is consistent with management’s assessment of the collectability of the loan portfolio in light of the amount of loans committed and outstanding and current economic conditions and market trends. When specific loan losses are identified, the amount of the expected loss is removed, or charged-off, from the allowance. Our methodology for establishing the appropriateness of the allowance for loan losses depends on our subjective application of risk grades as indicators of each borrower’s ability to repay specific loans, together with our assessment of how actual or projected changes in competitor underwriting practices, competition for borrowers and depositors and other conditions in our markets are likely to impact improvement or deterioration in the collectability of our loans as compared to our historical experience.

Our business model makes our Bank more vulnerable to changes in underlying business credit quality than other banks with which we compete. We have a substantially larger percentage of commercial, real estate and other categories of business loans relative to total assets than most other banks in our market and our individual loans are generally larger as a percentage of our total earning assets than other banks. While we have substantially increased our liquidity ~~over the past three~~in recent years, these funds are invested in low-yielding deposits with federal agencies and other financial institutions. A substantially smaller portion of our assets consists of securities and other earning asset categories that can be less vulnerable to changes in local, regional or industry-specific economic trends, causing our potential for credit losses to be more severe than other banks. Our business model has focused on growth in various loan categories that can be more sensitive to changes in economic trends. We believe our ability to maintain an above-peer ~~rates~~rate of growth in commercial loans is dependent on maintaining above-peer credit quality metrics. The failure to ~~do so~~maintain above-peer credit quality metrics would have a material adverse impact on our growth and profitability. Historically, we have sought to take action prior to economic downturns by slowing growth rates and decreasing

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the risk level of our assets by, among other things, allowing runoff of loans that we believe may not perform well during a weakening or declining economic environment.

If our assessment of inherent risk and losses in our loan portfolio is inaccurate, or economic and market conditions or our borrowers' financial performance experience material unanticipated changes, the allowance may become inadequate, requiring larger provisions for loan losses that can materially decrease our earnings. Certain of our loans individually represent a significant percentage of our total allowance for loan losses. Adverse collection experience in a relatively small number of these loans could require an increase in the provision for loan losses. Federal regulators periodically review our allowance for loan losses and, based on their judgments, which may be different than ours, may require us to change classifications or grades of loans, increase the allowance for loan losses or recognize further loan charge-offs. Any increase in the allowance for loan losses or in the amount of loan charge-offs required by ~~these~~our methodology or regulatory agencies could have a negative effect on our results of operations and financial condition.

Changes in accounting standards, including the implementation of Current Expected Credit Loss methodology for 2020, could materially affect how we report our financial results. The Financial Accounting Standards Board adopted a new accounting standard for determining the amount of our allowance for credit losses (ASU 2016-13 Financial Instruments - Credit Losses (Topic 326) that will be effective for our fiscal year ending December 31, 2020, referred to as Current Expected Credit Loss ("CECL"). Implementation of CECL will require that we determine periodic estimates of lifetime expected future credit losses on loans in the provision for loan losses in the period when the loans are booked. Based on our fourth quarter parallel run, review of the portfolio, including the composition, characteristics and quality of the underlying loans, and the prevailing economic conditions and forecasts as of the adoption date, we believe that adoption of ASU 2016-13 will result in an immaterial increase of approximately 5-6% to our allowance for credit losses. This is consistent with our expectations given that our current portfolio is of shorter duration and commercially focused. The ongoing impact of CECL will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Should these factors materially change, we may be required to increase or decrease our allowance for loan losses, decreasing or increasing our reported income, and introducing additional volatility into our reported earnings.

Our business is concentrated in Texas; our ~~Energy~~energy industry exposure could adversely affect our performance. Although more than 50% of our loan exposure is outside of Texas and more than 50% of our deposits are sourced outside of Texas, our Texas concentration remains significant compared to other peer banks. A majority of our ~~customers~~loans held for investment, excluding mortgage finance loans and other national lines of business, are ~~located~~to businesses with headquarters or operations in Texas. As a result, our financial condition and results of operations may be strongly affected by any prolonged period of economic recession or other adverse business, economic or regulatory conditions affecting Texas businesses and financial institutions. Although more than 50% of our loan exposure is outside of Texas and more than 50% of our deposits are sourced outside of Texas, our Texas concentration remains significant compared to other peer banks. While the Texas economy is more diversified than in the 1980’s, the energy sector continues to play an important role. At December 31, ~~2017~~2019 our outstanding energy loans represented 6%5% of total loans. Our energy loans consist primarily of producing reserve-based loans to exploration and production companies with a smaller portion of our loan balances attributable to royalty owners, midstream operators, saltwater disposal and other service companies whose businesses primarily relate to production, not exploration and development, of oil and gas. These businesses have been significantly affected by volatility in oil and natural gas prices, ~~and~~reserve depletion curves, material declines in the level of drilling and production activity in Texas and in other areas of the United ~~States.~~

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~~Adverse developments~~States and material fluctuations in the energy sector in 2015 and 2016 have had and may continue to have significant spillover effects on the Texas economy, including adverse effects on commercial and residential real estate values and the general level of economic activity. While oil and natural gas prices have stabilized during 2017, we will continue to carefully monitor the impact of any volatilityinvestor interest in oil and ~~natural~~ gas ~~prices on our loan portfolio.~~exploration and production investments. We experienced an increase in non-performing assets and higher charge-offs primarily related to energy loans during 2016, and while those levels have moderated ~~in 2017,~~over the last three years, they still remain elevated compared to the overall loan portfolio. There is no assurance that we will not be materially adversely impacted by the direct and indirect effects of current and future conditions in the energy industry in Texas and nationally.

Our business faces unpredictable economic and business conditions. Our business is directly impacted by general economic and business conditions in Texas, the United States and internationally. The credit quality of our loan portfolio necessarily reflects, among other things, the general economic conditions in the areas in which we and our customers conduct our respective businesses. Our continued financial success can be affected by other factors that are beyond our control, including:

national, regional and local economic conditions;

the value of the U.S. Dollar in relation to the currencies of other advanced and emerging market countries;

the performance of both domestic and international equity and debt markets and valuation of securities ~~represented and~~ traded on recognized domestic and international exchanges;

~~fluctuations in the value of commodities including but not limited to petroleum and natural gas;~~

general economic consequences of international conditions, such as weakness in European and South American sovereign debt and ~~foreign~~ currencies and the U.K.'s referendum to exit from the European Union, and the impact of ~~that weakness~~those conditions on the US and global economies;

legislative and regulatory changes impacting our industry;

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the financial health of our customers and economic conditions affecting them and the value of our collateral, including effects from continued price volatility of oil and gas and other commodities;

the incidence of fraud, illegal payments, security breaches and other illegal acts among or impacting our Bank and our customers;

structural changes in the markets for origination, sale and servicing of residential mortgages;

changes in governmental economic and regulatory policies, ~~generally,~~ including the extent and timing of intervention in credit markets by the Federal Reserve ~~Board~~ or withdrawal from that ~~intervention;~~intervention, generally as well as changes attributable to presidential and congressional elections;

changes in the availability of liquidity at a systemic level; and

material inflation or deflation.

Substantial deterioration in any of the foregoing conditions can have a material adverse effect on our prospects and our results of operations and financial condition. There is no assurance that we will be able to ~~sustain~~return to our historical rate of growth or our profitability. Our Bank's customer base is primarily commercial in nature, and our Bank does not have a significant retail branch network or retail consumer deposit base. In periods of economic downturn, business and commercial deposits may be more volatile than traditional retail consumer deposits. As a result, our financial condition and results of operations could be adversely affected to a greater degree by these uncertainties than ~~our~~ competitors ~~who have~~having a larger retail customer base.

The impact of the Tax Cuts and Jobs Act (the "Tax Act") on us and our customers contributes to uncertainty and risk related to our customers' future demand for credit and our future results. The extent to which increased economic activity expected to result from the Tax Act has spurred additional economic activity or affected the extent of borrowing by our customers is unclear, although the continuation of the current economic expansion provides some evidence of a positive effect. At the same time, some of our customers may have elected to use their additional cash flow from lower taxes to fund their business, decreasing borrowing needs. The elimination of the federal income tax deductibility of business interest expense for a significant number of our customers effectively increases the cost of borrowing and makes equity or hybrid funding relatively more attractive. This could have a long-term negative impact on business customer borrowing. We realized a significant increase in our after-tax net income available to stockholders attributable to the Tax Act beginning in 2018, but there is no guarantee that future years' results will have the same benefit. The continued compression of net interest margin at our bank and for competitor banks indicates that some or all of the expected benefit from the Tax Act has been lost as the banks and financial services companies we compete with have elected to lower interest rates and fees and we have responded in order to remain competitive. Additionally, the tax benefits could be repealed as a result of future political or regulatory actions. There is no assurance that the current or anticipated benefits of the Tax Act will be realized in future periods.

Our growth plans are dependent on the availability of capital and funding. Our historical ability to raise capital through the sale of capital stock and debt securities may be affected by economic and market conditions or regulatory changes that are beyond our control. Adverse changes in our operating performance or financial condition could make raising additional capital difficult or more expensive or limit our access to customary sources of funding, including inter-bank borrowings, repurchase agreements and borrowings from the Federal Reserve Bank ("FRB") or the Federal Home Loan ~~Bank.~~Bank ("FLHB"). Unexpected changes in requirements for ~~regulatory~~ capital resulting from regulatory actions ~~or the results of our Dodd-Frank Act stress testing~~ could require us to raise capital at a time, and at a price, that might be unfavorable, or could require that we forego continuing growth or reduce our current loan portfolio. We cannot offer assurance that capital and funding will be available to us in the future, in needed amounts, upon acceptable terms or at all. Our efforts to raise capital could require the issuance of securities at times and with maturities, conditions and rates that are disadvantageous, and which could have a dilutive impact on our current stockholders. Factors that could adversely affect our ability to raise additional capital or necessary funding include conditions in the capital markets, our financial performance, our credit ratings, regulatory actions and general economic conditions. Increases in our cost of capital, including dilution and increased interest or dividend requirements, could have a direct adverse impact on our operating performance and our ability to achieve our growth objectives. Trust preferred securities are no longer viable as a source of new long-term debt capital as a result of regulatory changes. The treatment of our existing trust preferred securities as capital may be subject to further regulatory change prior to their maturity, which could require the Company to seek additional capital.

Our mortgage finance business has experienced, and will likely continue to experience, highly variable usage of our funding capacity resulting from seasonal demands for credit, surges in consumer demand driven by changes in interest rates and month-end “spikes” of residential mortgage closings. These spikes could also result in our Bank having capital ratios that are below internally targeted levels or even levels that could cause our Bank to not be well capitalized and could affect liquidity levels. At the same time managing this risk by declining to respond fully to the needs of our customers could severely impact our business. We have responded to these variable funding demands by, among other things, increasing the extent of participations sold in our mortgage loan interests, as needed, and by maintaining a substantial borrowing relationship with the FHLB. Our mortgage finance customers have in recent periods provided significant low-cost deposit balances associated with the borrower escrow accounts created at the time certain mortgage loans are funded, which have benefitted our liquidity and net interest

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margin. Due to the rising rate environment and in response to competitive pressures, we have found it necessary to pay interest on some of these accounts, as regulations allow or require and this trend may continue, materially increasing our costs of funds. Individual escrow account balances also experience significant variability monthly as principal and interest payments, as well as ad valorem taxes and insurance premiums, are paid periodically. While the short average holding period of our mortgage interests of approximately 20 days will allow us, if necessitated by a funding shortfall, to rapidly decrease the size of the portfolio and its associated capital and funding requirements, any such action might significantly damage our business and important mortgage finance relationships.

We must effectively manage our liquidity risk. Our Bank requires liquidity in the form of available funds to meet its deposit, debt and other obligations as they come due, borrower requests to draw on committed credit facilities as well as unexpected

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demands for cash payments. While we are not subject to Basel III liquidity regulations, the adequacy of our liquidity is a matter of regulatory interest given the significant portion of our balance sheet represented by loans as opposed to securities and other more marketable investments. Our Bank’s principal source of funding consists of customer ~~deposits.~~deposits, supplemented by our short-term and long-term borrowings, including federal funds purchased and FHLB borrowings. We also rely on the availability of the mortgage secondary market provided by Ginnie Mae and the GSEs to support the liquidity of our residential mortgage assets. A substantial majority of our Bank’s liabilities consist of demand, savings, ~~interest~~ checking and money market deposits, which are payable on demand or upon relatively short notice. By comparison, a substantial portion of our assets are loans, most of which, excluding our mortgage finance loans and mortgage loans held for sale, cannot be collected or sold in so short a time frame, creating the potential for an imbalance in the availability of liquid assets to satisfy depositors and loan funding requirements.

We hold smaller balances of marketable securities than many of our competitors, limiting our ability to increase our liquidity by completing market sales of these assets. An inability to raise funds through deposits, borrowings, the sale of securities and loans and other sources, or an inability to access the capital markets, could have a substantial negative effect on our Bank’s liquidity. We actively manage our available sources of funds to meet our expected needs under normal and financially stressed conditions, but there is no assurance that our Bank will be able to make new loans, meet ongoing funding commitments to borrowers and replace maturing deposits and advances as necessary under all possible circumstances. Our Bank’s ability to obtain funding could be impaired by factors beyond its control, such as disruptions in financial markets, negative expectations regarding the financial services industry generally or in our markets or negative perceptions of our Bank, including our credit ~~ratings.~~

~~Our mortgage finance business has experienced,~~ratings and ~~will likely continue to experience, highly variable usage~~in connection with the proposed Merger. See Merger-Related Risks for a discussion of our funding capacity resulting from seasonal demands for credit, surges in consumer demand driven by changes in interest rates and month-end “spikes” of residential mortgage closings. These spikes could also result in our Bank having capital ratios that are below internally targeted levels or even levels that could cause our Bank to not be well capitalized and could affect liquidity levels. At the same time managing this risk by declining to respond fullyrisks related to the needs of our customers could severely impact our business. We have responded to these variable funding demands by, among other things, increasing the extent of participations sold in our mortgage loan interests, as needed, and by maintaining a substantial borrowing relationship with the Federal Home Loan Bank. Our mortgage finance customers have in recent periods provided significant low-cost deposit balances associated with the borrower escrow accounts created at the time certain mortgage loans are funded, which have benefitted our liquidity and net interest margin. In a rising rate environment or in response to competitive pressures, we may have to pay interest on some or all of these accounts as regulations allow. Individual escrow account balances also experience significant variability monthly as principal and interest payments, as well as ad valorem taxes and insurance premiums, are paid periodically. While the short average holding period of our mortgage interests of approximately 20 days will allow us, if necessitated by a funding shortfall, to rapidly decrease the size of the portfolio and its associated funding requirements, any such action might significantly damage our business and important mortgage finance relationships.proposed merger.

Our Bank sources a significant volume of its demand deposits from financial services companies, mortgage finance customers and other commercial sources, resulting in a larger percentage of large deposits and a smaller number of sources of deposits than would be typical of other banks in our markets, creating concentrations of deposits that carry a greater risk of unexpected material withdrawals. In recent periods over half of our total deposits have been attributable to customers whose balances exceed the $250,000 FDIC insurance limit. Many of these customers actively monitor our financial condition and results of operations and could withdraw their deposits quickly upon the occurrence of a material adverse development affecting our Bank or their businesses. Significant deterioration in our credit quality or a downgrade in our credit ratings could affect funding sources such as financial institutions and broker ~~dealers, as well as our borrowing capacity at the Federal Home Loan Bank.~~dealers. In response to this risk we have ~~substantially~~ increased our liquidity and developed more sophisticated techniques for monitoring and planning for changes in liquidity and capital over the past ~~three~~several years, but there is no assurance that we will maintain or have access to sufficient ~~liquidity~~funding and capital to fully mitigate ~~this~~our liquidity risk.

One potential source of liquidity for our Bank consists of “brokered deposits” arranged by brokers acting as intermediaries, typically larger money-center financial institutions. We receive deposits provided by certain of our customers in connection with our delivery of other financial services to them or their customers which are subject to regulatory classification as “brokered deposits” even though we consider these to be relationship deposits and they are not subject to the typical risks or market pricing associated with conventional brokered deposits.

If we do not maintain our regulatory capital above the level required to be well capitalized we would be required to obtain FDIC consent for us to continue to accept deposits classified as brokered deposits, and there can be no assurance that the FDIC would consent under any circumstances. We could also be required to suspend or eliminate deposit gathering from any source classified as “brokered” deposits. The FDIC can change the definition of brokered deposits or extend the classification to deposits not currently classified as brokered deposits. These non-traditional deposits are subject to greater operational and reputational risk of unexpected withdrawal than traditional demand and time deposits, particularly those provided by consumers. A significant decrease in our balances of relationship brokered deposits could have a material adverse effect upon our financial condition and results of operations. See Management’s Discussion and Analysis of Financial Condition and Results of Operations below for further discussion of our liquidity.

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We, our vendors and customers must effectively manage our information systems risk. We, our vendors and customers all rely heavily on communications and information systems to conduct our respective businesses and work effectively together. The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven

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products and services. Our ability to compete successfully depends in part upon our ability to use technology to provide products and services that will satisfy customer demands. Many ofour larger competitors invest substantially greater resources in technological capabilities than we do. We may not be able to effectively protect, develop and manage mission critical systems and IT infrastructure to support strategic business initiatives, which could impair our ability to achieve financial, operational, compliance and strategic objectives and negatively affect our business, results of operations or financial condition.

Our communications and information systems and those of our vendors and customers remain vulnerable to unexpected disruptions, failures and cyber-attacks. The frequency and intensity of such attacks is escalating. ~~Failures~~Material failures or interruptions of these systems could impair our ability to serve our customers and to operate our business and could damage our reputation, result in a loss of business, subject us to additional regulatory scrutiny or enforcement or expose us to civil litigation and possible financial liability. While we have developed extensive recovery plans, we cannot assure that those plans will be effective to prevent adverse effects upon us and our customers resulting from system failures.

We collect and store sensitive data, including personally identifiable information of our customers and employees and in the ordinary course of business must allow certain of our vendors access to that data. ~~Computer break-ins~~Breaches of our systems or our vendors' or customers’ systems, thefts of data and other breaches and criminal activity may result in significant costs to respond, liability for customer losses if we or our vendors are at fault, damage to our customer relationships, regulatory scrutiny and enforcement and loss of future business opportunities due to reputational damage. Breaches can be perpetrated by unknown third parties, but could also be facilitated by employees either inadvertently or by consciously attempting to create disruption or certain acts of fraud. Although we, with the help of third-party service providers, will continue to implement information security technology solutions and establish operational procedures to protect sensitive data, there can be no assurance that these measures will be effective. We advise and provide training to our customers and evaluate and impose security requirements on our vendors regarding protection of their respective information systems, but there is no assurance that these actions will have the intended positive effects or will be effective to prevent losses. In some cases we may elect to contribute to the cost of responding to cybercrime against our customers, even when we are not at fault, in order to maintain valuable customer relationships. Successful cyber-attacks on our Bank, vendors or customers may affect the reputation of our Bank, and failure to meet customer expectations could have a material impact on our ability to attract and retain deposits as a primary source of funding.

Our operations rely extensively on a broad range of external vendors. We rely on ~~certain external~~a large number of vendors to provide products and services necessary to maintain our day-to-day operations, particularly in the areas of operations, treasury management systems, information technology and security. This reliance exposes us to the risk that these vendors will not perform as required by our agreements as well as risks resulting from disruptions in communications with our vendors, cyber-attacks and security breaches at our vendors, failure of a vendor to provide services for other reasons and poor performance of services. An external vendor’s failure to perform in any of these areas could be disruptive to our operations, which could have a material adverse impact on our business, financial condition and results of operations, as well as cause ~~reputation damage if our customers are affected by the failure.~~reputational damage. External vendors who must have access to our information systems in order to provide their services have been identified as significant sources of information technology security risk. While we have implemented an active program of oversight to address this risk, there can be no assurance that we will not experience material security breaches associated with our vendors.

We must effectively manage our interest rate risk. Our profitability is dependent to a large extent on our net interest income, which is the difference between the interest income paid to us on our loans and investments and the interest we pay to third parties such as our depositors, lenders and debtholders. Changes in interest rates can impact our profits and the fair values of certain of our assets and liabilities. Models that we use to forecast and plan for the impact of rising and falling interest rates may be incorrect or fail to consider the impact of competition and other conditions affecting our loans and deposits.

~~The banking industry has experienced a prolonged period~~Periods of unusually low or volatile interest rates ~~which~~ have ~~had an adverse~~a material effect on our ~~earnings by reducing yields on loans and other earning assets.~~earnings. The Federal Reserve began raising rates in late 2015 and ~~2016 and their benchmark rate and market rates~~ continued ~~to increase during 2017,~~through 2018 contributing to ~~some~~ improvement in our net interest ~~income. However there~~income as the increase in interest we receive on our assets exceeded the increase in interest we were required to pay our depositors. The Federal Reserve began to decrease interest rates and made changes in its approaches to financial market liquidity management in 2019, which had a negative impact on our earnings. Should interest rates remain unchanged or decline further in 2020, we expect a negative impact on our 2020 earnings to a greater degree than our peer group. There is ~~substantial~~ uncertainty regarding the extent to which interest rates may ~~increase~~change in ~~2018~~2020 and future periods and what the future effects of any such ~~increases will be. There is no assurance that recent expectations of increasing interest rates in future periods~~changes will be ~~realized.~~on our interest income and expense. Increases in market interest rates can ~~have negative impacts on~~negatively impact our business, including reducing our customers' desire to borrow money from us ~~or adversely affecting~~and their ability to repay their outstanding loans ~~by increasing~~as their debt service obligations increase through the periodic reset of adjustable interest rate loans. If our borrowers’ ability to pay their loans is impaired by increasing interest payment obligations, our level of non-performing assets would increase, producing an adverse effect on operating results. Asset values,, especially commercial real estate as collateral, securities or other fixed rate earning assets, can decline significantly with relatively minor changes in interest rates.

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Increases in interest rates and economic conditions affecting consumer demand for housing can have a material impact on the volume of mortgage originations and refinancings, adversely affecting the profitability of our mortgage finance business. Interest rate risk can also result from mismatches between the dollar amounts of repricing or maturing assets and liabilities and

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from mismatches in the timing and rates at which our assets and liabilities reprice. We actively monitor and manage the balances of our maturing and repricing assets and liabilities to reduce the adverse impact of changes in interest rates, but there can be no assurance that we will be able to avoid material adverse effects on our net interest margin in all market conditions.

Federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed in 2011 by the Dodd-Frank Act. This change has had limited impact to date due to the excess of commercial liquidity and the low interest rate environment. Rising interest rates ~~may result~~ in prior periods have increased our interest expense, ~~increasing,~~ with a commensurate adverse effect on our net interest income, ~~particularly if we must pay interest on demand deposits~~and may be expected to ~~attract or retain customer deposits. As interest rates increase, deposit costs will continue to increase, which could adversely impact our net interest income.~~do so in future periods. In a rising rate environment, competition for cost-effective deposits ~~can be expected to~~ increase, making it more costly for us to fund loan growth. Rapid and unexpected volatility in interest rates creates additional uncertainty and potential for adverse financial effects. There can be no assurance that we will not be materially adversely affected ~~in the~~by future ~~by increases~~changes in interest rates.

We are subject to extensive government regulation and supervision. We, as a bank holding company and financial holding company, and our Bank as a national bank, are subject to extensive federal and state regulation and supervision, and the potential for regulatory enforcement actions, that impact our business on a daily basis. See the discussion above at Business - Regulation and Supervision. These regulations affect our lending practices, permissible products and services and their terms and conditions, customer relationships, capital structure, investment practices, accounting, financial reporting, operations and our ability to grow, among other things. These regulations also impose obligations to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identities of our customers.

Congress, state legislatures, and federal and state regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. ~~Recent material~~Material changes in regulation and requirements imposed on financial institutions, such as the Dodd-Frank Act, ~~and the~~ Basel III ~~Accord,~~Capital Rules, European Union's General Data Protection Regulations ("GDPR") and California Consumer Privacy Act ("CCPA") result in additional costs, impose more stringent capital, liquidity and leverage requirements, limit the types of financial services and products we may offer and increase the ability of non-bank financial services providers to offer competing financial services and products, among other things. Such changes could result in new regulatory obligations which could prove difficult, expensive or competitively impractical to comply with if not equally imposed upon non-bank financial services providers with whom we compete.

~~The Dodd-Frank Act has not yet been fully implemented and there~~We are ~~many additional regulations called for~~subject to a continuous program of examinations by the Act that have not been proposed, or if proposed, have not been adopted. The full impact of the Dodd-Frank Act on our business strategies is not completely known at this time as there is uncertainty related to regulations still pending. The 2016 national election results and more recent statements and actions by the administration and members of Congress have contributed to continuing uncertainty regarding future implementation and enforcement of the Dodd-Frank Act and other financial sector regulatory requirements. While these developments have contributed to increased market valuations of a broad range of financial services companies, including the Company, there is no assurance that any of the anticipated changes will be implemented or that expected benefits to our future financial performance will be realized.

~~We receive inquiries from~~ our regulators ~~from time to time regarding,~~concerning, among other things, lending practices, reserve methodology, compliance with changing regulations and interpretations, BSA/AML compliance, our management of interest rate, liquidity, capital and operational risk, enterprise risk management, regulatory and financial accounting practices and policies and related matters, which can divert management’s time and attention from focusing on our business. We ~~have significantly increased the~~devote a significant amount of management time and expense ~~devoted~~ to ~~developing~~enhancing the infrastructure to support our ~~expanding~~ compliance obligations, which can pose significant regulatory enforcement, financial and reputational risks if not appropriately addressed.

~~We continue to respond to stress testing requirements contained in the Dodd-Frank~~The Regulatory Relief Act ~~(“DFAST”) to evaluate the adequacy~~passed on May 22, 2018 has provided a limited degree of regulatory relief for institutions of our ~~capital and liquidity planning. Uncertainties~~size. Uncertainty regarding ~~how the financial models of our business created pursuant to this requirement will respond to the regulatory scenarios issued annually, and~~ how our regulators will evaluate ~~our report of the results obtained, subject us to increased regulatory risk in future years as the standards for DFAST~~capital and ~~regulatory use of our reported data~~liquidity planning going forward remains a risk. We continue to evolve. Any change to our practices or policies requested or required by our regulators, or any changes in interpretation of regulatory policy applicable to our businesses, may have a material adverse effect on our business, results of operations or financial condition. We have increasedincrease our capital and liquidity and ~~expanded~~expand our regulatory compliance staffing and systems in ~~recent years in~~ order to address continuing regulatory ~~expectations for high-growth institutions, which reduced our net interest margin and earnings in those periods.~~requirements. There is no assurance that our financial performance in future years will not be similarly burdened.

We expend substantial effort and incur costs to maintain and improve our systems, controls, accounting, operations, information security, compliance, audit effectiveness, analytical capabilities, staffing and training in order to satisfy regulatory requirements. We cannot offer assurance that these efforts will be accepted by our regulators as satisfying the legal and

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regulatory requirements applicable to us. Failure to comply with relevant laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.

The FDIC has imposed higher general and special assessments on deposits or assets based on general industry conditions and as a result of changes in specific programs, as well as qualitative adjustments for individual institutions based on their risk characteristics that cannot be predicted with any certainty. There is no restriction on the amount by which the FDIC may increase deposit and asset assessments in the future. Increases in FDIC assessments, fees and taxes have adversely affected our earnings and may continue to do so in the future.

We must effectively execute our business strategy in order to continue our asset and earnings growth. Our core strategy is to develop our business principally through organic ~~growth.~~growth by offering a premier and differentiated banking experience to companies in high-value business segments. Our prospects for continued growth must be considered in light of the risks, expenses and difficulties frequently encountered by ~~companies seeking to realize significant growth.~~growing companies. In order to execute our ~~growth~~business strategy successfully, we must, among other things:

continue to identify and expand into suitable markets and lines of business, in Texas, regionally and nationally;

develop new products and services and execute our full range of products and services more efficiently and effectively;

attract and retain qualified bankers in each of our targeted ~~markets~~market segments to build our customer base;

respond to market opportunities promptly and nimbly while balancing the demands of risk management and compliance with regulatory requirements;

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expand our loan portfolio in an intensely competitive environment while maintaining credit quality;

attract sufficient deposits and capital to fund our anticipated loan growth and satisfy regulatory requirements;

control expenses; ~~and~~

acquire and maintain sufficient qualified staffing and information technology and operational ~~infrastructure~~resources to support growth and compliance with ~~increasing~~regulatory requirements; and ~~changing~~

consummate the proposed merger of equals with IBTX, which requires stockholder and regulatory ~~requirements.~~approval.

Failure to effectively execute our business strategy could have a material adverse effect on our business, future prospects, financial condition or results of operations. The merger agreement with IBTX restricts us from making certain acquisitions and taking other specified actions while the merger is pending without the consent of IBTX, and requires us to operate in the ordinary course of business. These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the completion of the merger or may otherwise adversely affect our ongoing business and operations. See Merger-Related Risks for a discussion of additional risks related to the proposed merger.

We may be adversely affected by changes in the method of determining the London Interbank Offered Rate (“LIBOR”), or the replacement of LIBOR with an alternative reference rate, for our variable rate loans, derivative contracts and other financial assets and liabilities. Our business relies upon a large volume of loans, derivative contracts and other financial instruments which are directly or indirectly dependent on LIBOR to establish their interest rate and/or value. The U.K. Financial Conduct Authority announced in 2017 that it would no longer compel banks to submit rates for the calculation of LIBOR after 2021. It is not possible to predict whether banks will continue to provide LIBOR submissions to the administrator of LIBOR, whether LIBOR rates will cease to be published or supported before or after 2021 or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. It is expected that a transition away from the widespread use of LIBOR to alternative rates is likely to occur during the next several years.

While we have established a working group consisting of key stakeholders from throughout the company to monitor developments relating to LIBOR uncertainty and changes and to guide the Bank’s response, the impact of these developments on our business and financial results is not yet known. The transition from LIBOR may cause us to incur increased costs and additional risk. Uncertainty as to the nature of alternative reference rates and as to potential changes in or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans originated prior to 2021. If LIBOR rates are no longer available, any successor or replacement interest rates may perform differently, which may affect our net interest income, change our market risk profile and require changes to our risk, pricing and hedging strategies. Any failure to adequately manage this transition could adversely impact our reputation.

We must be effective in developing and executing new lines of business and new products and services while managing associated risks. Our business strategy requires that we develop and grow new lines of business and offer new products and services within existing lines of business in order to compete successfully in ~~customer~~offering a premier and differentiated client banking experience to ensure future client acquisition and retention of existing clients and realize our ~~growth objectives~~strategic priorities for both loans and deposits. Substantial costs, risks and uncertainties are associated with these efforts, particularly in instances where the markets are not fully developed. Developing and marketing new activities requires that we invest significant time and resources before new sources of revenues, funding and profits can be realized. Timetables for the development and launch of new activities may not be achieved and price and profitability targets may not prove ~~feasible.~~feasible or their realization may be delayed. External factors, such as compliance with regulations, receipt of necessary licenses or permits, competitive alternatives and shifting market preferences, may also adversely impact the successful execution of new activities. New activities necessarily entail additional risks and may present additional risks to the effectiveness of our system of internal ~~controls.~~controls and risk management strategies. All service offerings, including current offerings and new activities, may become more risky due to changes in economic, competitive and market conditions beyond our control. Our regulators could determine that our risk management practices are not adequate or our capital levels are not sufficiently in excess of well-capitalized levels and take action to restrain our growth. Failure to successfully manage these risks, generally and to the satisfaction of our regulators, in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, results of operations and financial condition.

We must continue to attract, retain and develop key personnel. Our success depends to a significant extent upon our ability to attract, develop and retain experienced bankers in each of our lines of business and markets as well as managers in operational areas, compliance and other support areas to build and maintain the infrastructure and controls required to support continuing loan and deposit growth. Competition for the best people in our industry can be intense, and there is no assurance that we will continue to have the same level of success in this effort that has supported our historical results. Factors that affect our ability to attract, develop and retain key employees include our compensation and benefits programs, our profitability, our ability to establish appropriate succession plans for key talent, our reputation for rewarding and promoting qualified employees and market competition for employees with certain skills, including information systems development and security. The cost of employee compensation is a significant portion of our operating expenses and can materially impact our results of operations.

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The unanticipated loss of the services of key personnel could have an adverse effect on our business. Although we have entered into employment agreements with certain key employees, we cannot assure you that we will be successful in retaining them. These risks may be exacerbated by the proposed merger with IBTX. See Merger-Related Risks for a discussion of additional risks related to the proposed merger with IBTX.

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We compete with many banks and other financial service providers. Competition among providers of financial services in our markets, in Texas, regionally and nationally, is intense. We compete with other financial and bank holding companies, state and national commercial banks, savings and loan associations, consumer finance companies, credit unions, securities brokerages, insurance companies, mortgage banking companies, money market mutual funds, asset-based non-bank lenders, government sponsored or subsidized lenders and other financial services providers. Many of these competitors have substantially greater financial resources, lending limits and technological resources and larger branch networks than we do, and are able to offer a broader range of products and services than we can, including systems and services that could more effectively protect customers from cyber threats. Many competitors offer lower interest rates and more liberal loan terms that appeal to borrowers but adversely affect net interest margin and assurance of repayment. There are early indications that one effect of the Tax Act may be to allow financial services companies to effectively spend their tax savings by offering lower interest rates and fees to retain customers or generate growth. If this trend expands it could have a significant negative impact on our net interest margin and profitability. We are increasingly faced with competition in many of our products and services by non-bank providers who may have competitive advantages of size, access to potential customers and fewer regulatory requirements. Failure to compete effectively for deposit, loan and other banking customers in any of our ~~markets~~lines of business could cause us to lose market share, slow or reverse our growth rate or suffer adverse effects on our financial condition and results of operations. We face the risk that our competitors may seek to use the proposed merger to target our customers. See Merger-Related Risks for a discussion of additional risks related to the proposed merger.

Our mortgage correspondent aggregation business subjects us to additional risks. We launched our mortgage correspondent aggregation business (“MCA”), a correspondent lending program that complements our mortgage warehouse lending business, in 2015. Volatility in the mortgage industry has caused uncertainty related to the pricing of the mortgage loans that we seek to purchase, as well as uncertainty in the pricing of those loans when they are sold or securitized. Similar uncertainty exists with respect to volatility in the value of mortgage servicing rights ("MSRs") on our balance sheet. This volatility may cause the actual returns on mortgage sales or securitization transactions to be less than anticipated, which could adversely affect our overall loans held for sale ~~volumes.~~volumes and the profitability of this line of business. Fluctuations in the value of MSRs that we hold on our balance sheet could require that we recognize impairments in the value of such assets and/or actual losses on the disposition of such assets. Additionally, non-bank competitors may have a pricing advantage as they are not subject to the same capital maintenance requirements relative to mortgage loans and MSRs as our Bank.

Our MCA business subjects us to additional interest rate risk and price risk, which may have an adverse effect on our business. The persistent low interest rate environment ~~and expectation of future higher rates~~ has in certain cases resulted in an increase in the value of MSRs, causing other market participants and competitors who are planning to hold MSRs for a longer term to be more aggressive in their pricing of the underlying loan purchases than a participant like our Bank that does not plan to hold MSRs on a long-term basis. While we believe market and competitive conditions may improve in the future, a prolonged low interest rate environment could adversely affect the economics of our MCA business over a longer period of time. Conversely, an environment of rising interest rates could have a significant effect on loan volumes in our MCA business if refinancing and home purchase activities are reduced.

We have entered into loan purchase commitments and forward sales commitments in connection with the MCA business. While we believe that our hedging strategies will be successful in mitigating our exposure to interest rate risk associated with the purchase of mortgage loans held for sale, no hedging strategy can completely protect us. Poorly designed strategies, improperly executed transactions, or inaccurate assumptions regarding future interest rates or market conditions could have a material adverse effect on our financial condition and results of operations.

We ~~may be~~are from time to time required to hold or repurchase mortgage loans or reimburse investors as a result of breaches in contractual representations and warranties under the agreements pursuant to which we purchase and sell mortgage loans. While our agreements with the originators and sellers of mortgage loans provide us with legal recourse against them that may allow us to recover some or all of our losses, these companies are frequently not financially capable of paying large amounts of damages and as a result we can offer no assurance that we will not bear all of the risk of loss.

We may incur other costs and losses as a result of actual or alleged violations of regulations related to the origination and purchase of residential mortgage loans. The origination of residential mortgage loans is governed by a variety of federal and state laws and regulations, which are frequently changing. We sell residential mortgage loans that we have purchased or that we have originated to various parties, including Ginnie Mae and GSEs such as Fannie Mae or Freddie Mac and other financial institutions that purchase mortgage loans for investment or private label securitization. We may also pool FHA-insured and VA-guaranteed mortgage loans which back securities issued by Ginnie Mae. Our accrued mortgage repurchase liability represents management’s best estimate of the probable loss that we may expect to incur for the representations and warranties in the contractual provisions of our sales of mortgage loans, but there is no assurance that our losses will not materially exceed such amounts.

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Our accounting estimates and risk management processes rely on management judgment, which may prove inadequate or be adversely impacted by inaccurate assumptions or models. The processes we use to estimate probable credit losses for purposes of establishing the allowance for loan losses and to measure the fair value of financial instruments, certain of our liquidity and capital planning tools, as well as the processes we use to estimate the effects of changing interest rates and other

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market measures on our financial condition and results of operations, all depend upon management’s judgment. Management’s judgment and the data relied upon by management may be based on assumptions that prove to be inaccurate, particularly in times of market stress or other unforeseen circumstances. ~~As a bank with total assets exceeding $10 billion we have become subject~~Additionally, the adoption of CECL methodology for determining our provision for credit losses and allowance for credit losses in 2020 is expected to increase the ~~stress testing requirements~~complexity, and associated risk, of the ~~Dodd-Frank Act~~analysis and ~~our forecasting and modeling requirements have increased and become more complex. Even if the relevant factual assumptions determined by~~processes relying on management are accurate, our decisions may prove to be inadequate or inaccurate because of other flaws in the design or use of analytical tools by management. Any such failures in our processes for producing accounting estimates and managing risks could have a material adverse effect on our business, financial condition and results of operations.judgment.

Our risk management strategies and processes may not be effective; our controls and procedures may fail or be circumvented. We continue to invest in the development of risk management techniques, strategies, assessment methods and related controls and monitoring approaches on an ongoing basis. However, these risk management strategies and processes may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk. Any failures in our risk management strategies and processes to accurately identify, quantify and monitor our risk exposure could limit our ability to effectively manage our risks. Management regularly reviews and updates our internal controls over financial reporting, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and management judgment 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.

We must effectively manage our counterparty risk. Financial services institutions are interrelated as a result of trading, clearing, counterparty and other relationships. Our Bank has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other ~~institutional clients.~~financial market participants. Many of these transactions expose our Bank to credit risk in the event of a default by a counterparty or client. In addition, our Bank’s credit risk may be increased when the collateral ~~it is entitled to~~securing its loans cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of its credit or derivative exposure. Any such losses could have a material adverse effect on our business, financial condition and results of operations.

Our business is susceptible to fraud. Our business exposes us to fraud risk from our loan and deposit customers, the parties they do business with, as well as from our employees, contractors and vendors. We rely on financial and other data from new and existing customers which could turn out to be fraudulent when accepting such customers, executing their financial transactions and making and purchasing loans and other financial assets. In times of increased economic stress we are at increased risk of fraud losses. We believe we have underwriting and operational controls in place to prevent or detect such fraud, but we cannot provide assurance that these controls will be effective in detecting fraud or that we will not experience fraud losses or incur costs or other damage related to such fraud, at levels that adversely affect our financial results or reputation. Our lending customers may also experience fraud in their businesses which could adversely affect their ability to repay their loans or make use of our services. Our exposure and the exposure of our customers to fraud may increase our financial risk and reputation risk as it may result in unexpected loan losses that exceed those that have been provided for in our allowance for loan losses.

We must maintain adequate regulatory capital to support our business objectives. Under regulatory capital adequacy guidelines and other regulatory requirements, we must satisfy capital requirements based upon quantitative measures of assets, liabilities and certain off-balance sheet items. Our satisfaction of these requirements is subject to qualitative judgments by regulators that may differ materially from management’s and that are subject to being determined retroactively for prior periods. Additionally, regulators can make subjective assessments about the adequacy of capital levels, even ~~those over~~if our Bank's reported capital exceeds the “well-capitalized” requirements. Our ability to maintain our status as a financial holding company and to continue to operate our Bank as we have in recent periods is dependent upon a number of factors, including our Bank qualifying as “well capitalized” and “well managed” under applicable prompt corrective action regulations and upon our company qualifying on an ongoing basis as “well capitalized” and “well managed” under applicable Federal Reserve regulations.

Failure to meet regulatory capital standards could have a material adverse effect on our business, including damaging the confidence of customers in us, adversely impacting our reputation and competitive position and retention of key ~~people.~~personnel. Any of these developments could limit our access to:

~~Brokered~~brokered deposits;

~~The~~the Federal Reserve discount window;

~~Advances~~advances from the ~~Federal Home Loan Bank;~~FHLB;

~~Capital~~

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capital markets transactions; and

~~Development~~development of new financial services.

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Failure to meet regulatory capital standards may also result in higher FDIC assessments. If we fall below guidelines for being deemed “adequately capitalized” the OCC or Federal Reserve could impose restrictions on our activities and a broad range of regulatory requirements in order to effect “prompt corrective action.” The capital requirements applicable to us are in a process of continuous evaluation and revision in connection with actions of the Basel ~~III~~Committee, our regulators and the requirements of the Dodd-Frank Act. We cannot predict the final form, or the effects, of these regulations on our business, but among the possible effects are requirements that we slow our rate of growth or obtain additional capital which could reduce our earnings or dilute our existing stockholders.

We are dependent on funds obtained from borrowing or capital transactions or from our Bank to fund our obligations. We are a financial holding company engaged in the business of managing, controlling and operating our Bank. We conduct no material business or other activity at the parent company level other than activities incidental to holding equity and debt investments in our Bank. As a result, we rely on the proceeds of capital transactions, borrowings under our revolving line of credit, payments of interest and principal on loans made to our Bank and dividends on preferred stock issued by our Bank to pay our operating expenses, to satisfy our obligations to debtholders and to pay dividends on our preferred stock. The profitability of our Bank is subject to fluctuation based upon, among other things, the cost and availability of funds, changes in interest rates and economic conditions in general. Our Bank’s ability to pay dividends to us is subject to regulatory limitations that can, under certain adverse circumstances, prohibit the payment of dividends to us. Our right to participate in any distribution from the liquidation or sale of our Bank’s assets is subject to the prior claims of our Bank’s creditors.

If we are unable to access funds from capital transactions, borrowing under our revolving line of credit or dividends or interest on loan payments from our Bank, we may be unable to satisfy our obligations to creditors or debtholders or pay dividends on our preferred stock. Changes in our Bank’s operating results or capital requirements could require us to convert subordinated notes or preferred stock of our bank held by us into common equity, reducing our cash flow available to meet our obligations.

We are subject to claims and litigation in the ordinary course of our business, including claims that may not be covered by our ~~insurers.~~ insurers, and may be subject to stockholder litigation in connection with the proposed merger with IBTX. Customers and other parties we engage with assert claims and take legal action against us on a regular basis and we regularly take legal action to collect unpaid borrower obligations, realize on collateral and assert our rights in commercial and other contexts. These actions frequently result in counter-claims against us. Litigation arises in a variety of contexts, including lending activities, employment practices, commercial agreements, fiduciary responsibility related to our wealth management services, intellectual property rights and other general business matters. We may incur additional costs in connection with the defense or settlement of any stockholder lawsuits filed in connection with the proposed merger with IBTX. Such litigation could prevent the consummation of the Merger. See Merger-Related Risks for a discussion of additional risks related to the proposed merger.

Claims and legal actions may result in significant legal costs to defend us or assert our rights and may result in reputational damage that adversely affects existing and future customer relationships. If claims and legal actions are not resolved in a manner favorable to us we may suffer significant financial liability or adverse effects upon our reputation, which could have a material adverse effect on our business, financial condition and results of operations. See Legal Proceedings below for additional disclosures regarding legal proceedings.

We purchase insurance coverage to mitigate a wide range of operating risks, including general liability, errors and omissions, professional liability, business interruption, cyber-crime, fraud and property loss, for events that may be materially detrimental to our Bank or customers. There is no assurance that our insurance will be adequate to protect us against material losses in excess of our coverage limits or that insurers will perform their obligations under our policies without attempting to limit or exclude coverage. We could be required to pursue legal actions against insurers to obtain payment of amounts we are owed, and there is no assurance that such actions, if pursued, would be successful.

We are subject to environmental liability risk associated with lending activities. A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. There is a risk that hazardous or toxic substances could be found on these properties, and that we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property's value by limiting our ability to use or sell it. Although we have policies and procedures requiring environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations. Future laws or regulations or more stringent interpretations or enforcement policies with respect to existing laws and regulations may increase our exposure to environmental liability.

Severe weather, earthquakes, other natural disasters, pandemics, acts of war or terrorism and other external events could significantly impact our business. Severe weather, earthquakes, other natural disasters, pandemics, acts of war or terrorism

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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. Recent hurricanes caused extensive flooding and destruction along the coastal areas of Texas and in other areas in the US, including communities where we conduct business. Although management has established disaster recovery policies and procedures, the occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations.

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Risks Relating to Our Securities

Our stock price can be volatile. Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:

actual or anticipated variations in quarterly and annual results of ~~operations;~~our operations or those of IBTX;

changes in recommendations by securities analysts;

delay or failure to close the pending merger of equals with IBTX, as well as failure to realize the expected benefits of the transaction;

changes in composition and perceptions of the investors who own our stock and other securities;

changes in ratings from national rating agencies on publicly or ~~privately owned~~privately-owned debt securities and deposits in our Bank;

operating and stock price performance of other companies that investors deem comparable to us;

news reports relating to trends, concerns and other issues in the financial services industry, including regulatory actions against other financial institutions;

actual or expected economic conditions that are perceived to affect our company such as changes in commodity prices, real estate values or interest rates;

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;~~competitors, including the proposed merger with IBTX;

the stock price of IBTX (as a result of the proposed merger);

changes in government regulations and interpretation of those regulations, changes in our practices requested or required by regulators and changes in regulatory enforcement focus; and

geopolitical conditions such as acts or threats of terrorism or military conflicts.

General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of operating results.

The trading volume in our common stock is less than that of other larger financial services companies. Although our common stock is traded on the Nasdaq Global Select Market, the trading volume in our common stock is less than that of other larger financial services companies. Given the lower trading volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause our stock price to fall. In addition, a substantial majority of common stock outstanding is held by institutional ~~shareholders,~~investors, and trading activity involving large positions may increase volatility of the stock price. Concentration of ownership by institutional investors and inability to execute trades covering large numbers of shares can increase volatility of stock price. Changes in general economic outlook or perspectives on our business or prospects by our institutional investors, whether factual or speculative, can have a major impact on our stock price.

Our preferred stock is thinly traded. There is only a limited trading volume in our preferred stock due to the small size of the issue and its largely institutional holder base. Significant sales of our preferred stock, or the expectation of these sales, could cause the price of the preferred stock to fall substantially.

An investment in our securities is not an insured deposit. Our common stock, preferred stock and indebtedness are not bank deposits and, therefore, are not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of securities of any company. As a result, if you acquire our common stock, preferred stock or indebtedness, you may lose some or all of your investment.

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The holders of our indebtedness and preferred stock have rights that are senior to those of our common stockholders. As of December 31, ~~2017,~~2019, we had $111.0 million outstanding in subordinated notes issued by our holding company and $113.4 million outstanding in junior subordinated notes that are held by statutory trusts which issued trust preferred securities to investors. At December 31, ~~2017~~2019 our Bank had $175.0 million in subordinated notes outstanding. Payments of the principal and interest on our trust preferred securities are conditionally guaranteed by us to the extent not paid by each trust, provided the trust has funds available for such obligations.

Our subordinated notes and junior subordinated notes are senior to our shares of preferred stock and common stock in right of payment of dividends and other distributions. We must be current on interest and principal payments on our indebtedness before any dividends can be paid on our preferred stock or our common stock. In the event of our bankruptcy, dissolution or liquidation, the holders of our indebtedness must be satisfied before any distributions can be made to our preferred or common stockholders. If certain conditions are met, we have the right to defer interest payments on the junior subordinated debentures

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~~(and~~ (and the related trust preferred securities) at any time or from time to time for a period not to exceed 20 consecutive quarters in a deferral period, during which time no dividends may be paid to holders of our preferred stock or common stock. Because our Bank’s subordinated notes are obligations of the Bank, they would in liquidation of our Bank or sale of its assets receive payment before any amounts would be payable to holders of our common stock, preferred stock or subordinated notes.

At December 31, ~~2017,~~2019, we had issued and outstanding 6 million shares of our 6.50% Non-Cumulative Perpetual Preferred Stock, Series A, having an aggregate liquidation preference of $150.0 million. Our preferred stock is senior to our shares of common stock in right of payment of dividends and other distributions. We must be current on dividends payable to holders of preferred stock before any dividends can be paid on our common stock. In the event of our bankruptcy, dissolution or liquidation, the holders of our preferred stock must be satisfied before any distributions can be made to our common stockholders.

We do not currently pay dividends on our common ~~stock~~stock; the payment of dividends by the combined company following the merger is subject to future events and determinations by the board of directors and applicable regulatory limitations. We have not paid dividends on our common stock and we do not expect to do so for the foreseeable future. Our ability to pay dividends is limited by regulatory restrictions and the need to maintain sufficient consolidated capital. The ability of our Bank to pay dividends to us is limited by its obligation to maintain sufficient capital and by other regulatory restrictions as discussed above under the heading Supervision and ~~Regulation.~~Regulation - Restrictions on Payment of Dividends by Our Bank.

It is anticipated that following the merger of the Company and IBTX the combined company will pay dividends to stockholders at the rate of $1.00 per share annually; however there is no assurance as to the amount and timing of any dividends that may be declared and paid by the combined company. The board of directors of the combined company may change its dividend policy at any time without notice to stockholders. Stockholders are entitled to receive only such dividends as the board of directors may declare out of funds legally available for such payments. Any declaration and payment of dividends on will depend upon the earnings and financial condition, liquidity and capital requirements of the combined company, the general economic and regulatory climate, the ability of the combined company to service preferred stock and debt obligations and other factors deemed relevant by the board of directors at the time. The board of directors of the combined company may make capital management decisions and adopt policies that could adversely impact the amount of dividends, if any, paid to the combined company’s stockholders.

Restrictions on ownership. The ability of a third party to acquire us is limited under applicable U.S. banking laws and regulations. The BHCA requires any bank holding company (as defined therein) to obtain the approval of the Federal Reserve prior to acquiring, directly or indirectly, more than 5% of our outstanding Common Stock. Any “company” (as defined in the BHCA) other than a bank holding company would be required to obtain Federal Reserve approval before acquiring “control” of us. “Control” generally means (i) the ownership or control of 25% or more of a class of voting securities, (ii) the ability to elect a majority of the directors or (iii) the ability otherwise to exercise a controlling influence over management and policies. A holder of 25% or more of our outstanding Common Stock, other than an individual, is subject to regulation and supervision as a bank holding company under the BHCA. In addition, under the Change in Bank Control Act of 1978, as amended, and the Federal Reserve’s regulations thereunder, any person, either individually or acting through or in concert with one or more persons, is required to provide notice to the Federal Reserve prior to acquiring, directly or indirectly, 10% or more of our outstanding common stock.

Anti-takeover provisions of our certificate of incorporation, bylaws and Delaware law may make it more difficult for you to receive a change in control premium. Certain provisions of our certificate of incorporation and bylaws could make a merger, tender offer or proxy contest more difficult, even if such events were perceived by many of our stockholders as beneficial to their interests. These provisions include advance notice for nominations of directors and stockholders' proposals, and authority to issue “blank check” preferred stock with such designations, rights and preferences as may be determined from time to time by our board of directors. In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law which, in general, prevents an interested stockholder, defined generally as a person owning 15% or more of a

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corporation's outstanding voting stock, from engaging in a business combination with our company for three years following the date that person became an interested stockholder unless certain specified conditions are satisfied.

Limitations on payment of subordinated notes. Under the FDIA, “critically undercapitalized” banks may not, beginning 60 days after becoming critically undercapitalized, make any payment of principal or interest on their subordinated debt (subject to certain limited exceptions). In addition, under Section 18(i) of the FDIA, our Bank is required to obtain the advance consent of the FDIC to retire any part of its subordinated notes. Under the FDIA, a bank may not pay interest on its subordinated notes if such interest is required to be paid only out of net profits, or distribute any of its capital assets, while it remains in default on any assessment due to the FDIC.

Our Bank’s subordinated indebtedness is unsecured and subordinate and junior in right of payment to the Bank’s obligations to its depositors, its obligations under banker’s acceptances and letters of credit, its obligations to any Federal Reserve Bank, certain obligations to the FDIC, and its obligations to its other creditors, whether now outstanding or hereafter incurred, except any obligations which expressly rank on a parity with or junior to the subordinated notes.

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ITEM 1B.	UNRESOLVED STAFF COMMENTS

None.


ITEM 2.	PROPERTIES

Our corporate headquarters is located in downtown Dallas, Texas. These facilities, which we lease, house our executive and primary administrative offices, as well as the principal banking headquarters of Texas Capital Bank. We also lease other facilities in our primary market regions of Dallas, Fort Worth, Houston, Austin and San Antonio, as well as in California, Illinois, Louisiana, Missouri and New York, some of which operate as full-service banking centers. We also lease an operations center in Richardson, Texas that houses our loan and deposit operations and our customer call center.


ITEM 3.	LEGAL PROCEEDINGS

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The Company is subject to various claims and legal actions that may arise in the course of conducting its business. Management does not expect the disposition of any of these matters to have a material adverse impact on the Company’s financial statements or results of operations.


ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable.

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ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on The Nasdaq Global Select Market under the symbol “TCBI”. On February ~~13, 2018,~~11, 2020, there were approximately ~~179~~192 holders of record of our common stock.

No cash dividends have ever been paid by us on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future. Our principal source of funds to pay cash dividends on our common stock would be cash dividends from our Bank. The payment of dividends by our Bank is subject to certain restrictions imposed by federal banking laws, regulations and authorities. See ~~Regulation and Supervision - Restrictions on Dividends and Repurchases"~~ ~~above.~~

~~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 2016 and 2017.~~

Price Per Share
Quarter Ended High Low
March 31, 2016 49.88
29.78
June 30, 2016 51.84
34.54
September 30, 2016 55.25
42.36
December 31, 2016 81.25
54.20

March 31, 2017 93.35
75.80
June 30, 2017 84.35
70.65
September 30, 2017 87.50
69.65
December 31, 2017 95.20
77.65

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Stock Performance Graph

The following table and graph sets forth the cumulative total stockholder return for the Company’s common stock for the five-year period ending on December 31, ~~2017,~~2019, compared to an overall stock market index (Russell 2000 Index) and the Company’s peer group index (Nasdaq Bank Index). The Russell 2000 Index and Nasdaq Bank Index are based on total returns assuming reinvestment of dividends. The graph assumes an investment of $100 on December 31, ~~2012.~~2014. The performance graph represents past performance and should not be considered to be an indication of future performance.

12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017
Texas Capital
Bancshares, Inc. $ 100.00
$ 138.78
$ 121.22
$ 110.26
$ 174.92
$ 198.35
Russell 2000
Index (RTY) 100.00
136.65
141.62
133.77
159.59
180.42
Nasdaq Bank
Index (CBNK) 100.00
137.95
142.12
151.67
204.03
211.49



	12/31/2014		12/31/2015		12/31/2016		12/31/2017		12/31/2018		12/31/2019
Texas Capital Bancshares, Inc.	$	100.00	$	90.96	$	144.30	$	163.63	$	94.04	$	104.49
Russell 2000 Index (RTY)	100.00		94.46		112.69		127.40		112.22		138.57
Nasdaq Bank Index (CBNK)	100.00		106.72		143.56		148.81		123.11		149.00

Source: Bloomberg

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ITEM 6.	SELECTED CONSOLIDATED FINANCIAL DATA

You should read the selected financial data presented below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this Form 10-K.


	At or For the Year Ended December 31,										At or For the Year Ended December 31,
	2017		2016		2015		2014		2013
	(In thousands, except per share, average share and percentage data)
Consolidated Operating Data(1)
(in thousands, except per share, average share and percentage data)											2019		2018		2017		2016		2015
Consolidated Operating Data
Interest income	$	879,299	$	703,408	$	602,958	$	514,547	$	444,625	$	1,365,312	$	1,164,193	$	879,299	$	703,408	$	602,958
Interest expense	117,971		63,594		46,428		37,582		25,112		385,592		249,333		117,971		63,594		46,428
Net interest income	761,328		639,814		556,530		476,965		419,513		979,720		914,860		761,328		639,814		556,530
Provision for credit losses	44,000		77,000		53,250		22,000		19,000		75,000		87,000		44,000		77,000		53,250
Net interest income after provision for credit losses	717,328		562,814		503,280		454,965		400,513		904,720		827,860		717,328		562,814		503,280
Non-interest income	74,256		60,780		47,738		42,511		44,024		92,440		78,024		74,256		60,780		47,738
Non-interest expense	465,876		382,397		326,523		285,114		256,729		589,999		525,096		465,876		382,397		326,523
Income before income taxes	325,708		241,197		224,495		212,362		187,808		407,161		380,788		325,708		241,197		224,495
Income tax expense	128,645		86,078		79,641		76,010		66,757		84,295		79,964		128,645		86,078		79,641
Net income	197,063		155,119		144,854		136,352		121,051		322,866		300,824		197,063		155,119		144,854
Preferred stock dividends	9,750		9,750		9,750		9,750		7,394		9,750		9,750		9,750		9,750		9,750
Net income available to common stockholders	$	187,313	$	145,369	$	135,104	$	126,602	$	113,657	$	313,116	$	291,074	$	187,313	$	145,369	$	135,104
Consolidated Balance Sheet Data(1)
Consolidated Balance Sheet Data
Total assets	$	25,075,645	$	21,697,134	$	18,903,821	$	15,900,034	$	11,717,174	$	32,548,069	$	28,257,767	$	25,075,645	$	21,697,134	$	18,903,821
Loans held for sale, MCA	1,007,695		968,929		86,075		—		—
Loans held for investment	15,366,252		13,001,011		11,745,674		10,154,887		8,486,603
Loans held for investment, mortgage finance loans	5,308,160		4,497,338		4,966,276		4,102,125		2,784,265
Liquidity assets(2)	2,727,581		2,725,645		1,681,374		1,233,990		61,427
Securities available-for-sale	23,511		24,874		29,992		41,719		63,214
Loans held for sale											2,577,134		1,969,474		1,011,004		968,929		86,075
Loans held for investment (LHI)											16,476,413		16,690,550		15,366,252		13,001,011		11,745,674
Loans held for investment, mortgage finance											8,169,849		5,877,524		5,308,160		4,497,338		4,966,276
Liquidity assets(1)											4,263,766		2,865,874		2,727,581		2,725,645		1,681,374
Investment securities											239,871		120,216		23,511		24,874		29,992
Demand deposits	7,812,660		7,994,201		6,386,911		5,011,619		3,347,567		9,438,459		7,317,161		7,812,660		7,994,201		6,386,911
Total deposits	19,123,180		17,016,831		15,084,619		12,673,300		9,257,379		26,478,593		20,606,113		19,123,180		17,016,831		15,084,619
Federal funds purchased and repurchase agreements	365,040		109,575		143,051		92,676		170,604		141,766		641,174		365,040		109,575		143,051
Other borrowings	2,800,000		2,000,000		1,500,000		1,100,005		855,026		2,400,000		3,900,000		2,800,000		2,000,000		1,500,000
Subordinated notes	281,406		281,044		280,682		280,321		108,110		282,129		281,767		281,406		281,044		280,682
Trust preferred subordinated debentures	113,406		113,406		113,406		113,406		113,406		113,406		113,406		113,406		113,406		113,406
Stockholders’ equity	2,202,721		2,009,557		1,623,533		1,484,190		1,096,350		2,832,258		2,500,394		2,202,721		2,009,557		1,623,533

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	At or For the Year Ended December 31,															At or For the Year Ended December 31,
	2017			2016			2015			2014			2013
	(In thousands, except per share, average share and percentage data)
(in thousands, except per share, average share and percentage data)																2019			2018			2017			2016			2015
Other Financial Data
Income per share
Basic	$	3.78		$	3.14		$	2.95		$	2.93		$	2.78		$	6.23		$	5.83		$	3.78		$	3.14		$	2.95
Diluted	3.73			3.11			2.91			2.88			2.72			6.21			5.79			3.73			3.11			2.91
Tangible book value per share(3)	40.97			37.17			31.69			28.72			22.54
Book value per share	41.35			37.56			32.12			29.17			23.06
Book value per common share																53.29			46.82			41.35			37.56			32.12
Tangible book value per common share(2)																52.93			46.45			40.97			37.17			31.69
Weighted average shares
Basic	49,587,169			46,239,210			45,808,440			43,236,344			40,864,225			50,286,300			49,936,702			49,587,169			46,239,210			45,808,440
Diluted	50,259,834			46,765,902			46,437,872			44,003,256			41,779,881			50,419,204			50,272,872			50,259,834			46,765,902			46,437,872
Selected Financial Ratios
Performance Ratios
Net interest margin	3.49		%	3.14		%	3.14		%	3.78		%	4.22		%	3.28		%	3.78		%	3.49		%	3.14		%	3.14		%
Return on average assets	0.87		%	0.74		%	0.79		%	1.05		%	1.17		%	1.04		%	1.19		%	0.87		%	0.74		%	0.79		%
Return on average equity	9.51		%	9.27		%	9.65		%	11.31		%	12.82		%
Efficiency ratio(4)	55.75		%	54.58		%	54.04		%	54.88		%	55.39		%
Return on average common equity																12.38		%	13.14		%	9.51		%	9.27		%	9.65		%
Efficiency ratio(3)																55.03		%	52.89		%	55.75		%	54.58		%	54.04		%
Non-interest expense to average earning assets	2.12		%	1.88		%	1.84		%	2.26		%	2.58		%	1.96		%	2.15		%	2.12		%	1.88		%	1.84		%
Asset Quality Ratios
Allowance for loan losses to LHI																0.79		%	0.85		%	0.89		%	0.96		%	0.84		%
Net charge-offs (recoveries) to average LHI	0.16		%	0.29		%	0.07		%	0.05		%	0.05		%	0.31		%	0.37		%	0.16		%	0.29		%	0.07		%
Net charge-offs (recoveries) to average LHI excluding mortgage finance loans	0.21		%	0.38		%	0.10		%	0.07		%	0.07		%
Allowance for loan losses to LHI	0.89		%	0.96		%	0.84		%	0.71		%	0.78		%
Allowance for loan losses to LHI excluding mortgage finance loans	1.20		%	1.29		%	1.20		%	0.99		%	1.03		%
Allowance for loan losses to non-accrual loans	1.8x			1.0x			.8x			2.3x			2.7x			.9x			2.4x			1.8x			1.0x			.8x
Non-accrual loans to LHI	0.49		%	0.96		%	1.08		%	0.30		%	0.29		%	0.91		%	0.36		%	0.49		%	0.96		%	1.08		%
Non-accrual loans to LHI excluding mortgage finance loans	0.66		%	1.29		%	1.53		%	0.43		%	0.38		%
Total NPAs to LHI plus OREO	0.55		%	1.07		%	1.08		%	0.31		%	0.33		%	0.91		%	0.36		%	0.55		%	1.07		%	1.08		%
Total NPAs to LHI excluding mortgage finance loans plus OREO	0.74		%	1.43		%	1.53		%	0.43		%	0.44		%
Capital and Liquidity Ratios(5)
Capital and Liquidity Ratios
CET1	8.45		%	8.97		%	7.47		%	7.89		%	N/A			8.88		%	8.58		%	8.45		%	8.97		%	7.47		%
Total capital ratio	9.52		%	10.23		%	11.05		%	11.83		%	10.73		%	11.37		%	11.31		%	11.50		%	12.48		%	11.05		%
Tier 1 capital ratio	11.50		%	12.48		%	8.81		%	9.46		%	9.15		%	9.75		%	9.53		%	9.52		%	10.23		%	8.81		%
Tier 1 leverage ratio	9.15		%	9.34		%	8.92		%	10.76		%	10.87		%	8.42		%	9.87		%	9.15		%	9.34		%	8.92		%
Average equity/average assets	9.33		%	8.20		%	8.51		%	9.75		%	9.68		%
Tangible common equity/total tangible assets(6)	8.11		%	8.49		%	7.69		%	8.26		%	7.87		%
Average LHI, net/average total deposits	97.56		%	95.82		%	101.71		%	111.57		%	116.25		%
Total common equity to total assets																8.24		%	8.32		%	8.19		%	8.57		%	7.79		%
Tangible common equity to total tangible assets(4)																8.16		%	8.26		%	8.11		%	8.49		%	7.69		%
Average LHI, net to average total deposits																95.73		%	102.74		%	97.56		%	95.82		%	101.71		%


(1)	The consolidated operating data and consolidated balance sheet data presented above for the five most recent fiscal years 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)~~	Liquidity assets ~~consist of Federal~~include federal funds sold and interest-bearing deposits in other banks.


~~(3)~~(2)	Stockholders' equity excluding preferred stock, less goodwill and intangibles, divided by shares outstanding at period end. See Supplemental Financial Data for a reconciliation of non-GAAP measures.


~~(4)~~(3)	Non-interest expense divided by the sum of net interest income and non-interest income.

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~~(5)~~	~~The Basel III Capital Rules specifying the CET1 ratio became effective on January 1, 2015.~~


~~(6)~~(4)	Stockholders' equity excluding preferred stock, ~~and~~less accumulated other comprehensive income ~~less~~and goodwill and intangibles, divided by total assets, less accumulated other comprehensive income and goodwill and intangibles. See Supplemental Financial Data for a reconciliation of non-GAAP measures.

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ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the Company’s financial condition and results of operations for the years ended December 31, 2019 and 2018 should be read in conjunction with the Company’s Selected Consolidated Financial Data and the audited consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. Certain risks, uncertainties and other factors, including those set forth under “Risk Factors” in Part I, Item 1A, and elsewhere in this Annual Report on Form 10-K, may cause actual results to differ materially from the results discussed in the forward-looking statements appearing in this discussion and analysis. Refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2018 Annual Report on Form 10K filed with the SEC on February 14, 2019, for discussion of our results of operations for the years ended December 31, 2018 and 2017.

Forward-Looking Statements

Certain statements and financial analysis contained in this report that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of federal securities laws. Forward-looking statements may also be contained in our future filings with SEC, in press releases and in oral and written statements made by us or with our approval that are not statements of historical fact. These forward-looking statements are based on our beliefs, assumptions and expectations of our future performance taking into account all information available to us at the time such statements are made. Words such as “believes,” “expects,” “estimates,” “anticipates,” “plans,” “goals,” “objectives,” “expects,” “intends,” “seeks,” “likely,” “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 may include, among other things, statements about the credit quality of our loan portfolio, statements related to the proposed merger, including the expected timing of the consummation of the merger, the potential effects of the proposed merger on our business and operations upon or prior to the consummation thereof, the effects on us if the merger is not consummated and information regarding the combined business and operations of TCBI and IBTX following the merger, if consummated, general economic conditions in the United States and in our markets, including the continued impact on our customers from ~~declines and~~ volatility in oil and gas prices, the financial impact of the Tax Act on our results of operations, expectations regarding rates of default orand loan losses, volatility in the mortgage industry, our business strategies and our expectations about future financial performance, future growth and earnings, the appropriateness of our allowance for loan losses and provision for loan losses, the impact of ~~increased~~changing regulatory requirements and legislative changes on our business, increased competition, interest rate risk, new lines of business, new product or service offerings and new technologies.

Forward-looking statements are subject to various risks and uncertainties, which change over time, are based on management’s expectations and assumptions at the time the statements are made and are not guarantees of future results. Important factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to, the following:

Deterioration of the credit quality of our loan portfolio or declines in the value of collateral related to external factors such as commodity prices, real estate values or interest rates, increased default rates and loan losses or adverse changes in the industry concentrations of our loan portfolio.

~~Changing economic conditions~~The possibility that the previously announced merger does not close when expected or at all because required regulatory, stockholder or other ~~developments~~approvals and other conditions to closing are not received or satisfied on a timely basis or at all.

The possibility that the various federal and state regulatory agencies from which approval for the merger must be obtained impose conditions that could adversely ~~affecting~~affect us or cause the merger to be delayed or abandoned.

The occurrence of any event, change or other circumstance that could give rise to the right of TCBI, IBTX or both to terminate the merger agreement.

The negative impact on our ~~commercial, entrepreneurial~~stock price and ~~professional customers.~~our future business and financial results if the proposed merger is not consummated.

The inability of our stockholders to be certain of the precise value of the merger consideration they may receive in the merger due to the fluctuation in the market price of IBTX and TCBI common stock, including as a result of the financial performance of TCBI prior to closing.

The dilution caused by IBTX's issuance of additional shares of its capital stock in connection with the proposed merger.

The outcome of pending or threatened litigation or of matters before regulatory agencies, whether currently existing or commencing in the future, including litigation related to the proposed merger.

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The possibility that the anticipated benefits of the proposed merger, including anticipated cost savings and strategic gains, are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy, competitive factors in the areas where we and IBTX do business, or as a result of other unexpected factors or events.

The possibility that the proposed merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events.

The impact of purchase accounting with respect to the proposed merger, or any change in the assumptions used regarding the assets purchased and liabilities assumed to determine their fair value.

Diversion of management's attention from ongoing business operations and opportunities as a result of the proposed merger.

Potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the proposed merger.

The ability to complete the transaction and integration of TCBI and IBTX successfully, which may take longer than anticipated or be more costly than anticipated or have unanticipated adverse results relating to TCBI's or IBTX's existing businesses.

Operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which IBTX and TCBI are highly dependent.

Changes in interest rates, which may affect TCBI's or IBTX's net income and other future cash flows, or the market value of TCBI's or IBTX's assets, including the market value of investment securities.

Changes in the ability of TCBI or IBTX to access the capital markets, including changes in their respective credit ratings.

Changes in the value of commercial and residential real estate securing our loans or in the demand for credit to support the purchase and ownership of such assets.

Changing economic conditions or other developments adversely affecting our commercial, entrepreneurial and professional customers.

Adverse economic conditions and other factors affecting our middle market customers and their ability to continue to meet their loan obligations.

Unanticipated effects from the Tax Act may limit its benefits or adversely impact our business, which could include decreased demand for borrowing by our middle market customers or increased price competition that offsets the benefits of decreased federal income tax expense.

The failure to correctly assess and model the assumptions supporting our allowance for loan losses, causing it to become inadequate in the event of deteriorations in loan quality and increases in ~~charge-offs.~~charge-offs, or increases or decreases to our allowance for loan losses as a result of the implementation of CECL.

Changes in the U.S. economy in general or the Texas economy specifically resulting in deterioration of credit quality, increases in non-performing assets or charge-offs or reduced demand for credit or other financial services we offer, including the effects from declines in the level of drilling and production related to ~~the continued~~ volatility in oil and gas prices.

Adverse changes in economic or market conditions, in Texas, the United States or internationally, that could affect the credit quality of our loan portfolio or our operating performance.

Unexpected market conditions or regulatory changes that could cause access to capital market transactions and other sources of funding to become more difficult to obtain on terms and conditions that are acceptable to us.

The inadequacy of our available funds to meet our deposit, debt and other obligations as they become due, or our failure to maintain our capital ratios as a result of adverse changes in our operating performance or financial condition, or changes in applicable regulations or regulator interpretation of regulations impacting our business or the characterization or risk weight of our assets.

The failure to effectively balance our funding sources with cash demands by depositors and borrowers.

The failure to manage information systems risk or to prevent cyber-attacks against us, our customers or our third party vendors, or to manage risks from disruptions or security breaches affecting us, our customers or our third party vendors.

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The failure to effectively manage our interest rate risk resulting from unexpectedly large or sudden changes in interest rates, ~~or rate or~~ maturity imbalances in our assets and liabilities, ~~and~~ potential adverse effects to our borrowers including their

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inability to repay loans with increased interest ~~rates.~~rates and the impact to our net interest income from the increasing cost of interest-bearing deposits.

Uncertainty regarding the future of the London Interbank Offered Rate ("LIBOR"), and the potential transition away from LIBOR toward new interest rate benchmarks.

Legislative and regulatory changes imposing further restrictions and costs on our business, a failure to remain well capitalized or well managed status or regulatory enforcement actions against us, and uncertainty related to future implementation and enforcement of regulatory requirements resulting from the current political environment.

Changes in the monetary and fiscal policies of the U.S. Government, including policies of the U.S. Department of Treasury and the Federal Reserve.

The failure to successfully execute our business strategy, which may include expanding into new markets, developing and launching new lines of business or new products and services within the expected timeframes and budgets or to successfully manage the risks related to the development and implementation of these new businesses, products or services.

The failure to attract and retain key personnel or the loss of key individuals or groups of employees.

Increased or more effective competition from banks and other financial service providers in our markets.

Structural changes in the markets for origination, sale and servicing of residential mortgages.

Uncertainty in the pricing of mortgage loans that we purchase, and later sell or securitize, as well as competition for the MSRs related to these loans and related interest rate risk or price risk resulting from retaining MSRs, and the potential effects of higher interest rates on our MCA loan volumes.

Changes in accounting principles, policies, practices or guidelines.

Material failures of our accounting estimates and risk management processes based on management judgment, or the supporting analytical and forecasting models.

Failure of our risk management strategies and procedures, including failure or circumvention of our controls.

Credit risk resulting from our exposure to counterparties.

An increase in the incidence or severity of fraud, illegal payments, security breaches and other illegal acts impacting our Bank and our customers.

The failure to maintain adequate regulatory capital to support our business.

Unavailability of funds obtained from borrowing or capital transactions or from our Bank to fund our obligations.

Incurrence of material costs and liabilities associated with legal and regulatory proceedings and related matters with respect to the financial services industry, including those directly involving us or our Bank.

Environmental liability associated with properties related to our lending activities.

Severe weather, natural disasters, acts of war or terrorism and other external events.

Actual outcomes and results may differ materially from what is expressed in our forward-looking statements and from our historical financial results due to the factors discussed elsewhere in this report or disclosed in our other SEC filings. Forward-looking statements included herein speak only as of the date hereof and should not be relied upon as representing our expectations or beliefs as of any date subsequent to the date of this report. Except as required by law, we undertake no obligation to revise any forward-looking statements contained in this report, whether as a result of new information, future events or otherwise. The factors discussed herein are not intended to be a complete summary of all risks and uncertainties that may affect our businesses. Though we strive to monitor and mitigate risk, we cannot anticipate all potential economic, operational and financial developments that may adversely impact our operations and our financial results. Forward-looking statements should not be viewed as predictions and should not be the primary basis upon which investors evaluate an investment in our securities.

Additional Information about the Merger and Where to Find It

In connection with the proposed merger between IBTX and TCBI, IBTX filed a registration statement on Form S-4 with the SEC on January 21, 2020 to register the shares of IBTX’s capital stock to be issued in connection with the merger. The registration statement includes a joint proxy statement/prospectus. The registration statement has not yet become effective. After the Form S-4 is effective, a definitive joint proxy statement/prospectus will be sent to the stockholders of IBTX and TCBI seeking their approval of the proposed transaction.

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INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THE REGISTRATION STATEMENT ON FORM S-4, THE JOINT PROXY STATEMENT/PROSPECTUS INCLUDED WITHIN THE REGISTRATION STATEMENT ON FORM S-4 AND ANY OTHER RELEVANT DOCUMENTS FILED OR TO BE FILED WITH THE SEC IN CONNECTION WITH THE PROPOSED TRANSACTION BECAUSE THESE DOCUMENTS DO AND WILL CONTAIN IMPORTANT INFORMATION ABOUT IBTX, TCBI AND THE PROPOSED TRANSACTION.

Investors and security holders may obtain copies of these documents free of charge through the website maintained by the SEC at www.sec.gov or from IBTX at its website, www.ibtx.com, or from TCBI at its website, www.texascapitalbank.com. Documents filed with the SEC by IBTX will be available free of charge by accessing the Investor Relations page of IBTX’s website at www.ibtx.com or, alternatively, by directing a request by telephone or mail to Independent Bank Group, Inc., 7777 Henneman Way, McKinney, Texas 75070, (972) 562-9004, and documents filed with the SEC by TCBI will be available free of charge by accessing TCBI’s website at www.texascapitalbank.com under the tab “About Us,” and then under the heading “Investor Relations” or, alternatively, by directing a request by telephone or mail to Texas Capital Bancshares, Inc., 2000 McKinney Avenue, Suite 700, Dallas, Texas 75201, (214) 932-6600.

Participants in the Solicitation

TCBI, IBTX and certain of their respective directors and executive officers may be deemed to be participants in the solicitation of proxies from the stockholders of TCBI and IBTX in connection with the proposed transaction under the rules of the SEC. Certain information regarding the interests of these participants and a description of their direct and indirect interests, by security holdings or otherwise, will be included in the joint proxy statement/prospectus regarding the proposed transaction when it becomes available. Additional information about IBTX, and its directors and executive officers, may be found in IBTX’s definitive proxy statement relating to its 2019 Annual Meeting of Shareholders filed with the SEC on April 23, 2019, and other documents filed by IBTX with the SEC. Additional information about TCBI, and its directors and executive officers, may be found in TCBI’s definitive proxy statement relating to its 2019 Annual Meeting of Shareholders filed with the SEC on March 7, 2019, and other documents filed by TCBI with the SEC. These documents can be obtained free of charge from the sources described above.

Overview of Our Business Operations

We commenced our banking operations in December 1998. An important aspect of our growth strategy has been our ability to effectively service and manage a large number of loans and deposit accounts in multiple markets in Texas, as well as several lines of business serving a regional or national clientele of commercial borrowers. Accordingly, we have created an operations infrastructure sufficient to support our lending and banking operations that we continue to build out as needed to serve a larger customer base and specialized industries.

~~Outstanding energy loans totaled $1.3 billion, or approximately 6%~~On December 9, 2019, we and IBTX announced that both companies' boards of ~~total loans, at December 31, 2017. Unfunded energy loan commitments increased by $147.5 million~~directors unanimously approved the merger agreement to ~~$678.3 million (54%~~combine the companies in an all-stock merger of outstanding energy loans) at December 31, 2017 compared to $530.8 million at December 31, 2016 reflecting new commitments. We recorded $20.0 million in net charge-offs during 2017 compared to $36.0 million for 2016. Energy non-accruals decreased to $65.2 million at December 31, 2017 compared to $121.5 million at December 31, 2016. We continue to proactively manage our energy portfolio and overall credit quality, and we believe we are appropriately reserved against further energy-related losses.

~~The following discussion and analysis presents the significant factors affecting our financial condition as of December 31, 2017 and 2016 and results of operations for each~~equals. Upon closing of the ~~three years ended December 31, 2017, 2016~~merger, each share of TCBI common stock will be exchanged for 1.0311 shares of IBTX common stock. The corporate headquarters of the surviving entity and ~~2015. This discussion should~~the surviving bank will be located in McKinney, Texas. The name of the surviving entity will be Independent Bank Group, Inc., and the name of the surviving bank will be Texas Capital Bank. The surviving bank will be operated under the name Independent Financial in Colorado and under the name Texas Capital Bank in Texas. The board of directors of the surviving entity and the surviving bank will be comprised of 13 directors, of which seven will be former members of the Board of Directors of TCBI and six will be former members of the board of directors of IBTX. The merger is expected to close in mid-2020, subject to satisfaction of customary closing conditions, including receipt of customary regulatory approvals and approval by the stockholders of each company. Refer to Merger with Independent Bank Group, Inc. in Item 1 for additional disclosures.

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~~be read in conjunction with our consolidated financial statements and notes to the financial statements appearing later in this report.~~

Year ended December 31, ~~2017~~2019 compared to year ended December 31, ~~2016~~2018

We reported net income of ~~$197.1~~$322.9 million and net income available to common stockholders of ~~$187.3~~$313.1 million, or ~~$3.73~~$6.21 per diluted common share, for the year ended December 31, ~~2017,~~2019, compared to net income of ~~$155.1~~$300.8 million and net income available to common stockholders of ~~$145.4~~$291.1 million, or ~~$3.11~~$5.79 per diluted common share, for ~~2016.~~2018. Return on average common equity ("ROE") was ~~9.51%~~12.38% and return on average assets ("ROA") was ~~0.87%~~1.04% for the year ended December 31, ~~2017,~~2019, compared to ~~9.27%~~13.14% and ~~0.74%~~1.19%, respectively, for ~~2016.~~2018. The ~~decrease~~decreases in ROE for 2017 compared to 2016 reflects a $17.6 million write-off of our net deferred tax asset ("DTA") in response to enactment of the Tax Act, which was recorded as additional income tax expense during the fourth quarter of 2017. As a result of the Tax Act our effective tax rate for 2017 increased to 40% from 36% for 2016. The federal corporate income tax rate declined from 35% to 21% effective January 1, 2018 as a result of the Tax Act. The amount of the DTA write-off is expected to be recovered in 2018 from tax savings attributable to the Tax Act.

~~Net income increased $41.9 million for the year ended December 31, 2017 compared to 2016. The $41.9 million increase was~~and ROA were driven primarily the result of a $121.5 million increase in net interest income, a $33.0 million decrease in the provision for credit losses and a $13.5 million increase in non-interest income, offset by an $83.5 million increase in non-interest expense and a $42.6 million increase in income tax expense.

~~Year ended December 31, 2016 compared to year ended December 31, 2015~~

We reported net income of $155.1 million and net income available to common stockholders of $145.4 million, or $3.11 per diluted common share, for the year ended December 31, 2016, compared to net income of $144.9 million and net income available to common stockholders of $135.1 million, or $2.91 per diluted common share, for 2015. Return on average equity ("ROE") was 9.27% and return on average assets ("ROA") was 0.74% for the year ended December 31, 2016, compared to 9.65% and 0.79%, respectively, for 2015. The decrease in ROE for 2016 compared to 2015 resulted from a higher provision for credit losses and the dilutive effect of the fourth quarter 2016 offering of 3.45 million common shares, which increased common equity by $236.4 million. ROA was impacted in 2016 and 2015 by larger balances in total mortgage finance loans and liquidity ~~assets balances, including a $735.0 million increase in average liquidity assets for the year ended December 31, 2016 compared to 2015.~~assets.

Net income increased by $10.3 million for the year ended December 31, 2016 compared to 2015. The $10.3 million increase was primarily the result of an $83.3 million increase in net interest income and a $13.0 million increase in non-interest income, offset by a $23.8 million increase in the provision for credit losses, a $55.9 million increase in non-interest expense and a $6.4 million increase in income tax expense.

~~Net Interest Income~~

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Net interest income was $761.3 million for the year ended December 31, 2017 compared to $639.8 million for 2016. The increase was primarily due to an increase in earning assets of $1.6 billion as compared to 2016, as well as the effect of increases in interest rates on loan yields. The increase in average earning assets included a $599.8 million increase in average loans held for sale, a $1.5 billion increase in average net loans held for investment

Consolidated Daily Average Balances, Average Yields and a $24.6 million increase in average securities, offset by a $490.3 million decrease in average liquidity assets. For the year ended December 31, 2017, average net loans held for investment, liquidity assets and loans held for sale represented approximately 82%, 13% and 5%, respectively, of average earning assets compared to approximately 81%, 17% and 2%, respectively, in 2016.

Average interest-bearing liabilities for the year ended December 31, 2017 increased $1.2 billion from the year ended December 31, 2016, which included a $1.0 billion increase in interest-bearing deposits and a $137.9 million increase in other borrowings. For the same periods, the average balance of demand deposits increased to $8.3 billion from $8.1 billion. The average cost of total deposits and borrowed funds increased to 0.49% for the year ended December 31, 2017, compared to 0.23% for 2016. The average cost of interest-bearing liabilities increased from 0.58% for the year ended December 31, 2016 to 0.97% for 2017.

Net interest income was $639.8 million for the year ended December 31, 2016 compared to $556.5 million for 2015. The increase in net interest income was primarily due to an increase of $2.7 billion in average earning assets as compared to 2015. The increase in average earning assets included a $1.5 billion increase in average net loans, a $735.0 million increase in average liquidity assets and a $410.0 million increase in average loans held for sale. For the year ended December 31, 2016, average net loans, liquidity assets and loans held for sale represented approximately 81%, 17% and 2%, respectively, of average earning assets compared to approximately 84%, 15% and less than 1%, respectively, in 2015.

Average interest-bearing liabilities for the year ended December 31, 2016 increased $902.1 million from the year ended December 31, 2015, which included an $803.4 million increase in interest-bearing deposits and a $98.3 million increase in other borrowings. For the same periods, the average balance of demand deposits increased to $8.1 billion from $6.4 billion. The

Rates



	Year ended December 31,
	2019						2018						2017
(in thousands except percentages)	Average Balance		Revenue / Expense		Yield / Rate		Average Balance		Revenue / Expense		Yield / Rate		Average Balance		Revenue / Expense		Yield / Rate
Assets
Investment Securities—taxable	$	37,574	$	1,611	4.29	%	$	24,142	$	849	3.52	%	$	51,751	$	1,064	2.06	%
Investment Securities—non-taxable(2)	176,328		8,915		5.06	%	46,553		2,512		5.40	%	55		3		4.85	%
Federal funds sold and securities purchased under resale agreements	73,946		1,529		2.07	%	201,236		3,792		1.88	%	237,371		2,542		1.07	%
Interest-bearing Deposits in other banks	3,483,254		71,093		2.04	%	1,769,074		32,597		1.84	%	2,715,669		29,399		1.08	%
Loans held for sale	2,688,677		112,526		4.19	%	1,561,530		71,240		4.56	%	1,016,144		39,159		3.85	%
Loans held for investment, mortgage finance	6,999,585		241,665		3.45	%	4,875,860		181,438		3.72	%	4,136,653		143,275		3.46	%
Loans held for investment(1)(2)	16,803,930		934,228		5.56	%	16,075,007		877,688		5.46	%	14,040,965		670,265		4.77	%
Less reserve for loan losses	200,283		—		—		183,863		—		—		174,105		—		—
Loans held for investment, net	23,603,232		1,175,893		4.98	%	20,767,004		1,059,126		5.10	%	18,003,513		813,540		4.52	%
Total earning assets	30,063,011		1,371,567		4.56	%	24,369,539		1,170,116		4.80	%	22,024,503		885,707		4.02	%
Cash and other assets	952,994						828,150						680,345
Total assets	$	31,016,005					$	25,197,689					$	22,704,848
Liabilities and stockholders’ equity
Transaction deposits	$	3,535,282	$	68,908	1.95	%	$	3,044,300	$	47,738	1.57	%	$	2,159,375	$	15,290	0.71	%
Savings deposits	9,780,532		168,856		1.73	%	7,986,135		114,255		1.43	%	7,495,318		61,230		0.82	%
Time deposits	2,351,698		55,773		2.37	%	1,292,864		23,123		1.79	%	478,513		3,366		0.70	%
Total interest-bearing deposits	15,667,512		293,537		1.87	%	12,323,299		185,116		1.50	%	10,133,206		79,886		0.79	%
Other borrowings	3,038,095		70,265		2.31	%	2,102,404		42,738		2.03	%	1,618,238		17,729		1.10	%
Subordinated notes	281,936		16,764		5.95	%	281,574		16,764		5.95	%	281,213		16,764		5.96	%
Trust preferred subordinated debentures	113,406		5,026		4.43	%	113,406		4,715		4.16	%	113,406		3,592		3.17	%
Total interest-bearing liabilities	19,100,949		385,592		2.02	%	14,820,683		249,333		1.68	%	12,146,063		117,971		0.97	%
Demand deposits	8,989,104						7,890,304						8,320,650
Other liabilities	246,931						121,203						118,944
Stockholders’ equity	2,679,021						2,365,499						2,119,191
Total liabilities and stockholders’ equity	$	31,016,005					$	25,197,689					$	22,704,848

Net interest income(2)			$	985,975					$	920,783					$	767,736
Net interest margin					3.28	%					3.78	%					3.49	%
Net interest spread					2.54	%					3.12	%					3.05	%
Loan spread(3)					3.59	%					4.04	%					4.00	%


(1)	The loan averages include non-accrual loans which are stated net of unearned income. Loan interest income includes loan fees totaling $57.1 million, $71.0 million and $59.5 million for the years ended December 31, 2019, 2018 and 2017, respectively.


(2)	Taxable equivalent rates used where applicable.


(3)	Yield on loans, net of reserves, less funding cost including all deposits and borrowed funds.

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average cost of total deposits and borrowed funds increased to 0.23% for the year ended December 31, 2016, compared to 0.17% for 2015. The average cost of interest-bearing liabilities increased from 0.46% for the year ended December 31, 2015 to 0.58% for 2016.

Volume/Rate Analysis

The following table presents the changes ~~(in thousands)~~ in taxable-equivalent net interest income and identifies the changes due to differences in the average volume of earning assets and interest-bearing liabilities and the changes due to differences in the average interest rate on those assets and liabilities.


	Years Ended December 31,																	Years Ended December 31,
	2017/2016								2016/2015									2019/2018									2018/2017
	Net Change		Change Due To(1)						Net Change			Change Due To(1)						Net Change			Change Due To(1)						Net Change		Change Due To(1)
			Volume			Yield/Rate(2)						Volume			Yield/Rate(2)
(in thousands)																		Net Change			Volume			Yield/Rate(2)					Net Change			Volume		Yield/Rate(2)
Interest income:
Securities	$	88	$	868		$	(780	)	$	(305	)	$	(301	)	$	(4	)
Investment securities																		$	7,165		$	5,787		$	1,378		$	2,294	$	722		$	1,572
Loans held for sale	25,150		20,183			4,967			13,766			15,667			(1,901		)	41,286			51,381			(10,095		)	32,081		21,385			10,696
Loans held for investment, mortgage finance loans	8,528		(4,906		)	13,434			15,070			9,004			6,066			60,227			78,979			(18,752		)	38,163		25,541			12,622
Loans held for investment	134,234		72,328			61,906			61,222			53,751			7,471			56,540			38,729			17,811			207,423		96,521			110,902
Federal funds sold and securities purchased under resale agreements	995		(357		)	1,352			865			102			763			(2,263		)	(2,329		)	66			1,250		(435		)	1,685
Deposits in other banks	13,087		(2,174		)	15,261			10,019			1,792			8,227
Interest-bearing deposits in other banks																		38,496			36,304			2,192			3,198		(10,437		)	13,635
Total	182,082		85,942			96,140			100,637			80,015			20,622			201,451			208,851			(7,400		)	284,409		133,297			151,112
Interest expense:
Transaction deposits	8,071		(131		)	8,202			4,604			808			3,796			21,170			7,644			13,526			32,448		6,197			26,251
Savings deposits	34,202		4,609			29,593			8,290			1,530			6,760			54,601			27,534			27,067			53,025		3,382			49,643
Time deposits	438		(87		)	525			294			(89		)	383			32,650			15,517			17,133			19,757		6,181			13,576
Deposits in foreign branches	—		—			—			(591		)	(591		)	—
Other borrowings	11,084		619			10,465			4,110			180			3,930			27,527			18,344			9,183			25,009		5,173			19,836
Long-term debt	583		—			583			458			22			436			311			20			291			1,123		20			1,103
Total	54,378		5,010			49,368			17,165			1,860			15,305			136,259			69,059			67,200			131,362		20,953			110,409
Net interest income	$	127,704	$	80,932		$	46,772		$	83,472		$	78,155		$	5,317		$	65,192		$	139,792		$	(74,600	)	$	153,047	$	112,344		$	40,703


(1)	Yield/rate and volume variances are allocated to yield/rate.


(2)	Taxable equivalent rates used where applicable assuming a ~~35%~~21% tax rate.

Net ~~interest margin, which is defined as the ratio of net~~Interest Income

Net interest income ~~to average earning assets,~~ was ~~3.49%~~$979.7 million for the year ended December 31, ~~2017,~~2019 compared to ~~3.14%~~$914.9 million for ~~2016.~~2018. The increase was primarily due to an increase in average earning assets of $5.7 billion, offset by the effect of decreases in interest rates on loan yields, an increase in average interest-bearing liabilities of $4.3 billion and the effect of increasing funding costs. The increase in average earning assets included a $1.1 billion increase in average loans held for sale, a $2.8 billion increase in average net loans held for investment, primarily from increases in average mortgage finance loans driven by lower long-term interest rates, a $143.2 million increase in average investment securities, and a $1.6 billion increase in average liquidity assets. The increase in average interest-bearing liabilities included a $3.3 billion increase in interest-bearing deposits and a $935.7 million increase in other borrowings. Average demand deposits for the year ended December 31, 2019 increased to $9.0 billion from $7.9 billion for 2018. Net interest margin for the year ended December 31, 2019 was 3.28% compared to 3.78% for 2018. The decrease was primarily due to the effect of ~~increases~~decreases in interest rates during 2019 on loan yields ~~attributable~~and higher funding costs compared to ~~our asset-sensitive balance sheet.~~ 2018.

The yield on total loans held for investment ~~increased~~decreased to ~~4.52%~~4.98% for the year ended December 31, ~~2017~~2019 compared to ~~4.07%~~5.10% for ~~2016~~2018 and the yield on earning assets ~~increased~~decreased to ~~4.02%~~4.56% for the year ended December 31, ~~2017~~2019 compared to ~~3.45%~~4.80% for ~~2016. Funding costs, including demand~~2018. The average cost of total deposits and borrowed funds increased to ~~0.49%~~1.31% for ~~2017 compared to 0.23%~~2019 from 1.02% for ~~2016.~~2018. The spread on total earning assets, net of the cost of deposits and borrowed funds, was ~~3.53%~~3.25% for ~~2017~~2019 compared to ~~3.22%~~3.78% for ~~2016.~~2018. The ~~increase resulted~~decrease was primarily ~~from increases in interest rates and increases~~a result of an increase in the ~~higher yielding~~cost of interest-bearing liabilities coupled with declining loan ~~components of earning assets.~~yields. Total funding costs, including all deposits, long-term debt and stockholders' equity increased to ~~0.52%~~1.25% for ~~2017~~2019 compared to ~~0.30%~~0.99% for ~~2016. Average long-term debt remained flat as compared to 2016 and the average interest rate on long-term debt for 2017 was 5.16% compared to 5.02% for 2016.~~2018.

Net interest margin remained flat at 3.14% for the year ended December 31, 2016, compared to 2015. We experienced a 5 basis point increase in the yield on earning assets, primarily as a result of growth in loans with higher yields. Funding costs, including demand deposits and borrowed funds, increased to 0.23% for 2016 compared to 0.17% for 2015. The spread on total earning assets, net of the cost of deposits and borrowed funds, was 3.22% for 2016 compared to 3.23% for 2015. Total funding costs, including all deposits, long-term debt and stockholders' equity increased to .30% for 2016 compared to 0.25% for 2015. Average long-term debt remained flat as compared to 2015 and the average interest rate on long-term debt for 2016 was 5.02% compared to 4.90% for 2015.

3339

~~Table of Contents~~

~~Consolidated Daily Average Balances, Average Yields and Rates~~

Year ended December 31,

2017 2016 2015

Average
Balance
Revenue /
Expense
Yield /
Rate
Average
Balance
Revenue /
Expense Yield /
Rate
Average
Balance
Revenue /
Expense Yield /
Rate
Assets
Securities—taxable $ 51,751
$ 1,064
2.06 % $ 26,619
$ 943
3.54 % $ 33,616
$ 1,197
3.56 %
Securities—non-taxable(2) 55
3
4.85 % 604
36
5.92 % 1,544
87
5.63 %
Federal funds sold and securities purchased under resale agreements 237,371
2,542
1.07 % 310,128
1,547
0.50 % 269,610
682
0.25 %
Deposits in other banks 2,715,669
29,399
1.08 % 3,133,196
16,312
0.52 % 2,438,742
6,293
0.26 %
Loans held for sale 1,016,144
39,159
3.85 % 416,325
14,009
3.36 % 6,359
243
3.82 %
Loans held for investment, mortgage finance 4,136,653
143,275
3.46 % 4,292,942
134,747
3.14 % 3,992,548
119,677
3.00 %
Loans held for investment(1)(2) 14,040,965
670,265
4.77 % 12,371,634
536,031
4.33 % 11,113,520
474,809
4.27 %
Less reserve for loan losses 174,105
—
—
163,623
—
—
114,965
—
—
Loans held for investment, net 18,003,513
813,540
4.52 % 16,500,953
670,778
4.07 % 14,991,103
594,486
3.97 %
Total earning assets 22,024,503
885,707
4.02 % 20,387,825
703,625
3.45 % 17,740,974
602,988
3.40 %
Cash and other assets 680,345
558,900
480,616

Total assets $ 22,704,848
$ 20,946,725
$ 18,221,590

Liabilities and stockholders’ equity
Transaction deposits $ 2,159,375
$ 15,290
0.71 % $ 2,199,292
$ 7,219
0.33 % $ 1,680,220
$ 2,615
0.16 %
Savings deposits 7,495,318
61,230
0.82 % 6,403,306
27,028
0.42 % 5,920,046
18,738
0.32 %
Time deposits 478,513
3,366
0.70 % 493,128
2,928
0.59 % 510,378
2,634
0.52 %
Deposits in foreign branches —
—
— % —
—
— % 181,657
591
0.33 %
Total interest-bearing deposits 10,133,206
79,886
0.79 % 9,095,726
37,175
0.41 % 8,292,301
24,578
0.30 %
Other borrowings 1,618,238
17,729
1.10 % 1,480,302
6,645
0.45 % 1,382,013
2,535
0.18 %
Subordinated notes 281,213
16,764
5.96 % 280,850
16,764
5.97 % 280,487
16,764
5.98 %
Trust preferred subordinated debentures 113,406
3,592
3.17 % 113,406
3,009
2.65 % 113,406
2,551
2.25 %
Total interest-bearing liabilities 12,146,063
117,971
0.97 % 10,970,284
63,593
0.58 % 10,068,207
46,428
0.46 %
Demand deposits 8,320,650
8,124,174
6,447,147

Other liabilities 118,944
134,678
155,960

Stockholders’ equity 2,119,191
1,717,589
1,550,276

Total liabilities and stockholders’ equity $ 22,704,848
$ 20,946,725
$ 18,221,590

Net interest income(2) $ 767,736
$ 640,032
$ 556,560

Net interest margin 3.49 % 3.14 % 3.14 %
Net interest spread 3.05 % 2.87 % 2.94 %
Loan spread(3) 4.00 % 3.81 % 3.80 %


~~(1)~~	The loan averages include non-accrual loans which are stated net of unearned income. Loan interest income includes loan fees totaling $66.9 million, $56.5 million and $55.8 million for the years ended December 31, 2017, 2016 and 2015, respectively.


~~(2)~~	~~Taxable equivalent rates used where applicable assuming a 35% tax rate.~~


~~(3)~~	~~Yield on loans, net of reserves, less funding cost including all deposits and borrowed funds.~~

Table of Contents

Non-interest Income


	Year ended December 31,							Year ended December 31,
	2017		2016		2015
	(in thousands)
(in thousands)								2019			2018			2017
Service charges on deposit accounts	$	12,432	$	10,341	$	8,323		$	11,320		$	12,787		$	12,432
Wealth management and trust fee income	6,153		4,268		5,022			8,810			8,148			6,153
Bank owned life insurance (BOLI) income	2,260		2,073		2,011
Brokered loan fees	23,331		25,339		18,661			29,738			22,532			23,331
Servicing income	15,657		1,715		(12		)	13,439			18,307			15,657
Swap fees	3,990		2,866		4,275			4,387			5,625			3,990
Net gain/(loss) on sale of loans held for sale								(20,259		)	(15,934		)	(2,387		)
Other(1)	10,433		14,178		9,458			45,005			26,559			15,080
Total non-interest income	$	74,256	$	60,780	$	47,738		$	92,440		$	78,024		$	74,256


(1)	Other non-interest income includes such items as letter of credit fees, ~~gain~~bank owned life insurance ("BOLI") income, dividends on ~~sale of loans held for sale~~FHLB and FRB stock, income from legal settlements 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 ~~$13.5~~$14.4 million during the year ended December 31, ~~2017~~2019 to ~~$74.3~~$92.4 million, compared to ~~$60.8~~$78.0 million for 2016. This increase was primarily due to a $13.9 million increase in servicing income during 2017 compared to 2016 attributable to an increase in MSRs. Service charges increased $2.1 million during 2017 compared to 2016 as a result of the increase in deposit balances and improved pricing of treasury services. Wealth management and trust fee2018. Other non-interest income increased ~~$1.9~~$18.4 million, which included the settlement of $15.0 million in legal claims during ~~2017 compared to 2016~~2019. Brokered loan fees increased $7.2 million due to an increase in ~~assets under management. Swap fees increased $1.1 million~~total mortgage finance volumes during ~~2017~~2019 compared to ~~2016.~~2018. Offsetting these increases was a $4.9 million decrease in servicing income due to an overall decrease in average MSR balances held during 2019 as compared to 2018, a $4.3 million decrease in net gain/(loss) on sale of loans held for sale, a $1.5 million decrease in service charges and a $1.2 million decrease in swap fees. Swap fees are ~~fees related to~~based upon customer swap transactions, are received from the institution that is our counterparty on the transaction and fluctuate from time to time based on the number and volume of transactions closed during the year. Offsetting these increases were decreases of $3.7 million and $2.0 million in other non-interest income and brokered loan fees, respectively, compared to 2016. The decrease in brokered loan fees during 2017 compared to 2016 resulted from a decrease in total mortgage finance volumes. The decrease in other non-interest income during 2017 compared to 2016 primarily related to a decrease in the gain on sale of loans held for sale in our MCA business.

Non-interest income increased by $13.0 million during the year ended December 31, 2016 to $60.8 million, compared to $47.7 million for 2015. This increase was primarily due to a $6.7 million increase in brokered loan fees as a result of an increase in mortgage finance and MCA volumes. Service charges increased $2.0 million during 2016 compared to 2015 as a result of an increase in deposit balances year-over-year as well as improved pricing. Servicing income increased $1.7 million during 2016 compared to 2015 attributable to an increase in MSRs. Other non-interest income increased $4.7 million during 2016 compared to 2015, of which $3.0 million relates to an increase in gain on sale of loans held for sale related to our MCA business. Offsetting these increases was a $1.4 million decrease in swap fee income during the year ended December 31, 2016 as compared to 2015.

While management expects continued growth in certain components of non-interest income, the future rate of growth could be affected by increased competition from national and regional financial institutions and general economic conditions. In order to achieve continued growth in non-interest income, management from time to time evaluates new products, new lines of business or the expansion of existing lines of business. Any new product introduction or new market entry could place additional demands on capital and managerial resources and introduce new risks to our business.

~~Table of Contents~~

Non-interest Expense


	Year ended December 31,						Year ended December 31,
	2017		2016		2015
	(in thousands)
(in thousands)							2019		2018		2017
Salaries and employee benefits	$	264,231	$	228,985	$	192,610	$	315,080	$	291,768	$	264,231
Net occupancy expense	25,811		23,221		23,182		32,989		30,342		25,811
Marketing	26,787		17,303		16,491		53,355		39,335		26,787
Legal and professional	29,731		23,326		22,150		53,830		42,990		29,731
Communications and technology	31,004		25,562		21,425		44,826		30,056		31,004
FDIC insurance assessment	23,510		24,440		17,231		20,093		24,307		23,510
Servicing related expenses	15,506		1,703		14
Servicing-related expenses							22,573		14,934		15,506
Allowance and other carrying costs for OREO	6,437		824		22		7		474		6,437
Other(1)	42,859		37,033		33,398		47,246		50,890		42,859
Total non-interest expense	$	465,876	$	382,397	$	326,523	$	589,999	$	525,096	$	465,876


(1)	Other expense includes such items as courier expenses, regulatory assessments other than FDIC insurance, ~~due from bank charges~~insurance expenses and other general operating ~~expenses, none of which account for 1% or more of total interest income and non-interest income.~~expenses.

Non-interest expense for the year ended December 31, ~~2017~~2019 increased ~~$83.5~~$64.9 million compared to ~~2016.~~2018. The increase is primarily due to increases in salaries and employee benefits, ~~marketing, legal and professional, other non-interest~~net occupancy expense and ~~communications~~communication and technology expenses, all of which were due to general business growth and continued ~~build-out. Also contributing to the year-over-year~~build-out, as well as increases in marketing, legal and professional and servicing-related expenses, partially offset by decreases in FDIC insurance assessment and other non-interest expense. The increase in ~~non-interest~~marketing expense was ~~a $13.8 million increase in servicing related expenses resulting from a $2.8 million impairment charge~~ primarily due to an ~~anticipated sale of Ginnie Mae MSRs in the first or second quarter of 2018 and an~~ increase in ~~amortization and servicing~~variable expenses ~~related~~tied to ~~MSRs. Allowance and other carrying costs for OREO increased $5.6 million primarily due to a $6.1 million write-down of one OREO property taken during the fourth quarter of 2017.~~

~~Non-interest expense for the year ended December 31, 2016 increased $55.9 million compared to 2015.~~deposit balances. The increase ~~is primarily due to increases of $36.4 million, $4.1 million and $1.2 million~~ in ~~salaries and employee benefits, communications and technology expense and~~ legal and professional expense ~~all of which were~~includes $1.3 million in expenses related to our pending merger with IBTX, as well as increases related to investment in Bask Bank and new commercial loan verticals. The increase in servicing-related expenses is due to ~~general business growth and continued build-out. Also contributing to the year-over-year increase in non-interest~~higher amortization expense ~~was a $7.2 million increase in FDIC insurance assessment~~ resulting from higher mortgage prepayment rates, as well as an increase in ~~total assets from December 31, 2015 to December 31, 2016.~~impairment expense.

Table of Contents

Analysis of Financial Condition

Loans Held for Investment

The following table summarizes our loans held for investment on a gross basis by portfolio segment:



	December 31,
(in thousands)	2019		2018		2017		2016		2015
Commercial	$	10,230,828	$	10,373,288	$	9,189,811	$	7,291,545	$	6,672,631
Mortgage finance	8,169,849		5,877,524		5,308,160		4,497,338		4,966,276
Construction	2,563,339		2,120,966		2,166,208		2,098,706		1,851,717
Real estate	3,444,701		3,929,117		3,794,577		3,462,203		3,139,197
Consumer	71,463		63,438		48,684		34,587		25,323
Equipment leases	256,462		312,191		264,903		185,529		113,996
Total loans held for investment	$	24,736,642	$	22,676,524	$	20,772,343	$	17,569,908	$	16,769,140

Our total loans held for investment have grown at an annual rate of ~~18%~~9%, 5%9% and ~~17%~~18% in 2019, 2018 and 2017, ~~2016 and 2015,~~ respectively, ~~reflecting~~with the continued build-up of our lending operations. Our business plan focuses primarily on lending to middle market businesses and successful professionals and entrepreneurs, and as such, commercial, real estate and construction loans have comprised a majority of ~~our loan portfolio, representing 73% of total loans held for investment at December 31, 2017. Consumer loans generally have represented 1% or less of~~ the ~~portfolio from December 31, 2013~~growth in 2019 relating to ~~December 31, 2017. Mortgage~~mortgage finance loans. These loans relate to our mortgage warehouse lending operations in which we purchase mortgage loan ownership interests that are typically sold within 10 to 20 ~~days.~~days and represent 33% of total loans held for investment at December 31, 2019 compared to 26% at December 31, 2018. Volumes fluctuate based on the level of market demand for the product and the number of days between purchase and sale of the loans, ~~as well as~~which can be affected by changes in overall market interest rates, and tend to peak at the end of each month. The significant growth in this portfolio during 2019 resulted from increases in volumes driven by continued lower long-term interest rates. Offsetting this increase was a slight decline in traditional loans held for investment in 2019. These declines reflect slower loan growth in 2019 as compared to 2018, as well as planned reductions in our leveraged lending and energy balances.

We originate a substantial majority of all loans held for ~~investment, excluding mortgage finance loans.~~investment. We also participate in syndicated loan relationships, both as a participant and as an agent. As of December 31, ~~2017,~~2019, we had ~~$2.6~~$2.3 billion in syndicated loans, ~~$877.8~~$621.1 million of which we administer as agent. All syndicated loans, whether we act as agent or participant, are underwritten to the same standards as all other loans we originate. As of December 31, ~~2017, $52.1~~2019, $26.0 million of our syndicated loans were on non-accrual.

~~Table of Contents~~

~~The following table summarizes our loans held for investment on a gross basis by major category as of the dates indicated (in thousands):~~

December 31,
2017 2016 2015 2014 2013
Commercial $ 9,189,811
$ 7,291,545
$ 6,672,631
$ 5,869,219
$ 5,020,565
Mortgage finance 5,308,160
4,497,338
4,966,276
4,102,125
2,784,265
Construction 2,166,208
2,098,706
1,851,717
1,416,405
1,262,905
Real estate 3,794,577
3,462,203
3,139,197
2,807,127
2,146,522
Consumer 48,684
34,587
25,323
19,699
15,350
Equipment leases 264,903
185,529
113,996
99,495
93,160
Total loans held for investment $ 20,772,343
$ 17,569,908
$ 16,769,140
$ 14,314,070
$ 11,322,767

For additional information on the types of loans we originate, see Note 3 - Loans Held for Investment and Allowance for Loan Losses in the accompanying notes to the consolidated financial statements included elsewhere in this report.

Portfolio Geographic and Industry Concentrations

~~More~~Although more than 50% of our total loan exposure is outside of Texas and more than 50% of our deposits are sourced outside of ~~Texas. However, as~~Texas, our Texas concentration remains significant. As of December 31, ~~2017,~~2019, a majority of our loans held for investment, excluding ~~our~~ mortgage finance loans and other national lines of business, were to businesses with headquarters or operations in Texas. This geographic concentration subjects the loan portfolio to the general economic conditions within this ~~area.~~state. We also make loans to ~~these~~ customers that are secured by assets located outside of Texas. The risks created by this concentration have been considered by management in the determination of the appropriateness of the allowance for loan losses.

~~We updated our internal industry reporting during 2017 to provide more clarity in our portfolio analysis and comparison to our banking peers.~~

Table of Contents

The table below summarizes the industry concentrations of our ~~funded~~ loans held for investment on a gross basis at December 31, ~~2017.~~2019.

(in thousands except percentage data) Amount
Percent of
Total Loans Held for Investment
Mortgage finance loans 5,308,160
25.6 %
Real estate and construction 5,012,727
24.1 %
Financials excluding banks 4,193,356
20.2 %
Oil & gas and pipelines 1,260,158
6.1 %
Healthcare and pharmaceuticals 753,667
3.6 %
Retail 456,414
2.2 %
Machinery, equipment and parts manufacturing 458,528
2.2 %
Technology, telecom and media 394,104
1.9 %
Government and education 676,446
3.3 %
Commercial services 368,135
1.8 %
Materials and commodities 262,914
1.3 %
Consumer services 232,927
1.1 %
Transportation services 129,444
0.6 %
Entertainment and recreation 234,364
1.1 %
Food and beverage manufacturing and wholesale 123,427
0.6 %
Auto-related 129,704
0.6 %
Diversified or miscellaneous 777,868
3.7 %
Total loans held for investment $ 20,772,343
100.0 %

~~Table of Contents~~



(in thousands except percentage data)	Amount		Percent of Total Loans Held for Investment
Industry type:
Mortgage finance loans	$	8,169,849	33.0	%
Real estate and construction	5,430,580		22.0	%
Financials excluding banks	5,053,285		20.4	%
Oil & gas and pipelines	1,665,422		6.7	%
Government and education	527,217		2.1	%
Healthcare and pharmaceuticals	510,077		2.1	%
Machinery, equipment and parts manufacturing	409,306		1.7	%
Commercial services	368,394		1.5	%
Retail	360,463		1.5	%
Technology, telecom and media	309,237		1.3	%
Materials and commodities	260,896		1.1	%
Entertainment and recreation	200,181		0.8	%
Food and beverage manufacturing and wholesale	193,964		0.8	%
Consumer services	178,726		0.7	%
Transportation services	98,813		0.4	%
Auto-related	80,794		0.3	%
Diversified or miscellaneous	919,438		3.6	%
Total loans held for investment	$	24,736,642	100.0	%

Our largest concentration ~~in traditional~~of loans held for investment, excluding mortgage finance, in any single industry is in real estate and construction. Loans extended to borrowers within the real estate and construction industries generally include market risk real estate loans. We extend market risk real estate loans, including both construction/development financing and limited term financing, to builders, professional real estate developers and owners/managers of commercial real estate projects and properties who have a demonstrated record of past success with similar properties. Collateral properties include office buildings, warehouse/distribution buildings, shopping centers, apartment buildings and residential and commercial tract development located primarily within our five major metropolitan markets in Texas. These loans are generally repaid through the borrower's sale or lease of the properties or through refinancing by other institutional sources offering long-term fixed rate financing. Loan amounts are determined in part from an analysis of pro forma cash flows. Loans are also underwritten to comply with product-type specific advance rates against both cost and market value. Borrowers represented within the real estate and construction category are largely owners and managers of both residential and non-residential commercial real estate properties, including homebuilders.

Loans extended to borrowers in the financials excluding banks category are comprised largely of loans to companies who loan money to businesses and consumers for various purposes including, but not limited to, insurance, consumer goods and real estate. This category also includes loans to companies involved in investment management and securities and commodities trading.

Table of Contents

We believe the loans we originate are appropriately collateralized under our credit standards. Approximately 97% of our ~~funded~~ loans held for investment are secured by collateral. Over ~~73%~~61% of the real estate collateral is located in Texas. The table below sets forth information regarding the distribution of our ~~funded~~ loans held for investment on a gross basis among various types of collateral at December 31, ~~2017 (in thousands except percentage data):~~2019:

Amount
Percent of
Total Loans
Collateral type:
Business assets $ 6,360,634
30.6 %
Real property 5,960,785
28.7 %
Mortgage finance loans 5,308,160
25.6 %
Energy 920,346
4.4 %
Municipal tax- and revenue-secured 715,589
3.4 %
Unsecured 649,472
3.1 %
Highly liquid assets 492,527
2.4 %
Other assets 302,041
1.5 %
Rolling stock 51,712
0.2 %
U. S. Government guaranty 11,077
0.1 %
Total loans held for investment $ 20,772,343
100.0 %

~~Table of Contents~~



(in thousands except percentage data)	Amount		Percent of Total Loans Held for Investment
Collateral type:
Mortgage finance loans	$	8,169,849	33.0	%
Business assets	7,257,383		29.3	%
Real property	6,008,040		24.3	%
Energy	1,235,384		5.0	%
Municipal tax- and revenue-secured	635,061		2.6	%
Unsecured	782,993		3.2	%
Highly liquid assets	210,082		0.8	%
Other assets	383,591		1.6	%
Rolling stock	45,982		0.2	%
U. S. Government guaranty	8,277		—	%
Total loans held for investment	$	24,736,642	100.0	%

As noted in the table above, approximately ~~29%~~24.3% of our loans held for investment as of December 31, ~~2017~~2019 are secured by real property. The table below summarizes our total real estate loan portfolio, which includes real estate loans and construction loans, 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, ~~2017 (in thousands except percentage data):~~2019:


	Amount		Percent of Total Real Estate Loans
(in thousands except percentage data)					Amount		Percent of Total Real Estate Loans
Property type:
Market risk
Apartment buildings					$	1,011,552	16.8	%
1-4 Family dwellings (other than condominium)	$	886,760	14.9	%	731,220		12.2	%
Commercial buildings	779,294		13.1	%	704,318		11.7	%
Hotel/motel buildings					377,412		6.3	%
Hospital/medical buildings	589,162		9.9	%	367,156		6.1	%
Apartment buildings	502,037		8.4	%
Hotel/motel buildings	421,117		7.1	%
Industrial buildings	410,091		6.9	%
Residential lots	372,045		6.2	%	348,282		5.8	%
Shopping center/mall buildings	341,694		5.7	%	327,431		5.4	%
Industrial buildings					294,315		4.9	%
Commercial lots	92,255		1.5	%	94,214		1.6	%
Unimproved land	72,590		1.2	%	54,657		0.9	%
Other	315,186		5.3	%	476,194		7.9	%
Other than market risk
1-4 Family dwellings (other than condominium)					384,094		6.4	%
Commercial buildings	343,591		5.8	%	311,948		5.2	%
1-4 Family dwellings (other than condominium)	314,698		5.3	%
Industrial buildings	227,206		3.8	%	300,184		5.0	%
Other	293,059		4.9	%	225,063		3.8	%
Total real estate loans	$	5,960,785	100.0	%	$	6,008,040	100.0	%

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The table below summarizes our market risk real estate portfolio at December 31, ~~2017~~2019 as segregated by the geographic region in which the property is ~~located (in thousands except percentage data):~~located:


	Amount		Percent of Total
(in thousands except percentage data)					Amount		Percent of Total
Geographic region:
Dallas/Fort Worth	$	1,200,812	25.1	%	$	1,095,967	22.9	%
Houston	1,122,349		23.5	%	908,119		19.0	%
San Antonio	537,764		11.2	%	411,146		8.6	%
Austin	514,247		10.8	%	403,945		8.4	%
Other Texas cities	173,107		3.6	%	108,281		2.3	%
Other states	1,233,952		25.8	%	1,859,293		38.8	%
Total market risk real estate loans	$	4,782,231	100.0	%	$	4,786,751	100	%

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. We engage a variety of professional firms to supply appraisals, market studies and feasibility reports, environmental assessments and project site inspections to complement our internal resources to underwrite and monitor these credit exposures. Generally, our policy requires a new appraisal every three years. However, in periods of economic uncertainty where real estate values can fluctuate 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 or other indicators of increasing risk of reliance on collateral value as the sole source of repayment of the loan. Annual appraisals are generally obtained for 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.

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Appraisals are, in substantially all cases, reviewed by a third party to determine the reasonableness of the appraised value. The third party reviewer will challenge whether or not the data used is appropriate and relevant, form an opinion as to the appropriateness of the appraisal methods and techniques used, and determine if overall the analysis and conclusions of the appraiser can be relied upon. Additionally, the third party reviewer provides a detailed report of that analysis. Further review may be conducted by our credit officers, as well as by the Bank’s managed asset committee as conditions warrant. These additional steps of review are undertaken to confirm that the underlying appraisal and the third party analysis can be relied upon. If we have differences, we address those with the reviewer and determine an appropriate resolution. Both the appraisal process and the appraisal review process can be less reliable in establishing accurate collateral values during and following periods of economic weakness due to the lack of comparable sales and the limited availability of financing to support an active market of potential purchasers.

Large Credit Relationships

We originate and maintain large credit relationships with numerous customers in the ordinary course of business. The legal lending limit of our Bank is approximately ~~$385.2~~$489.3 million. We employ much lower house limits which vary by assigned risk grade, product and collateral type. Such house limits, which generally range from $20 million to $50 million, may be exceeded with appropriate authorization for exceptionally strong borrowers and otherwise where business opportunity and perceived credit risk warrant a somewhat larger investment. We consider large credit relationships to be those with commitments equal to or in excess of $20.0 million. The following table provides additional information on our large held for investment credit relationships, excluding mortgage finance, outstanding at ~~year-end (in thousands, except relationship data):~~

year-end:


	December 31, 2017					December 31, 2016					December 31, 2019					December 31, 2018
		Period End Balances					Period End Balances					Period End Balances					Period End Balances
	Number of Relationships	Committed		Outstanding		Number of Relationships	Committed		Outstanding
(in thousands, except relationship data)											Number of Relationships	Committed		Outstanding		Number of Relationships	Committed		Outstanding
$30.0 million and greater	109	$	4,817,219	$	2,610,872	65	$	2,783,291	$	1,454,065	177	$	8,254,124	$	4,251,321	152	$	6,995,259	$	3,678,155
$20.0 million to $29.9 million	206	4,802,310		2,957,223		187	4,389,200		2,790,393		196	4,708,982		3,103,200		224	5,272,529		3,362,732

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Growth in period-end outstanding balances related to large credit relationships primarily resulted from an increase in the number of commitments. The following table summarizes the average ~~per relationship~~ committed and outstanding loan balances per relationship related to our large held for investment credit relationships, excluding mortgage finance, at ~~year-end (in thousands):~~

year-end:

2017 Average Balance 2016 Average Balance

Committed Outstanding Committed Outstanding
$30.0 million and greater $ 44,195
$ 23,953
$ 42,820
$ 22,370
$20.0 million to $29.9 million 23,312
14,355
23,472
14,921

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	2019 Average Balance per Relationship				2018 Average Balance per Relationship
(in thousands)	Committed		Outstanding		Committed		Outstanding
$30.0 million and greater	$	46,633	$	24,019	$	46,021	$	24,198
$20.0 million to $29.9 million	24,025		15,833		23,538		15,012

Loan Maturities and Interest Rate Sensitivity ~~as of December 31, 2017~~


	Remaining Maturities of Selected Loans								December 31, 2019
(in thousands)	Total		Within 1 Year		1-5 Years		After 5 Years		Total		Within 1 Year		1-5 Years		After 5 Years
Loan maturity:
Commercial	$	9,189,811	$	3,801,267	$	4,566,771	$	821,773	$	10,230,828	$	3,563,035	$	5,807,416	$	860,377
Mortgage finance	5,308,160		5,308,160		—		—		8,169,849		8,169,849		—		—
Construction	2,166,208		677,722		1,423,761		64,725		2,563,339		731,908		1,766,100		65,331
Real estate	3,794,577		806,527		2,127,767		860,283		3,444,701		664,770		1,851,049		928,882
Consumer	48,684		33,989		4,588		10,107		71,463		56,182		7,740		7,541
Equipment leases	264,903		11,240		93,006		160,657		256,462		29,512		107,965		118,985
Total loans held for investment	$	20,772,343	$	10,638,905	$	8,215,893	$	1,917,545	$	24,736,642	$	13,215,256	$	9,540,270	$	1,981,116
Interest rate sensitivity for selected loans with:
Predetermined interest rates	$	3,025,345	$	1,438,322	$	592,476	$	994,547	$	3,074,975	$	1,556,329	$	530,507	$	988,139
Floating or adjustable interest rates	17,746,998		9,200,583		7,623,417		922,998		21,661,667		11,658,927		9,009,763		992,977
Total loans held for investment	$	20,772,343	$	10,638,905	$	8,215,893	$	1,917,545	$	24,736,642	$	13,215,256	$	9,540,270	$	1,981,116

Interest Reserve Loans

As of December 31, ~~2017~~2019 and December 31, ~~2016,~~2018, we had ~~$894.4~~$743.8 million and ~~$870.0~~$718.5 million, respectively, in loans held for investment that included interest reserve arrangements, representing approximately ~~41%~~29% and ~~41%~~34%, respectively, of our construction loans. Interest reserve provisions are common in construction loans. The use of interest reserves is carefully controlled by our underwriting standards, which consider the feasibility of the project, the creditworthiness of the borrower and guarantors and the loan-to-value coverage of the collateral. The interest reserve allows the borrower to draw loan funds to pay interest charges on the outstanding balance of the loan when financial conditions precedent are met. When drawn, the interest is capitalized and added to the loan balance, subject to conditions specified during the initial underwriting and at the time the credit is approved. We have ongoing controls for monitoring compliance with loan covenants, advancing funds and determining default conditions.

When we finance land on which improvements will be constructed, construction funds are generally not advanced until the borrower has received lease or purchase commitments which will meet cash flow coverage requirements and/or our analysis of market conditions and project feasibility indicates to our satisfaction that such lease or purchase commitments are forthcoming or other sources of repayment have been identified to repay the loan. It is our general policy to require a substantial equity investment by the borrower to complement the Bank's credit commitment. Any such required borrower investment is first contributed and invested in the project before any draws are allowed under the Bank's credit commitment. We require current financial statements of the borrowing entity and guarantors, as well as conduct periodic inspections of the project and analysis of whether the project is on schedule or delayed. Updated appraisals are ordered when necessary to validate the collateral values to support 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. If at any time we believe that our collateral position is jeopardized, we retain the right to stop the use of interest reserves. As of December 31, ~~2017~~2019 and December 31, ~~2016,~~2018, none of our loans with interest reserves were on non-accrual.

4145

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Non-performing Assets

Non-performing assets include non-accrual loans and leases and repossessed assets. The table below summarizes our non-performing assets by type and by type of property securing the ~~credit (in thousands):~~credit:


	As of December 31,						As of December 31,
	2017		2016		2015
(in thousands)							2019		2018		2017
Non-accrual loans~~(2)~~(1)
Commercial
Oil and gas properties	$	64,192	$	115,599	$	104,179	$	125,049	$	37,532	$	64,192
Assets of the borrowers	7,571		18,592		30,360		54,538		16,538		7,571
Inventory	24,399		27,630		2,099
Accounts receivable and inventory							29,789		21,300		24,399
Other	3,569		3,119		2,020		4,084		2,493		3,569
Total commercial	99,731		164,940		138,658		213,460		77,863		99,731
Construction
Commercial building	—		—		16,667
Other	—		159		—
Total construction	—		159		16,667
Real estate
Commercial property	1,096		2,083		2,867		1,751		988		1,096
Unimproved land and/or developed residential lots	—		—		3,576
Farm land	—		326		12,486
Single family residences							1,449		1,469		118
Hotel/motel							8,500		—		—
Other	617		—		383		—		—		499
Total real estate	1,713		2,409		19,312		11,700		2,457		1,713
Consumer	—		200		—		34		55		—
Equipment leases	—		83		5,151		190		—		—
Total non-accrual loans	101,444		167,791		179,788		225,384		80,375		101,444
Repossessed assets:
OREO(3)	11,742		18,961		278
Other repossessed assets	—		—		230
Total other repossessed assets	11,742		18,961		508
OREO(2)							—		79		11,742
Total non-performing assets	$	113,186	$	186,752	$	180,296	$	225,384	$	80,454	$	113,186
Restructured loans - accruing	$	—	$	—	$	249	$	—	$	—	$	—
Loans past due 90 days and accruing(4)(5)	$	28,166	$	10,729	$	7,013
Loans held for investment past due 90 days and accruing(3)							$	17,584	$	9,353	$	8,429
Loans held for sale past due 90 days and accruing(4)							$	8,207	$	16,829	$	19,737


(1)	If these loans had been current throughout their terms, interest and fees on loans would have increased by approximately $19.0 million, $7.9 million and $7.0 million for the years ended December 31, 2017, 2016 and 2015, respectively.


~~(2)~~	As of December 31, ~~2017, 2016~~2019, 2018 and ~~2015,~~2017, non-accrual loans included ~~$18.8~~$35.1 million, ~~$18.1~~$20.0 million and ~~$24.9~~$18.8 million, respectively, in loans that met the criteria for restructured.

~~(3)~~(2)

At December 31, ~~2017, 2016~~2019, 2018 and ~~2015,~~2017, there was no valuation allowance recorded against the OREO balance; however, we recorded a $6.1 million write-down on one asset during 2017. For additional information on OREO, see Note 4 - OREO and Valuation Allowance for Losses on OREO in the accompanying notes to the consolidated financial statements included elsewhere in this report.balance.


~~(4)~~(3)	At December 31, ~~2017, 2016~~2019, 2018 and ~~2015,~~2017, loans past due 90 days and still accruing includes premium finance loans of ~~$5.5~~$8.5 million, ~~$6.8~~$9.2 million and ~~$6.6~~$5.5 million, respectively.

~~(5)~~(4)

~~At December 31, 2017,~~Includes loans ~~past due 90 days and still accruing includes $19.7 million in~~guaranteed by U.S. government agencies that were repurchased out of Ginnie Mae securities. Loans are recorded as loans held for sale ~~of which $19.0 million are~~and carried at fair value on the balance sheet. Interest on these past due loans ~~with government guarantees~~accrues at the debenture rate guaranteed by the U.S. government. Also includes loans that, ~~we purchased and sold into securitized Ginnie Mae pools. Pursuant~~pursuant to Ginnie Mae servicing guidelines, we have the unilateral right, but not the obligation, to repurchase ~~these loans~~ if ~~they meet~~ defined delinquent loan criteria are met and therefore must record ~~any delinquent~~as loans as held for sale on our balance sheet regardless of whether the repurchase option has been exercised.

Total non-performing assets at December 31, ~~2017 decreased $73.6~~2019 increased $144.9 million from December 31, ~~2016, compared to a $6.5 million~~2018. The increase ~~from December 31, 2015 to December 31, 2016. The decrease~~ during ~~2017~~2019 primarily related to ~~the~~

~~Table of Contents~~

~~improvements~~increases in our energy ~~portfolio.~~and leveraged loan portfolios. Energy non-performing assets totaled ~~$65.2~~$125.0 million at December 31, ~~2017~~2019 compared to ~~$121.5~~$37.5 million at December 31, ~~2016. Our provision~~2018, and leveraged lending non-performing assets totaled $73.2 million and $28.8 million for ~~credit losses decreased as a result of these improvements, as well as improvements in~~ the composition of our pass-rated and classified loan portfolios. This resulted in a decrease in the allowance for loan losses as a percent of loans excluding mortgage finance loans for 2017 as compared to 2016.same periods, respectively.

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, ~~2017,~~2019, we had ~~$49.1~~$46.6 million in loans of this type, compared to ~~$19.3~~$81.7 million at December 31, ~~2016.~~2018.

For additional information on non-performing assets, see Note 3 - Loans Held for Investment and Allowance for Loan Losses in the accompanying notes to the consolidated financial statements included elsewhere in this report.

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Summary of Loan Loss Experience

The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the allowance for loan losses at a level consistent with management’s assessment of ~~the collectability of~~inherent losses in the loan portfolio ~~in light of current economic conditions and market trends.~~at the balance sheet date. We recorded a provision for credit losses of $75.0 million for the year ended December 31, 2019, $87.0 million for the year ended December 31, 2018, and $44.0 million for the year ended December 31, ~~2017, $77.0 million for the year ended December 31, 2016, and $53.3 million for the year ended December 31, 2015.~~2017. The decrease in provision recorded during ~~2017~~2019 compared to ~~2016~~2018 was primarily related to ~~improvements~~decreases in ~~the composition~~charge-offs and loans held for investment, excluding mortgage finance, balances.

The table below presents a summary of our ~~pass-rated and classified~~ loan ~~portfolios, including energy loans.~~loss experience for the past five years:



	Year Ended December 31,
(in thousands except percentage and multiple data)	2019				2018			2017				2016			2015
Allowance for loan losses:
Beginning balance	$	191,522			$	184,655		$	168,126			$	141,111		$	100,954
Loans charged-off:
Commercial	76,958				79,692			34,145				56,558			16,254
Construction	—				—			59				—			—
Real estate	662				—			290				528			389
Consumer	—				767			180				47			62
Equipment leases	19				319			—				—			25
Total charge-offs	77,639				80,778			34,674				57,133			16,730
Recoveries:
Commercial	3,290				2,468			4,593				9,364			4,944
Construction	—				—			104				34			400
Real estate	—				69			75				63			33
Consumer	69				438			70				21			173
Equipment leases	11				33			10				77			38
Total recoveries	3,370				3,008			4,852				9,559			5,588
Net charge-offs	74,269				77,770			29,822				47,574			11,142
Provision for loan losses	77,794				84,637			46,351				74,589			51,299
Ending balance	$	195,047			$	191,522		$	184,655			$	168,126		$	141,111
Allowance for off-balance sheet credit losses:
Beginning balance	$	11,434			$	9,071		$	11,422			$	9,011		$	7,060
Provision for off-balance sheet credit losses	(2,794		)		2,363			(2,351		)		2,411			1,951
Ending balance	$	8,640			$	11,434		$	9,071			$	11,422		$	9,011
Total allowance for credit losses	$	203,687			$	202,956		$	193,726			$	179,548		$	150,122
Total provision for credit losses	$	75,000			$	87,000		$	44,000			$	77,000		$	53,250
Allowance for loan losses to LHI	0.79			%	0.85		%	0.89			%	0.96		%	0.84		%
Net charge-offs to average LHI	0.31			%	0.37		%	0.16			%	0.29		%	0.07		%
Total provision for credit losses to average LHI	0.32			%	0.42		%	0.24			%	0.46		%	0.35		%
Recoveries to total charge-offs	4.34			%	3.72		%	13.99			%	16.73		%	33.40		%
Allowance for off-balance sheet credit losses to off-balance sheet credit commitments	0.10			%	0.14		%	0.13			%	0.19		%	0.16		%
Combined allowance for credit losses to LHI	0.83			%	0.90		%	0.94			%	1.03		%	0.90		%
Allowance as a multiple of non-performing loans	0.9			x	2.4		x	1.8			x	1.0		x	0.8		x

The allowance for credit losses, including the allowance for losses on unfunded commitments reported on the consolidated balance sheets in other liabilities, totaled $203.7 million at December 31, 2019, $203.0 million at December 31, 2018 and $193.7 million at December 31, ~~2017, $179.5 million at December 31, 2016 and $150.1 million at December 31, 2015.~~2017. The combined allowance as a percentage of loans held for investment ~~excluding mortgage finance loans~~ decreased to ~~1.26% at year-end 2017 from 1.38% and 1.28%~~0.83% at December 31, ~~2016~~2019 from 0.90% and ~~2015, respectively, as a result of strong loan growth coupled with a lower provision recorded during 2017. During 2016~~0.94% at December 31, 2018 and ~~2015, the combined allowance trended upward primarily as a result of the increasing provision for credit losses driven by deterioration~~2017, respectively. The downward trend in our energy portfolio and management's allocation of an increased reserve to the Bank's pass-rated portfolio as deemed appropriate in light of environmental conditions existing during those periods. During 2017, the combined allowance as a ~~percent~~percentage of loans held for investment ~~excluding~~that began in 2017 continued during 2018 and 2019 due primarily to growth in mortgage finance loans ~~began trending downward as we recognized losses on loans~~held for ~~which there were specific or general allocations~~investment.

Table of ~~reserves and saw an improvement in our overall credit quality.~~Contents

The ~~overall~~following table presents a summary of our allowance for loan losses ~~results from consistent application~~by portfolio segment for the past five years:



	December 31,
	2019				2018				2017				2016				2015
(in thousands except percentage data)	Reserve		% of Loans		Reserve		% of Loans		Reserve		% of Loans		Reserve		% of Loans		Reserve		% of Loans
Loan category:
Commercial	$	162,119	42	%	$	129,442	46	%	$	118,806	45	%	$	128,768	41	%	$	112,446	40	%
Mortgage finance loans	2,265		33	%	—		26	%	—		26	%	—		26	%	—		29	%
Construction	14,773		10	%	19,242		9	%	19,273		10	%	13,144		12	%	6,836		11	%
Real estate	15,502		14	%	33,353		18	%	34,287		18	%	19,149		20	%	13,381		19	%
Consumer	53		—		425		—		357		—		241		—		338		—
Equipment leases	335		1	%	1,829		1	%	3,542		1	%	1,124		1	%	3,931		1	%
Additional qualitative reserve	—		—		7,231		—		8,390		—		5,700		—		4,179		—
Total allowance for loan losses	$	195,047	100	%	$	191,522	100	%	$	184,655	100	%	$	168,126	100	%	$	141,111	100	%

During 2019, we refined our methodology for calculating the allowance for loan losses to improve the specificity of the risk weights and the risk-weighting process for each product type assigned to the loans in our held for investment portfolio. As a result of these refinements, we believe that management is better able to allocate inherent losses previously accounted for in the additional qualitative reserve component of our allowance for loan losses to specific product types and credit risk grades, thus eliminating the additional qualitative reserve component of our allowance for loan losses in 2019. Additionally, this improved specificity and consideration of current mortgage market conditions resulted in the allocation of a portion of the company’s allowance and provision for loan losses to our mortgage finance loan portfolio for the first time in 2019.

The increase in allowance allocated to commercial loans recorded at December 31, 2019 compared to 2018 is due to an increase in total criticized loans, primarily related to our energy and leveraged lending portfolios. The decrease in allowance allocated to construction and real estate loans recorded at December 31, 2019 compared to 2018 is primarily related to a decrease in applied risk weights specific to these product types. This decrease was the result of the refinements discussed above as well as management's continued evaluation of changing market conditions in these product types relative to historical loss ~~reserve methodology.~~ experience.

At December 31, ~~2017,~~2019, we believe the allowance is appropriate and has been derived from consistent application of our methodology. Should any of the factors considered by management in evaluating the appropriateness of the allowance for loan losses change, our estimate of inherent losses in the portfolio could also change, which would affect the level of future provisions for loan losses.

See Note 1 - Operations and Summary of Significant Accounting Policies and Note 34 - Loans Held for Investment and Allowance for Loan Losses in the accompanying notes to the consolidated financial statements included elsewhere in this report for details of the allowance for loan losses.

~~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,

2017 2016 2015 2014 2013
Allowance for loan losses:
Beginning balance $ 168,126
   $ 141,111
   $ 100,954
   $ 87,604
   $ 74,337

Loans charged-off:
Commercial 34,145
   56,558
   16,254
   9,803
   6,575

Construction 59
   —
   —
   —
   —

Real estate 290
   528
   389
   296
   144

Consumer 180
   47
   62
   266
   45

Equipment leases —
   —
   25
   —
   2

Total charge-offs 34,674
   57,133
   16,730
   10,365
   6,766

Recoveries:
Commercial 4,593
   9,364
   4,944
   2,762
   1,203

Construction 104
   34
   400
   —
   —

Real estate 75
   63
   33
   79
   270

Consumer 70
   21
   173
   162
   73

Equipment leases 10
   77
   38
   1,082
   322

Total recoveries 4,852
   9,559
   5,588
   4,085
   1,868

Net charge-offs 29,822
   47,574
   11,142
   6,280
   4,898

Provision for loan losses 46,351
   74,589
   51,299
   19,630
   18,165

Ending balance $ 184,655
   $ 168,126
   $ 141,111
   $ 100,954
   $ 87,604

Allowance for off-balance sheet credit losses:
Beginning balance $ 11,422
   $ 9,011
   $ 7,060
   $ 4,690
   $ 3,855

Provision for off-balance sheet credit losses (2,351 )    2,411
   1,951
   2,370
   835

Ending balance $ 9,071
   $ 11,422
   $ 9,011
   $ 7,060
   $ 4,690

Total allowance for credit losses $ 193,726

$ 179,548

$ 150,122

$ 108,014

$ 92,294

Total provision for credit losses $ 44,000
   $ 77,000
   $ 53,250
   $ 22,000
   $ 19,000

Allowance for loan losses to LHI 0.89
% 0.96
% 0.84
% 0.71
% 0.78
%
Allowance for loan losses to LHI excluding mortgage finance loans 1.20
% 1.29
% 1.20
% 0.99
% 1.03
%
Net charge-offs to average LHI 0.16
% 0.29
% 0.07
% 0.05
% 0.05
%
Net charge-offs to average LHI excluding mortgage finance loans 0.21
% 0.38
% 0.10
% 0.07
% 0.07
%
Total provision for credit losses to average LHI 0.24
% 0.46
% 0.35
% 0.18
% 0.19
%
Total provision for credit losses to average LHI excluding mortgage finance loans 0.31
% 0.62
% 0.48
% 0.24
% 0.25
%
Recoveries to total charge-offs 13.99
% 16.73
% 33.40
% 39.41
% 27.61
%
Allowance for off-balance sheet credit losses to off-balance sheet credit commitments 0.13
% 0.19
% 0.16
% 0.13
% 0.12
%
Combined allowance for credit losses to LHI 0.94
% 1.03
% 0.90
% 0.76
% 0.82
%
Combined allowance for credit losses to LHI excluding mortgage finance loans 1.26
% 1.38
% 1.28
% 1.06
% 1.09
%
Allowance as a multiple of non-performing loans 1.8
x 1.0
x 0.8
x 2.3
x 2.7
x

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~~Allowance for Loan Loss Allocation~~

December 31,
2017 2016 2015 2014 2013
(in thousands except
percentage data)
Reserve
% of
Loans
Reserve
% of
Loans
Reserve
% of
Loans
Reserve
% of
Loans
Reserve
% of
Loans
Loan category:
Commercial $ 118,806
45 % $ 128,768
41 % $ 112,446
40 % $ 70,654
41 % $ 39,868
44 %
Mortgage finance loans(1) —
26 % —
26 % —
29 % —
28 % —
25 %
Construction 19,273
10 % 13,144
12 % 6,836
11 % 7,935
10 % 14,553
11 %
Real estate 34,287
18 % 19,149
20 % 13,381
19 % 15,582
20 % 24,210
19 %
Consumer 357
—
241
—
338
—
240
—
149
—
Equipment leases 3,542
1 % 1,124
1 % 3,931
1 % 1,141
1 % 3,105
1 %
Additional qualitative reserve 8,390
—
5,700
—
4,179
—
5,402
—
5,719
—
Total loans held for investment $ 184,655
100 % $ 168,126
100 % $ 141,111
100 % $ 100,954
100 % $ 87,604
100 %


~~(1)~~	~~No amount of the allowance is allocated to these loans based on their risk profile.~~

Increases in the allowance allocated to loan categories at December 31, 2017 compared to December 31, 2016 are due to the growth in the overall loan portfolio, as well as changes in applied risk weights. The decrease in allowance allocated to commercial loans recorded at December 31, 2017 compared to 2016 is primarily related to the credit quality improvement in our energy portfolio. During 2017, the total outstandings in our energy portfolio declined from 2016. At December 31, 2017, total energy criticized loans as a percent of the energy portfolio decreased to 7% from 20% at December 31, 2016, resulting in a lower allowance allocation. We have traditionally maintained an additional qualitative allowance component 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. The increase in the additional qualitative reserve at December 31, 2017 was primarily driven by a $4.5 million provision reflecting our assessment of the potential impact to our loan portfolio from Hurricanes Harvey and Irma. We believe the level of additional qualitative allowance at December 31, 2017 is warranted due to economic uncertainties and unpredictable factors that have produced losses, including those resulting from borrowers' misstatement of financial information or inaccurate certification of collateral values. Such losses are not necessarily correlated with historical loss trends or general economic conditions. Our methodology used to calculate the allowance considers historical losses, however, the historical loss rates for specific product types or credit risk grades may not fully incorporate the effects of uncertainty regarding the economy or other unpredictable events.

Loans Held for Sale

~~In the third quarter of 2015, we launched a correspondent lending program, MCA, to complement our warehouse lending program.~~ Through our MCA program we commit to purchase residential mortgage loans from independent correspondent lenders and deliver those loans into the secondary market via whole loan sales to independent third parties or in securitization transactions to Ginnie Mae and GSEs such as Fannie Mae and Freddie Mac. For additional information on our loans held for sale portfolio, see Note 51 - Operations and Summary of Significant Accounting Policies and Note 6 - Certain Transfers of Financial Assets in the accompanying notes to the consolidated financial statements included elsewhere in this report.

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 ~~eleven~~ banking centers, courier services and online and mobile banking. BankDirect and Bask Bank, our online banking ~~division, serves its~~divisions, serve customers on a 24 hours-a-day, 7 days-a-week basis solely through online banking.

Average total deposits for the year ended December 31, ~~2017~~2019 increased ~~$1.2~~$4.4 billion compared to ~~2016.~~2018. Average ~~savings deposits and~~ demand deposits for the year ended December 31, 2019 increased by $1.1 billion compared to 2018, and ~~$196.5 million, respectively. Average~~average interest-bearing ~~transaction~~ deposits ~~and time deposits decreased $39.9 million and $14.6 million, respectively.~~increased $3.3 billion. The average cost of deposits increased to ~~.43%~~1.19% in ~~2017~~2019 from ~~.22%~~0.92% in ~~2016~~2018 due to ~~increases in interest rates.~~increased

Average deposits for the year ended December 31, 2016 increased $2.5 billion compared to 2015. Average demand deposits, interest-bearing transaction deposits and savings deposits increased by $1.7 billion, $519.1 million and $483.3 million, respectively. Average time deposits (excluding deposits in foreign branches) and deposits in foreign branches decreased $17.3

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~~million and $181.7 million, respectively. The significant decrease in~~competition for deposits, ~~in foreign branches related~~as well as higher interest rates during the first half of 2019 prior to the ~~discontinuation of~~interest rate reductions that ~~deposit offering and closure of our Cayman Islands branch during 2015. The average cost of deposits increased to .22%~~began in ~~2016 from .17% in 2015 mainly due to the full year effect of the December 2015 increase in interest rates.~~August 2019.

The following table discloses our average ~~deposits for the years ended December 31, 2017, 2016 and 2015 (in thousands):~~deposits:


	Average Balances						Year Ended December 31,
	2017		2016		2015
(in thousands)							2019		2018		2017
Non-interest-bearing	$	8,320,650	$	8,124,174	$	6,447,147	$	8,989,104	$	7,890,304	$	8,320,650
Interest-bearing transaction	2,159,375		2,199,292		1,680,220		3,535,282		3,044,300		2,159,375
Savings	7,495,318		6,403,306		5,920,046		9,780,532		7,986,135		7,495,318
Time deposits	478,513		493,128		510,378		2,351,698		1,292,864		478,513
Deposits in foreign branches	—		—		181,657
Total average deposits	$	18,453,856	$	17,219,900	$	14,739,448	$	24,656,616	$	20,213,603	$	18,453,856

Uninsured deposits at December 31, ~~2017~~2019 were ~~59%~~53% of total deposits, compared to ~~54%~~57% of total deposits at December 31, ~~2016~~2018 and ~~56%~~59% of total deposits at December 31, ~~2015.~~2017. The insured deposit data for ~~2017, 2016~~2019, 2018 and ~~2015~~2017 reflect the deposit insurance impact of "combined ownership segregation" of escrow and other accounts at an aggregate level but ~~does~~do not reflect an evaluation of all of the account styling distinctions that would determine the availability of deposit insurance to individual accounts based on FDIC regulations.

Maturity of Domestic CDs and Other Time Deposits in Amounts of $100,000 or More


	December 31,						December 31,
(In thousands)	2017		2016		2015
(in thousands)							2019		2018		2017
Months to maturity:
3 or less	$	161,523	$	160,495	$	240,291	$	215,991	$	193,982	$	161,523
Over 3 through 6	146,027		95,482		100,582		75,632		89,529		146,027
Over 6 through 12	128,817		97,761		89,860		165,973		100,177		128,817
Over 12	28,965		17,118		15,714		50,619		15,834		28,965
Total	$	465,332	$	370,856	$	446,447	$	508,215	$	399,522	$	465,332

Liquidity and Capital Resources

In general terms, liquidity is a measurement of our ability to meet our cash needs. Our ~~objective~~objectives in managing our liquidity isare to maintain our ability to meet loan commitments, repurchase investment securities orand 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, formulated and monitored by our senior management and our ~~Balance Sheet~~Asset and Liability Management Committee (“~~BSMC”~~ALCO”), which take into account the demonstrated marketability of our assets, the sources and stability of our 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, ~~2017~~2019 and ~~2016,~~2018, our principal source of funding has been our customer deposits, supplemented by our short-term and long-term borrowings, primarily from ~~Federal~~federal funds purchased and ~~Federal Home Loan Bank (“FHLB”)~~FHLB borrowings, which are generally used to fund mortgage finance assets. We also rely on the availability of the mortgage secondary market provided by Ginnie Mae and the GSEs to support the liquidity of our ~~residential~~ mortgage finance assets.

~~Deposit~~

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In accordance with our liquidity strategy, deposit growth and increases in borrowing capacity related to our mortgage finance loans have resulted in increased liquidity assets in recent periods, which were ~~$2.7~~$4.3 billion at December 31, ~~2017~~2019 and $2.9 billion at December 31, ~~2016.~~2018. The following table summarizes the growth in and composition of liquidity ~~assets (in thousands):~~

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assets:


	December 31,									December 31,
	2017			2016			2015
(in thousands except percentage data)										2019			2018			2017
Federal funds sold and securities purchased under resale agreements	$	30,000		$	25,000		$	55,000		$	30,000		$	50,190		$	30,000
Interest-bearing deposits	2,697,581			2,700,645			1,626,374			4,233,766			2,815,684			2,697,581
Total liquidity assets	$	2,727,581		$	2,725,645		$	1,681,374		$	4,263,766		$	2,865,874		$	2,727,581

Total liquidity assets as a percent of:
Total loans held for investment, excluding mortgage finance loans	17.8		%	21.0		%	14.3		%
Total loans held for investment	13.2		%	15.6		%	10.1		%	17.3		%	12.7		%	13.2		%
Total earning assets	11.2		%	12.9		%	9.2		%	13.5		%	10.5		%	11.2		%
Total deposits	14.3		%	16.0		%	11.1		%	16.1		%	13.9		%	14.3		%

Our liquidity needs to support growth in loans held for investment have been fulfilled primarily through growth in our core customer deposits. Our goal is to obtain as much of our funding for loans held for investment and other earning assets as possible from deposits of these core customers. These deposits are generated principally through development of long-term customer relationships, with a significant focus on treasury management products. In addition to deposits from our core customers, we also have access to deposits through brokered customer relationships. For regulatory purposes, these relationship brokered deposits are categorized as brokered deposits; however, since these deposits arise from a customer relationship, which involves extensive treasury services, we consider these deposits to be core deposits for our reporting purposes.

We also have access to incremental deposits through brokered retail certificates of deposit, or CDs. These traditional brokered deposits are generally of short maturities, ~~30 to 90 days,~~less than 12 months, and are used to fund temporary differences in the growth in loan balances, including growth in loans held for sale or other specific categories of loans as compared to customer deposits. The following table summarizes our period-end and average ~~year-to-date~~ core customer deposits, relationship brokered deposits and traditional brokered ~~deposits (in millions):~~deposits:


	December 31,						December 31,
	2017			2016
(in thousands)							2019			2018
Deposits from core customers	$	17,100.8		$	15,400.5		$	22,549,568		$	17,015,541
Deposits from core customers as a percent of total deposits	89.4		%	90.5		%	85.2		%	82.6		%
Relationship brokered deposits	$	2,022.4		$	1,616.3		$	1,617,247		$	2,027,850
Relationship brokered deposits as a percent of average total deposits	10.6		%	9.5		%	6.1		%	9.8		%
Traditional brokered deposits	$	—		$	—		$	2,311,778		$	1,562,722
Traditional brokered deposits as a percent of total deposits	—		%	—		%	8.7		%	7.6		%
Average deposits from core customers	$	16,806.9		$	15,723.8		$	20,747,292		$	17,504,922
Average deposits from core customers as a percent of average total deposits	91.1		%	91.3		%	84.1		%	86.6		%
Average relationship brokered deposits	$	1,647.0		$	1,496.1		$	2,096,287		$	1,890,824
Average relationship brokered deposits as a percent of average total deposits	8.9		%	8.7		%	8.5		%	9.4		%
Average traditional brokered deposits	$	—		$	—		$	1,813,037		$	817,857
Average traditional brokered deposits as a percent of average total deposits	—		%	—		%	7.4		%	4.0		%

We have access to sources of traditional brokered deposits that we estimate to be ~~$3.5~~$5.3 billion. Based on our internal guidelines, we ~~may choose~~have chosen to limit our use of these sources to a lesser amount. ~~Customer deposits (total deposits, including relationship~~We have increased our use of traditional brokered deposits ~~minus brokered CDs) at December 31, 2017 increased $2.1 billion from December 31, 2016.~~in 2018 and 2019 in response to favorable rates available in that market relative to other available funding sources.

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We have short-term borrowing sources available to supplement deposits and meet our funding needs. Such borrowings are generally used to fund our mortgage finance loans, due to their liquidity, short duration and interest spreads available. These borrowing sources include ~~Federal~~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 and advances from the FHLB and the Federal Reserve. The following table summarizes our ~~borrowings (in thousands):~~short-term and other borrowings:

December 31,
2017 2016 2015

Balance Rate(3)
Maximum
Outstanding
at Any
Month End
Balance Rate(3)
Maximum
Outstanding
at Any
Month End
Balance Rate(3)
Maximum
Outstanding
at Any
Month End
Federal funds purchased(4) $ 359,338
1.45 % $ 101,800
0.80 % $ 74,164
0.55 %
Customer repurchase agreements(1) 5,702
0.03 % 7,775
0.05 % 68,887
0.02 %
FHLB borrowings(2) 2,800,000
1.35 % 2,000,000
0.61 % 1,500,000
0.31 %
Total borrowings $ 3,165,040
$ 3,165,040
$ 2,109,575
$ 2,117,280
$ 1,643,051
$ 1,643,051



	December 31,
(in thousands)	2019		2018		2017
Federal funds purchased	$	132,270	$	629,169	$	359,338
Repurchase agreements	9,496		12,005		5,702
FHLB borrowings	2,400,000		3,900,000		2,800,000
Line of credit	—		—		—
Total short-term and other borrowings	$	2,541,766	$	4,541,174	$	3,165,040


~~(1)~~	~~Securities pledged for customer repurchase agreements were $7.3 million, $10.2 million and $14.2 million at December 31, 2017, 2016 and 2015, respectively.~~

~~(2)~~

~~FHLB borrowings are collateralized by a blanket floating lien~~

For additional information on certain real estate secured loans, mortgage finance assets and also certain pledged securities. The weighted-average interest rate for the years ended December 31, 2017, 2016 and 2015 was 1.08%, 0.43% and 0.18%, respectively. The average balance of FHLB borrowings for the years ended December 31, 2017, 2016 and 2015 was $1.4 billion, $1.4 billion and $1.2 billion, respectively.


~~(3)~~	~~Interest rate as of period end.~~


~~(4)~~	The weighted-average interest rate on Federal funds purchased for the years ended December 31, 2017, 2016 and 2015 was 1.20%, 0.57% and 0.29%, respectively. The average balance of Federal funds purchased for the years ended December 31, 2017, 2016 and 2015 was $215.9 million, $90.9 million and $98.8 million, respectively.

~~The following table summarizes~~ our short-term and other ~~borrowing capacities~~borrowings, see Note 11 - Short-Term and Other Borrowings in ~~excess of balances outstanding (in thousands):~~

December 31,
2017 2016 2015
FHLB borrowing capacity relating to loans $ 3,890,995
$ 3,057,915
$ 4,101,396
FHLB borrowing capacity relating to securities 2,071
1,653
1,213
Total FHLB borrowing capacity $ 3,893,066
$ 3,059,568
$ 4,102,609
Unused Federal funds lines available from commercial banks $ 885,000
$ 1,118,000
$ 1,231,000
Unused Federal Reserve Borrowings capacity $ 4,114,594
$ 3,179,087
$ 2,966,702

~~From time~~the accompanying notes to ~~time, we borrow funds on an overnight basis from~~ the ~~Federal Reserve. We did not incur such borrowings during 2017, 2016 or 2015.~~

Our unsecured, revolving, non-amortizing line of credit has maximum availability of $130.0 million, matured on December 19, 2017, and was renewed on December 19, 2017 with a maturity date of December 18, 2018. The loan proceeds may be used for general corporate purposes including funding regulatory capital infusions into the Bank. The loan agreement contains customaryconsolidated financial ~~covenants and restrictions. No borrowings were outstanding as of December 31, 2017 or December 31, 2016. We did not borrow against~~statements included elsewhere in this ~~line of credit during the year ended December 31, 2017. The average borrowings during the year ended December 31, 2016 were $6.8 million.~~report.

From November 2002 to September 2006 various Texas Capital Statutory Trusts were created and subsequently issued floating rate trust preferred securities in various private offerings totaling $113.4 million. Interest payments on all trust preferred subordinated debentures are deductible for federal income tax purposes. As of December 31, 2017, the weighted average quarterly rate on the trust preferred subordinated debentures was 3.33%, compared to 3.17% average for all of 2017, and 2.65% for all of 2016.

Because our Bank had less than $15.0 billion in total consolidated assets as of December 31, 2009, we are allowed to continue to classify our trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1 capital.

Our equity capital averaged ~~$2.1~~$2.7 billion for the year ended December 31, ~~2017~~2019 as compared to ~~$1.7~~$2.4 billion in ~~2016~~2018 and ~~$1.6~~$2.1 billion in ~~2015.~~2017. We have not paid any cash dividends on our common stock since we commenced ~~operations and~~operations. While we have no plans to ~~do so in the foreseeable future.~~

~~Table of Contents~~

~~On December 2, 2016, we completed a sale of 3.45 million shares of~~pay dividends on our common stock in ~~a public offering. Net proceeds from~~ the ~~sale totaled $236.4 million. The additional equity was used for general corporate purposes, including repayment~~foreseeable future, it is anticipated that following the merger of ~~$20.0 million~~the Company and IBTX the combined company will pay dividends to stockholders at the rate of ~~short-term debt and as additional capital~~$1.00 per share annually. See the discussion at Risk Factors – Risks Relating to ~~support continued loan growth.~~Our Securities.

For additional information on our capital, ~~and stockholders' equity,~~ see Note 14 - Regulatory Restrictions ~~and Note 21 - Stockholders' Equity~~ in the accompanying notes to the consolidated financial statements included elsewhere in this report.

Commitments and Contractual Obligations

The following table presents, as of December 31, ~~2017,~~2019, significant fixed and determinable contractual obligations to third parties by payment date. Amounts in the table do not include accrued or accruing interest. ~~Payments related to leases are based on actual payments specified~~See Note 7 - Leases in the ~~underlying contracts.~~accompanying notes to the consolidated financial statements included elsewhere in this report for details of contractual lease obligations. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements included elsewhere in this ~~Form 10-K.~~report.


(In thousands)	Note Reference	Within One Year		After One But Within Three Years		After Three But Within Five Years		After Five Years		Total
(in thousands)												Note Reference	Within One Year		After One But Within Three Years		After Three But Within Five Years		After Five Years		Total
Deposits without a stated maturity	8	$	18,593,927	$	—	$	—	$	—	$	18,593,927	10	$	23,607,562	$	—	$	—	$	—	$	23,607,562
Time deposits	8	492,208		36,106		490		449		529,253		10	2,810,219		55,923		2,034		2,855		2,871,031
Federal funds purchased and customer repurchase agreements	9	365,040		—		—		—		365,040		11	141,766		—		—		—		141,766
FHLB borrowings	9	2,800,000		—		—		—		2,800,000		11	2,400,000		—		—		—		2,400,000
Operating lease obligations(1)	17	16,446		31,423		24,943		17,299		90,111
Subordinated notes	9	—		—		—		281,406		281,406		12	—		—		—		282,129		282,129
Trust preferred subordinated debentures	9, 10	—		—		—		113,406		113,406		12	—		—		—		113,406		113,406
Total contractual obligations		$	22,267,621	$	67,529	$	25,433	$	412,560	$	22,773,143		$	28,959,547	$	55,923	$	2,034	$	398,390	$	29,415,894


~~(1)~~	~~Non-balance sheet item.~~

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Off-Balance Sheet Arrangements

We had the following off-balance sheet contractual obligations as of December 31, ~~2017 (in thousands):~~2019:


	Within One Year		After One But Within Three Years		After Three But Within Five Years		After Five Years		Total
(in thousands)											Within One Year		After One But Within Three Years		After Three But Within Five Years		After Five Years		Total
Commitments to extend credit	$	2,180,367	$	2,893,064	$	1,721,078	$	163,338	$	6,957,847	$	2,672,791	$	3,112,661	$	2,066,169	$	215,034	$	8,066,655
Standby and commercial letters of credit	191,896		37,898		1,164		—		230,958		186,377		58,301		16,727		—		261,405
Total financial instruments with off-balance sheet risk	$	2,372,263	$	2,930,962	$	1,722,242	$	163,338	$	7,188,805	$	2,859,168	$	3,170,962	$	2,082,896	$	215,034	$	8,328,060

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. Commitments to extend credit do not include our mortgage finance arrangements with mortgage loan originators through our mortgage warehouse lending division, which are established as uncommitted "guidance" purchase and sale facilities under which the mortgage originator has no obligation to offer and we have no obligation to purchase interests in the mortgage loans subject to the arrangements. See Note 1 - Operations and Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this report.

Critical Accounting Policies

SEC guidance requires disclosure of “critical accounting policies.” The SEC defines “critical accounting policies” as those that are most important to the presentation of a company’s financial condition and results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

We follow financial accounting and reporting policies that are in accordance with accounting principles generally accepted in the United States. The more significant of these policies are summarized in Note 1 - Operations and Summary of Significant Accounting Policies in the ~~accompanying~~ notes to the consolidated financial statements included elsewhere in this report. Not all significant accounting policies require management to make difficult, subjective or complex judgments. However, the policy noted below could be deemed to meet the SEC’s definition of a critical accounting policy.

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Allowance for Loan Losses

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 credit 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.~~portfolio at the balance sheet date. The allowance for loan losses is comprised of general reserves and specific reserves assigned to certain ~~classified loans and general reserves.~~impaired loans. Factors contributing to the determination of specific reserves include the creditworthiness 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 ~~allowance,~~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” above and Note 34 – Loans Held for Investment and Allowance for Loan Losses in the accompanying notes to the consolidated financial statements included elsewhere in this report for further discussion of the risk factors considered by management in establishing the allowance for loan losses.

New Accounting Standards

~~See Note 23 – New~~ASU 2018-15 "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40 - Customer's Accounting ~~Standards~~for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract)" ("ASU 2018-15") aligns the ~~accompanying notes~~requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to ~~the~~develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 will be effective for us on January 1, 2020 and is not expected to have an impact on our consolidated financial statements as we currently apply this guidance in practice.

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ASU 2018-13 "Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement" ("ASU 2018-13") removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 fair value measurement methodologies, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. It also adds a requirement to disclose changes in unrealized gains and losses for the period included ~~elsewhere~~ in ~~this report~~other comprehensive income for ~~details~~recurring Level 3 fair value measurements held at the end of ~~recently issued accounting pronouncements~~the reporting period and ~~their~~the range and weighted average of significant unobservable inputs used to develop Level 3 measurements. For certain unobservable inputs, entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 will be effective for us on January 1, 2020 and is not expected to have a significant impact on our consolidated financial statements.

ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326)" ("ASU 2016-13") requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. ASU 2016-13, as updated, became effective for us on January 1, 2020. Through the date of adoption, we held steering committee and working group meetings that included individuals from various functional areas relevant to the implementation of CECL. Additionally, an assessment of our primary modeling tool was completed, which enabled us to complete parallel runs utilizing second and third quarter data, during which preliminary operational procedures and internal controls were designed. Management's steering committee and working group also validated the appropriateness of, among other things, management’s decisions regarding portfolio segmentation, life of loan considerations, and reasonable and supportable forecasting methodology. Based on our fourth quarter parallel run, review of the portfolio, including the composition, characteristics and quality of the underlying loans, and the prevailing economic conditions and forecasts as of the adoption date, we believe that adoption of ASU 2016-13 will result in an immaterial increase of approximately 5-6% to our allowance for credit losses. This is consistent with our expectations given that our current portfolio is of shorter duration and commercially focused.

Supplemental Financial Data

The following tables present the calculation of certain non-GAAP measures that we consider to be key performance measures that management uses in assessing our financial performance. While these non-GAAP measures may be widely used by investors, analysts and bank regulatory agencies to assess the financial performance of our company, they may not be comparable to similarly-titled measures reported by other companies. These non-GAAP measures are individually identified and calculations are explained in the footnotes below the tables. The following tables present reconciliations of these non-GAAP measures to the applicable amounts measured in accordance with GAAP.



	December 31,
(in thousands, except per share data)	2019			2018			2017			2016			2015
Total common equity	$	2,682,258		$	2,350,394		$	2,052,721		$	1,859,557		$	1,473,533
Adjustments:
Goodwill and intangibles	(18,099		)	(18,570		)	(19,040		)	(19,512		)	(19,960		)
Tangible common equity	$	2,664,159		$	2,331,824		$	2,033,681		$	1,840,045		$	1,453,573
Common shares outstanding	50,337,741			50,200,710			49,643,344			49,503,662			45,873,807
Book value per common share	$	53.29		$	46.82		$	41.35		$	37.56		$	32.12
Tangible book value per common share(1)	$	52.93		$	46.45		$	40.97		$	37.17		$	31.69


(1)	Stockholders’ equity excluding preferred stock, less goodwill and intangibles, divided by shares outstanding at period end.

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	December 31,
(in thousands, except percentage data)	2019			2018			2017			2016			2015
Total common equity	$	2,682,258		$	2,350,394		$	2,052,721		$	1,859,557		$	1,473,533
Adjustments:
AOCI	(8,950		)	(518		)	(428		)	(415		)	(718		)
Goodwill and intangibles	(18,099		)	(18,570		)	(19,040		)	(19,512		)	(19,960		)
Tangible common equity	$	2,655,209		$	2,331,306		$	2,033,253		$	1,839,630		$	1,452,855
Total Assets	$	32,548,069		$	28,257,767		$	25,075,645		$	21,697,134		$	18,903,821
Adjustments:
AOCI	(8,950		)	(518		)	(428		)	(415		)	(718		)
Goodwill and intangibles	(18,099		)	(18,570		)	(19,040		)	(19,512		)	(19,960		)
Tangible common equity	$	32,521,020		$	28,238,679		$	25,056,177		$	21,677,207		$	18,883,143
Total common equity to total assets	8.24		%	8.32		%	8.19		%	8.57		%	7.79		%
Tangible common equity to total tangible assets(1)	8.16		%	8.26		%	8.11		%	8.49		%	7.69		%


(1)	Stockholders’ equity excluding preferred stock, less accumulated other comprehensive income and goodwill and intangibles, divided by total assets, less accumulated other comprehensive income and goodwill and intangibles.


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. Additionally, we have some market risk relative to commodity prices through our energy lending activities. ~~Petroleum~~Declines and ~~natural gas commodity prices were suppressed throughout 2015 and 2016, but stabilized amidst continuing market uncertainty during 2017. Declines~~volatility in commodity prices negatively impacted our energy clients' ability to perform on their loan obligations in recent years, and further uncertainty and volatility could have a negative impact on our customers and our loan ~~portfolio. Management does not currently expect the current decline~~portfolio in ~~commodity prices to have a material adverse effect on our financial position.~~future periods. Foreign exchange rates, commodity prices ~~and/or~~(other than energy) and equity prices doare not expected to pose significant market risk to us.

The responsibility for managing market risk rests with the ~~BSMC,~~ALCO, which operates under policy guidelines established by our board of directors. The acceptable negative ~~acceptable~~ variation in net interest revenue due to a ~~200~~100 basis point increase or decrease in interest rates is generally limited by these guidelines to plus or minus ~~10-15%~~10-12%. These guidelines ~~also~~ establish maximum levels for

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short-term borrowings, short-term assets and public and brokered ~~deposits. They also establish~~deposits and minimum levels for ~~unpledged assets,~~liquidity, among other things. Oversight of our compliance with these guidelines is the ongoing responsibility of the ~~BSMC,~~ALCO, with exceptions reported to the Risk Management Committee, and to our board of directors if deemed necessary, on a quarterly basis. Additionally, the Credit Policy Committee ("CPC") specifically manages risk relative to commodity price market risks. The CPC establishes maximum portfolio concentration levels for energy loans as well as maximum advance rates for energy collateral.

Interest Rate Risk Management

Our interest rate sensitivity is illustrated in the following table. The table reflects rate-sensitive positions as of December 31, ~~2017,~~2019, and is not necessarily indicative of positions on other dates. The balances of interest rate sensitive assets and liabilities are presented in the periods in which they next reprice to market rates or mature and are aggregated to show the interest rate sensitivity gap. The mismatch between repricings or maturities within a time period is commonly referred to as the “gap” for that period. A positive gap (asset sensitive), where interest rate-sensitive assets exceed interest rate sensitive liabilities, generally will result in the net interest margin increasing in a rising rate environment and decreasing in a falling rate environment. A negative gap (liability sensitive) will generally have the opposite results on the net interest margin. To reflect anticipated prepayments, certain asset and liability categories are shown in the table using estimated cash flows rather than contractual cash flows. The Company employs interest rate floors in certain variable rate loans to enhance the yield on those loans at times when market interest rates are extraordinarily low. The degree of asset sensitivity, spreads on loans and net interest margin may be reduced until rates increase by an amount sufficient to eliminate the effects of floors. The adverse effect

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of floors as market rates increase may also be offset by the positive gap, the extent to which rates on deposits and other funding sources lag increasing market rates for loans and changes in composition of funding.

Interest Rate Sensitivity Gap Analysis

December 31, ~~2017~~2019


(in thousands)	0-3 mo Balance		4-12 mo Balance		1-3 yr Balance		3+ yr Balance		Total Balance		0-3 mo Balance		4-12 mo Balance			1-3 yr Balance		3+ yr Balance		Total Balance
Assets:
Interest-bearing deposits, federal funds sold and securities purchased under resale agreements	$	2,727,581	$	—	$	—	$	—	$	2,727,581
Securities(1)	8,397		917		922		13,275		23,511
Interest-bearing deposits in other banks, federal funds sold and securities purchased under resale agreements											$	4,263,766	$	—		$	—	$	—	$	4,263,766
Investment securities(1)											27,021		2,680			352		209,818		239,871
Total variable loans	18,222,718		97,919		13,492		1,749		18,335,878		23,716,946		173,143			32,628		316,084		24,238,801
Total fixed loans	534,566		1,385,340		433,619		1,093,944		3,447,469		259,483		1,296,845			300,767		1,217,880		3,074,975
Total loans(2)	18,757,284		1,483,259		447,111		1,095,693		21,783,347		23,976,429		1,469,988			333,395		1,533,964		27,313,776
Total interest sensitive assets	$	21,493,262	$	1,484,176	$	448,033	$	1,108,968	$	24,534,439	$	28,267,216	$	1,472,668		$	333,747	$	1,743,782	$	31,817,413
Liabilities
Liabilities:
Interest-bearing customer deposits	$	10,781,267	$	—	$	—	$	—	$	10,781,267	$	14,169,103	$	—		$	—	$	—	$	14,169,103
CDs & IRAs	180,612		311,596		36,106		939		529,253		229,827		268,614			55,923		4,889		559,253
Traditional brokered deposits											400,000		1,911,778			—		—		2,311,778
Total interest-bearing deposits	10,961,879		311,596		36,106		939		11,310,520		14,798,930		2,180,392			55,923		4,889		17,040,134
Repurchase agreements, Federal funds purchased, FHLB borrowings	3,165,040		—		—		—		3,165,040
Repurchase agreements, federal funds purchased, FHLB borrowings											2,541,766		—			—		—		2,541,766
Subordinated notes	—		—		—		281,406		281,406		—		—			—		282,129		282,129
Trust preferred subordinated debentures	—		—		—		113,406		113,406		—		—			—		113,406		113,406
Total borrowings	3,165,040		—		—		394,812		3,559,852		2,541,766		—			—		395,535		2,937,301
Total interest sensitive liabilities	$	14,126,919	$	311,596	$	36,106	$	395,751	$	14,870,372	$	17,340,696	$	2,180,392		$	55,923	$	400,424	$	19,977,435
GAP	$	7,366,343	$	1,172,580	$	411,927	$	713,217	$	—	$	10,926,520	$	(707,724	)	$	277,824	$	1,343,358	$	—
Cumulative GAP	7,366,343		8,538,923		8,950,850		9,664,067		9,664,067		$	10,926,520	$	10,218,796		$	10,496,620	$	11,839,978	$	11,839,978

Demand deposits									$	7,812,660										9,438,459
Stockholders’ equity									2,202,721											2,832,258
Total									$	10,015,381										$	12,270,717


(1)	~~Securities~~Investment securities based on fair market value.


(2)	~~Loans are~~Total loans includes loans held for investments, stated at ~~gross.~~gross, and loans held for sale.

~~The table above sets forth the balances as~~

Table of ~~December 31, 2017 for interest-bearing assets, interest-bearing liabilities, and the total of non-interest-bearing deposits and stockholders’ equity.~~ Contents

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”~~static rate scenario and two “shock test” scenarios.

~~The “most likely” rate scenario is~~These scenarios are based on ~~the consensus forecast of future~~ interest rates as of the last day of a reporting period published by independent ~~sources. These forecasts~~sources and incorporate ~~future spot rates and~~ relevant spreads of instruments that are actively traded in the open market. The Federal Reserve’s ~~Federal~~federal funds target affects short-term borrowing; the prime lending rate and LIBOR are the basis for most of our variable-rate loan pricing. The 10-year treasury rate is also monitored because of its effect on prepayment speeds for mortgage-backed securities and MSRs. These are our primary interest rate exposures. We are currently not using derivatives to manage our interest rate ~~exposure.~~exposure although we may do so in the future if that appears advisable.

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~~The two~~For modeling purposes, the “shock test” scenarios assume an immediate, sustained ~~parallel~~ 100 and 200 basis point ~~increase~~increases in interest ~~rates. As short-term~~ rates ~~have remained low through 2016~~ and ~~2017, we do not believe that analysis of an assumed~~a 100 basis point decrease in interest rates would provide meaningful results. We will continue to evaluate these scenarios as interest rates change, until short-term rates rise above 3.0%, at which point we will resume evaluations of shock scenarios in which interest rates decrease.rates.

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. Given~~change. In the current environment of ~~increasing~~decreasing short-term rates, deposit pricing can vary by product and customer. These assumptions have been developed through a combination of historical analysis and projection of 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~~these changes is factored into the simulation model. This modeling indicated interest rate sensitivity as ~~follows (in thousands):~~follows:

Anticipated Impact Over the Next
Twelve Months as Compared to Most Likely Scenario

December 31, 2017 December 31, 2016
100 bps Increase 200 bps Increase 100 bps Increase 200 bps Increase
Change in net interest income $ 112,970
$ 226,855
$ 124,583
$ 254,308



	Anticipated Impact Over the Next Twelve Months as Compared to Most Likely Scenario
	December 31, 2019							December 31, 2018
(in thousands)	100 bps Increase		200 bps Increase		100 bps Decrease			100 bps Increase		200 bps Increase		100 bps Decrease
Change in net interest income	$	93,290	$	187,968	$	(81,988	)	$	101,888	$	204,279	$	(105,505	)

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, customer behavior and management strategies, among other factors.

Our business relies upon a large volume of loans, derivative contracts and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR to establish their interest rate and/or value. In 2017, the U.K. Financial Conduct Authority announced that it would no longer compel banks to submit rates for the calculation of LIBOR after 2021. The impact of alternatives to LIBOR on the valuations, pricing and operation of our financial instruments is not yet known; however, the primary instruments that may be impacted include loans, securities, borrowings and derivatives indexed to LIBOR that mature after December 31, 2021. We have established a working group, consisting of key stakeholders from throughout the company, to monitor developments relating to LIBOR uncertainty and changes and to guide the Bank's response. This team is currently working to gain an understanding of the specific products, information technology systems, borrowing arrangements and legal agreements that will be impacted by the change.

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ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements



	Page Reference
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm	5458
Consolidated Balance Sheets — December 31, ~~2016~~2019 and December 31, ~~2015~~2018	5560
Consolidated Statements of Income and Other Comprehensive Income — Years ended December 31, ~~2016, 2015~~2019, 2018 and ~~2014~~2017	5661
Consolidated Statements of Stockholders’ Equity — Years ended December 31, ~~2016, 2015~~2019, 2018 and ~~2014~~2017	5762
Consolidated Statements of Cash Flows — Years ended December 31, ~~2016, 2015~~2019, 2018 and ~~2014~~2017	5863
Notes to Consolidated Financial Statements	5964

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Report of Ernst & Young, LLP, Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Texas Capital Bancshares, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Texas Capital Bancshares, Inc. (the Company) as of December 31, ~~2017~~2019 and ~~2016, and~~2018, the related consolidated statements of income and other comprehensive income, ~~stockholders’~~shareholders' equity and cash flows for each of the three years in the period ended December 31, ~~2017,~~2019, and the related notes (collectively referred to as ~~the “consolidated~~“the consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the ~~consolidated~~ financial position of the Company at December 31, ~~2017~~2019 and ~~2016,~~2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, ~~2017,~~2019, 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) (PCAOB), the ~~Company’s~~Company's internal control over financial reporting as of December 31, ~~2017,~~2019, based on ~~the~~ criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February ~~14, 2018~~12, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the ~~Company’s~~Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosure to which it relates.

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	Allowance for Loan Losses (“ALL”)
Description of the Matter	The Company’s loans held for investment (“LHFI”) portfolio totaled $24.6 billion as of December 31, 2019, and the associated ALL was $195.0 million. As discussed in both Notes 1 and 4 to the consolidated financial statements, the ALL is comprised of general reserves and specific reserves for impaired loans. The Company’s ALL methodology for its general reserve employs a loss migration technique to determine historical loss percentages applicable to all defined credit risk grades and portfolio segments, whereby a segment weight is computed as a measure of the relative risk of loans in each segment compared to the entire LHFI portfolio. The Company’s ALL methodology allows for management to adjust historical credit loss experience to be more reflective of losses inherent in its LHFI portfolio. Management has identified certain measures in addition to historical credit loss experience that are believed to offer guidance as leading, concurrent and trailing indicators respectively of general economic health that in turn are thought to be relevant to the measure of incurred loss in the Company’s LHFI portfolio (individually referred to as “Q Factors”). Ranges for individual Q Factors have been quantified and aggregated into a single adjustment (referred to as “the Q Factor adjustment”). Within the LHFI portfolio, management may also adjust segment weights applied for specific portfolio segments whereby historical loss experience may not be a measure reflective of incurred losses for the specific portfolio segment. Auditing management’s estimate of the ALL involved a high degree of subjectivity due to the judgmental nature of adjustments made to the historical loss experience through (1) the quantification and aggregation of the Q Factor adjustment applied to the portfolio as well as (2) the determination of segment loss weight adjustments applied to specific portfolio segments. Such judgments (collectively referred to herein as “the judgmental adjustments”) could have a significant impact to the ALL.



How We Addressed the Matter in Our Audit	We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls over the ALL process, including those over the identification and determination of individual Q Factors, the precision of management’s review and approval of the computation of the Q Factor adjustment, the identification and determination of segment weight adjustments, and the precision of management’s review and approval of the computed segment weight adjustments. To test the judgmental adjustments made to historical loss experience in the ALL, our audit procedures included, among others, evaluating the Company’s ALL methodology and the underlying data used by management in developing the judgmental adjustments to the ALL. We compared the judgmental adjustments made by management to both internal portfolio metrics and external macroeconomic data (as applicable) to support the judgmental adjustments and evaluate trends in such adjustments period over period. We evaluated the data and information utilized by management to support the judgmental adjustments by independently obtaining internal and external data and information to assess the reliability and appropriateness of the data and information used by management. We confirmed that the judgmental adjustments were appropriately input into the Company’s ALL computation by recomputing the impact of such adjustments. We performed an analytical review of the ALL in aggregate using both internal and external information to evaluate the overall reasonableness of the ALL, including the judgmental adjustments.

We have served as the Company's auditor since 1999.

Dallas, ~~Texas~~TX

February ~~14, 2018~~12, 2020

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TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS


	December 31,						December 31,
(in thousands except per share data)	2017			2016			2019			2018
Assets
Cash and due from banks	$	178,010		$	113,707		$	161,817		$	214,191
Interest-bearing deposits	2,697,581			2,700,645
Interest-bearing deposits in other banks							4,233,766			2,815,684
Federal funds sold and securities purchased under resale agreements	30,000			25,000			30,000			50,190
Securities, available-for-sale	23,511			24,874
Loans held for sale ($1,007.7 million and $968.9 million at December 2017 and 2016, respectively, at fair value)	1,011,004			968,929
Investment securities							239,871			120,216
Loans held for sale ($2,571.3 million and $1,969.2 million at December 2019 and 2018, respectively, at fair value)							2,577,134			1,969,474
Loans held for investment, mortgage finance	5,308,160			4,497,338			8,169,849			5,877,524
Loans held for investment (net of unearned income)	15,366,252			13,001,011			16,476,413			16,690,550
Less: Allowance for loan losses	184,655			168,126			195,047			191,522
Loans held for investment, net	20,489,757			17,330,223			24,451,215			22,376,552
Mortgage servicing rights, net	85,327			28,536			64,904			42,474
Premises and equipment, net	25,176			19,775			31,212			23,802
Accrued interest receivable and other assets	516,239			465,933			740,051			626,614
Goodwill and intangible assets, net	19,040			19,512			18,099			18,570
Total assets	$	25,075,645		$	21,697,134		$	32,548,069		$	28,257,767
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest-bearing	$	7,812,660		$	7,994,201		$	9,438,459		$	7,317,161
Interest-bearing	11,310,520			9,022,630			17,040,134			13,288,952
Total deposits	19,123,180			17,016,831			26,478,593			20,606,113
Accrued interest payable	7,680			5,498			12,760			20,675
Other liabilities	182,212			161,223			287,157			194,238
Federal funds purchased and repurchase agreements	365,040			109,575			141,766			641,174
Other borrowings	2,800,000			2,000,000			2,400,000			3,900,000
Subordinated notes, net	281,406			281,044			282,129			281,767
Trust preferred subordinated debentures	113,406			113,406			113,406			113,406
Total liabilities	22,872,924			19,687,577			29,715,811			25,757,373
Stockholders’ equity:
Preferred stock, $.01 par value, $1,000 liquidation value:
Authorized shares—10,000,000
Issued shares—6,000,000 shares issued at December 31, 2017 and 2016	150,000			150,000
Issued shares—6,000,000 shares issued at December 31, 2019 and 2018							150,000			150,000
Common stock, $.01 par value:
Authorized shares—100,000,000
Issued shares—49,643,761 and 49,504,079 at December 31, 2017 and 2016, respectively	496			495
Issued shares—50,338,158 and 50,201,127 at December 31, 2019 and 2018, respectively							503			502
Additional paid-in capital	961,305			955,468			978,205			967,890
Retained earnings	1,090,500			903,187			1,694,608			1,381,492
Treasury stock (shares at cost: 417 at December 31, 2017 and 2016)	(8		)	(8		)
Treasury stock (shares at cost: 417 at December 31, 2019 and 2018)							(8		)	(8		)
Accumulated other comprehensive income, net of taxes	428			415			8,950			518
Total stockholders’ equity	2,202,721			2,009,557			2,832,258			2,500,394
Total liabilities and stockholders’ equity	$	25,075,645		$	21,697,134		$	32,548,069		$	28,257,767

See accompanying notes to consolidated financial statements.

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TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND OTHER

COMPREHENSIVE INCOME


	Year ended December 31,								Year ended December 31,
(In thousands except per share data)	2017		2016			2015
(in thousands except per share data)									2019			2018			2017
Interest income
Interest and fees on loans	$	846,292	$	684,582		$	594,729		$	1,284,036		$	1,124,970		$	846,292
Securities	1,066		967			1,254
Investment securities									8,654			2,834			1,066
Federal funds sold and securities purchased under resale agreements	2,542		1,547			682			1,529			3,792			2,542
Deposits in other banks	29,399		16,312			6,293
Interest-bearing deposits in other banks									71,093			32,597			29,399
Total interest income	879,299		703,408			602,958			1,365,312			1,164,193			879,299
Interest expense
Deposits	79,886		37,175			24,578			293,537			185,116			79,886
Federal funds purchased	2,592		518			284			11,872			6,531			2,592
Other borrowings	15,137		6,128			2,251			58,393			36,207			15,137
Subordinated notes	16,764		16,764			16,764			16,764			16,764			16,764
Trust preferred subordinated debentures	3,592		3,009			2,551			5,026			4,715			3,592
Total interest expense	117,971		63,594			46,428			385,592			249,333			117,971
Net interest income	761,328		639,814			556,530			979,720			914,860			761,328
Provision for credit losses	44,000		77,000			53,250			75,000			87,000			44,000
Net interest income after provision for credit losses	717,328		562,814			503,280			904,720			827,860			717,328
Non-interest income
Service charges on deposit accounts	12,432		10,341			8,323			11,320			12,787			12,432
Wealth management and trust fee income	6,153		4,268			5,022			8,810			8,148			6,153
Bank owned life insurance (BOLI) income	2,260		2,073			2,011
Brokered loan fees	23,331		25,339			18,661			29,738			22,532			23,331
Servicing income	15,657		1,715			(12		)	13,439			18,307			15,657
Swap fees	3,990		2,866			4,275			4,387			5,625			3,990
Net gain/(loss) on sale of loans held for sale									(20,259		)	(15,934		)	(2,387		)
Other	10,433		14,178			9,458			45,005			26,559			15,080
Total non-interest income	74,256		60,780			47,738			92,440			78,024			74,256
Non-interest expense
Salaries and employee benefits	264,231		228,985			192,610			315,080			291,768			264,231
Net occupancy expense	25,811		23,221			23,182			32,989			30,342			25,811
Marketing	26,787		17,303			16,491			53,355			39,335			26,787
Legal and professional	29,731		23,326			22,150			53,830			42,990			29,731
Communications and technology	31,004		25,562			21,425			44,826			30,056			31,004
FDIC insurance assessment	23,510		24,440			17,231			20,093			24,307			23,510
Servicing related expenses	15,506		1,703			14			22,573			14,934			15,506
Allowance and other carrying costs for OREO	6,437		824			22
Allowance and other carrying costs for other real estate owned									7			474			6,437
Other	42,859		37,033			33,398			47,246			50,890			42,859
Total non-interest expense	465,876		382,397			326,523			589,999			525,096			465,876
Income before income taxes	325,708		241,197			224,495			407,161			380,788			325,708
Income tax expense	128,645		86,078			79,641			84,295			79,964			128,645
Net income	197,063		155,119			144,854			322,866			300,824			197,063
Preferred stock dividends	9,750		9,750			9,750			9,750			9,750			9,750
Net income available to common stockholders	$	187,313	$	145,369		$	135,104		$	313,116		$	291,074		$	187,313
Other comprehensive gain (loss)
Change in unrealized gain on available-for-sale securities arising during period, before tax	$	19	$	(467	)	$	(877	)
Income tax expense (benefit) related to unrealized loss on available-for-sale securities	6		(164		)	(306		)
Other comprehensive loss net of tax	13		(303		)	(571		)
Other comprehensive income (loss)
Change in unrealized gain (loss) on available-for-sale debt securities arising during period, before tax									$	10,674		$	7		$	19
Income tax expense (benefit) related to unrealized loss on available-for-sale debt securities									2,242			1			6
Other comprehensive income (loss), net of tax									8,432			6			13
Comprehensive income	$	197,076	$	154,816		$	144,283		$	331,298		$	300,830		$	197,076
Basic earnings per common share	$	3.78	$	3.14		$	2.95		$	6.23		$	5.83		$	3.78
Diluted earnings per common share	$	3.73	$	3.11		$	2.91		$	6.21		$	5.79		$	3.73

See accompanying notes to consolidated financial statements.

5661

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TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Preferred Stock Common Stock Additional Treasury Stock
Accumulated
Other

Paid-in Retained Comprehensive
(In thousands except share data) Shares Amount Shares Amount Capital Earnings Shares Amount Income Total
Balance at December 31, 2014 6,000,000
$ 150,000
45,735,424
$ 457
$ 709,738
$ 622,714
(417 ) $ (8 ) $ 1,289
$ 1,484,190
Comprehensive income:
Net income —
—
—
—
—
144,854
—
—
—
144,854
Change in unrealized gain (loss) on available-for-sale securities, net of tax benefit of $306 —
—
—
—
—
—
—
—
(571 ) (571 )
Total comprehensive income 144,283
Tax expense related to exercise of stock-based awards —
—
—
—
1,452
—
—
—
—
1,452
Stock-based compensation expense recognized in earnings —
—
—
—
4,597
—
—
—
—
4,597
Preferred stock dividend —
—
—
—
—
(9,750 ) —
—
—
(9,750 )
Issuance of stock related to stock-based awards —
—
138,800
2
(1,241 ) —
—
—
—
(1,239 )
Balance at December 31, 2015 6,000,000
150,000
45,874,224
459
714,546
757,818
(417 ) (8 ) 718
1,623,533
Comprehensive income:
Net income —
—
—
—
—
155,119
—
—
—
155,119
Change in unrealized gain (loss) on available-for-sale securities, net of tax benefit of $164 —
—
—
—
—
—
—
—
(303 ) (303 )
Total comprehensive income 154,816
Tax expense related to exercise of stock-based awards —
—
—
—
1,879
—
—
—
—
1,879
Stock-based compensation expense recognized in earnings —
—
—
—
5,093
—
—
—
—
5,093
Preferred stock dividend —
—
—
—
—
(9,750 ) —
—
—
(9,750 )
Issuance of stock related to stock-based awards —
—
172,459
1
(2,482 ) —
—
—
—
(2,481 )
Issuance of common stock —
—
3,450,000
35
236,432
—
—
—
—
236,467
Issuance of stock related to warrants —
—
7,396
—
—
—
—
—
—
—
Balance at December 31, 2016 6,000,000
150,000
49,504,079
495
955,468
903,187
(417 ) (8 ) 415
2,009,557
Comprehensive income:
Net income —
—
—
—
—
197,063
—
—
—
197,063
Change in unrealized gain (loss) on available-for-sale securities, net of tax expense of $6 —
—
—
—
—
—
—
—
13
13
Total comprehensive income 197,076
Tax expense related to exercise of stock-based awards —
—
—
—
—
—
—
—
—
—
Stock-based compensation expense recognized in earnings —
—
—
—
8,079
—
—
—
—
8,079
Preferred stock dividend —
—
—
—
—
(9,750 ) —
—
—
(9,750 )
Issuance of stock related to stock-based awards —
—
106,087
1
(2,242 ) —
—
—
—
(2,241 )
Issuance of common stock —
—
—
—
—
—
—
—
—
—
Issuance of stock related to warrants —
—
33,595
—
—
—
—
—
—
—
Balance at December 31, 2017 6,000,000
$ 150,000
49,643,761
$ 496
$ 961,305
$ 1,090,500
(417 ) $ (8 ) $ 428
$ 2,202,721



	Preferred Stock			Common Stock			Additional						Treasury Stock					Accumulated Other
	Preferred Stock			Common Stock			Paid-in			Retained			Treasury Stock					Comprehensive
(in thousands except share data)	Shares	Amount		Shares	Amount		Capital			Earnings			Shares		Amount			Income		Total
Balance at December 31, 2016	6,000,000	$	150,000	49,504,079	$	495	$	955,468		$	903,187		(417	)	$	(8	)	$	415	$	2,009,557
Comprehensive income:
Net income	—	—		—	—		—			197,063			—		—			—		197,063
Change in unrealized gain (loss) on available-for-sale debt securities, net of taxes of $6	—	—		—	—		—			—			—		—			13		13
Total comprehensive income																				197,076
Stock-based compensation expense recognized in earnings	—	—		—	—		8,079			—			—		—			—		8,079
Preferred stock dividend	—	—		—	—		—			(9,750		)	—		—			—		(9,750		)
Issuance of stock related to stock-based awards	—	—		106,087	1		(2,242		)	—			—		—			—		(2,241		)
Issuance of common stock related to warrants	—	—		33,595	—		—			—			—		—			—		—
Balance at December 31, 2017	6,000,000	150,000		49,643,761	496		961,305			1,090,500			(417	)	(8		)	428		2,202,721
Impact of adoption of new accounting standards(1)	—	—		—	—		—			(82		)	—		—			84		2
Comprehensive income:
Net income	—	—		—	—		—			300,824			—		—			—		300,824
Change in unrealized gain (loss) on available-for-sale debt securities, net of taxes of $1	—	—		—	—		—			—			—		—			6		6
Total comprehensive income																				300,830
Stock-based compensation expense recognized in earnings	—	—		—	—		8,973			—			—		—			—		8,973
Preferred stock dividend	—	—		—	—		—			(9,750		)	—		—			—		(9,750		)
Issuance of stock related to stock-based awards	—	—		120,242	1		(2,383		)	—			—		—			—		(2,382		)
Issuance of common stock related to warrants	—	—		437,124	5		(5		)	—			—		—			—		—
Balance at December 31, 2018	6,000,000	150,000		50,201,127	502		967,890			1,381,492			(417	)	(8		)	518		2,500,394
Comprehensive income:
Net income	—	—		—	—		—			322,866			—		—			—		322,866
Change in unrealized gain (loss) on available-for-sale debt securities, net of taxes of $2,242	—	—		—	—		—			—			—		—			8,432		8,432
Total comprehensive income																				331,298
Stock-based compensation expense recognized in earnings	—	—		—	—		11,775			—			—		—			—		11,775
Preferred stock dividend	—	—		—	—		—			(9,750		)	—		—			—		(9,750		)
Issuance of stock related to stock-based awards	—	—		128,263	1		(1,460		)	—			—		—			—		(1,459		)
Issuance of common stock related to warrants	—	—		8,768	—		—			—			—		—			—		—
Balance at December 31, 2019	6,000,000	$	150,000	50,338,158	$	503	$	978,205		$	1,694,608		(417	)	$	(8	)	$	8,950	$	2,832,258


(1)	Represents the impact of adopting Accounting Standard Update ("ASU") 2018-02 and ASU 2016-01. See Note 1 to the consolidated financial statements for more information.

See accompanying notes to consolidated financial statements.

5762

Table of Contents

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Year ended December 31,									Year ended December 31,
(In thousands)	2017			2016			2015
(in thousands)										2019			2018			2017
Operating activities
Net income	$	197,063		$	155,119		$	144,854		$	322,866		$	300,824		$	197,063
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	44,000			77,000			53,250			75,000			87,000			44,000
Deferred tax expense (benefit)	31,276			(2,946		)	(3,561		)	10,796			(6,400		)	31,276
Depreciation and amortization	27,871			21,814			16,495			37,267			32,022			27,871
Increase in valuation allowance on mortgage servicing rights	2,823			—			—
BOLI income	(2,260		)	(2,073		)	(2,011		)
Net (gain)/loss on sale of loans held for sale										20,259			15,934			2,387
Increase (decrease) in valuation allowance on mortgage servicing rights										5,803			(2,823		)	2,823
Stock-based compensation expense	22,019			13,578			12,304			17,604			16,938			22,019
Excess tax benefits from stock-based compensation arrangements	—			(2,013		)	(1,499		)
Purchases and originations of loans held for sale	(5,556,964		)	(3,327,482		)	(127,002		)	(10,183,057		)	(6,753,709		)	(5,556,964		)
Proceeds from sales and repayments of loans held for sale	5,457,117			2,405,592			40,490			9,508,927			5,759,067			5,457,117
Net (gain) loss on sale of loans held for sale and other assets	2,082			(2,519		)	179
Technology write-off	5,285			—			—
OREO write-down	6,111			—			—
Changes in operating assets and liabilities:
Accrued interest receivable and other assets	(114,551		)	(59,787		)	(61,002		)	(143,617		)	(123,542		)	(105,720		)
Accrued interest payable and other liabilities	10,289			(2,576		)	(3,554		)	87,884			(5,026		)	10,289
Net cash provided by (used in) operating activities	132,161			(726,293		)	68,943
Net cash (used in)/provided by operating activities										(240,268		)	(679,715		)	132,161
Investing activities
Purchases of available-for-sale securities	(97,776		)	(1,760		)	—
Purchases of investment securities										(113,233		)	(101,558		)	(97,776		)
Maturities and calls of available-for-sale securities	94,775			555			2,430			—			—			94,775
Principal payments received on available-for-sale securities	4,383			5,856			8,419
Principal payments received on investment securities										6,185			3,426			4,383
Originations of mortgage finance loans	(86,931,566		)	(100,574,326		)	(86,342,672		)	(138,759,289		)	(99,151,237		)	(86,931,566		)
Proceeds from pay-offs of mortgage finance loans	86,120,744			101,043,264			85,478,521			136,466,964			98,581,873			86,120,744
Net increase in loans held for investment, excluding mortgage finance loans	(2,395,063		)	(1,321,733		)	(1,603,880		)
Net (increase)/decrease in loans held for investment, excluding mortgage finance loans										139,868			(1,402,068		)	(2,395,063		)
Purchase of premises and equipment, net	(12,265		)	(2,176		)	(5,034		)	(16,651		)	(7,651		)	(12,265		)
Proceeds from sale of foreclosed assets	1,023			110			1,430
Proceeds from sale of MSRs										—			70,824			—
Proceeds from sale of other real estate owned, net										79			13,645			1,023
Net cash used in investing activities	(3,215,745		)	(850,210		)	(2,460,786		)	(2,276,077		)	(1,992,746		)	(3,215,745		)
Financing activities
Net increase in deposits	2,106,349			1,932,212			2,411,319			5,872,480			1,482,933			2,106,349
Costs from issuance of stock related to stock-based awards and warrants	(2,241		)	(2,481		)	(1,239		)	(1,459		)	(2,382		)	(2,241		)
Net proceeds from issuance of common stock	—			236,467			—
Preferred dividends paid	(9,750		)	(9,750		)	(9,750		)	(9,750		)	(9,750		)	(9,750		)
Net increase in other borrowings	800,000			500,000			399,995
Excess tax benefits from stock-based compensation arrangements	—			2,013			1,499
Net increase (decrease) in Federal funds purchased and repurchase agreements	255,465			(33,476		)	50,375
Net increase/(decrease) in other borrowings										(1,500,000		)	1,100,000			800,000
Net increase/(decrease) in federal funds purchased and repurchase agreements										(499,408		)	276,134			255,465
Net cash provided by financing activities	3,149,823			2,624,985			2,852,199			3,861,863			2,846,935			3,149,823
Net increase in cash and cash equivalents	66,239			1,048,482			460,356			1,345,518			174,474			66,239
Cash and cash equivalents at beginning of period	2,839,352			1,790,870			1,330,514			3,080,065			2,905,591			2,839,352
Cash and cash equivalents at end of period	$	2,905,591		$	2,839,352		$	1,790,870		$	4,425,583		$	3,080,065		$	2,905,591
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	115,789		$	63,193		$	46,078		$	393,507		$	236,338		$	115,789
Cash paid during the period for income taxes	103,871			88,262			87,450			89,967			75,405			103,871
Transfers from loans/leases to OREO and other repossessed assets	—			18,822			1,267

See accompanying notes to consolidated financial statements.

5863

Table of Contents

(1) Operations and Summary of Significant Accounting Policies

Organization and Nature of Business

Texas Capital Bancshares, Inc. (the "Company”), a Delaware corporation, was incorporated in November 1996 and commenced banking operations in December 1998. The consolidated financial statements of the Company include the accounts of Texas Capital Bancshares, Inc. and its wholly owned subsidiary, Texas Capital Bank, National Association (the "Bank”). We ~~are primarily a secured lender and~~ serve the needs of commercial businesses and successful professionals and entrepreneurs located in Texas as well as operate several lines of business serving a regional or national ~~clientèle~~clientele of commercial borrowers. We are primarily a secured lender, with the majority of our ~~greatest concentration~~loans held for investment, excluding mortgage finance loans and other national lines of ~~loans~~business, being made to businesses headquartered or with operations in Texas. Our national lines of business provide specialized leading products to businesses throughout the United States.

On December 9, 2019, the Company entered into a merger agreement with IBTX, the holding company for Independent Bank, under which TCBI and IBTX will combine in an all-stock merger of equals. Under the terms of the merger agreement, each share of TCBI common stock outstanding immediately prior to the effective time, other than certain shares held by TCBI or IBTX, will be converted into the right to receive the merger consideration of 1.0311 shares of IBTX common stock. At the effective time, each outstanding share of TCBI preferred stock will be automatically converted into the right to receive one share of IBTX preferred stock having substantially the same terms as such share of TCBI preferred stock. The name of the surviving entity will be Independent Bank Group, Inc. and the name of the surviving bank will be Texas Capital Bank. The surviving bank will be operated under the name Independent Financial in Colorado and under the name Texas Capital Bank in Texas.

The merger agreement was unanimously approved by the board of directors of TCBI and the board of directors of IBTX. The merger is expected to close in mid-2020, subject to satisfaction of customary closing conditions, including receipt of customary regulatory approvals and approval of the merger agreement by the stockholders of TCBI and the shareholders of IBTX, respectively. For more information on the merger agreement and the merger, see Part I, Item 1, Business-Merger with Independent Bank Group, Inc.

Basis of Presentation

Our accounting and reporting policies conform to accounting principles generally accepted in the United States ("GAAP") and to generally accepted practices within the banking industry. Certain prior period balances have been reclassified to conform to the current period presentation. ~~In that regard, ASU 2016-09,~~ ~~"Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,"~~ ("ASU 2016-09") became effective for us on January 1, 2017. ASU 2016-09 requires that excess tax benefits and deficiencies be recognized as a component of income taxes within the income statement. Additionally, ASU 2016-09 requires that all income tax-related cash flows resulting from share-based payments be reported as operating activities in the statement of cash flows. Previously, income tax benefits at award settlement were reported as a reduction to operating cash flows and an increase to financing cash flows to the extent that those benefits exceeded the income tax benefits reported in earnings during the award's vesting period. We have elected to apply that change in cash flow presentation on a prospective basis. ASU 2016-09 also requires that companies make an accounting policy election regarding forfeitures, to either estimate the number of awards that are expected to vest or account for them when they occur. We have elected to recognize forfeitures as they occur. The impact of this change and that of the remaining provisions of ASU 2016-09 did not have a significant impact on our financial statements.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for loan losses, the ~~allowance for off-balance sheet credit losses, the fair value of stock-based compensation awards, the fair value of mortgage servicing rights ("MSRs"), the~~ fair value of financial instruments and the status of contingencies are particularly susceptible to significant change.

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 non-vested stock-based 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 2 — Earnings Per Share.

Accumulated Other Comprehensive Income

Unrealized gains or losses on our available-for-sale debt securities (after applicable income tax expense or benefit) are included in accumulated other comprehensive income (loss), net ("AOCI"). AOCI is reported in the accompanying consolidated statements of stockholders’ equity and consolidated statements of income and other comprehensive income.

GAAP does not permit the adjustment of tax amounts in AOCI for changes in tax rates; as a result the effects become "stranded" in AOCI. Stranded tax effects caused by the 2018 revaluation of deferred taxes resulting from the corporate tax rates established by the Tax Cuts and Jobs Act (the "Tax Act") are reclassified from AOCI to retained earnings in accordance with our early adoption of ASU 2018-02 "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income."

Table of Contents

Cash and Cash Equivalents

Cash equivalents include amounts due from banks, interest-bearing deposits in other banks, federal funds sold and ~~Federal funds sold.~~securities purchased under resale agreements.

Investment Securities

Investment securities include available-for-sale debt securities and equity securities at fair value.

Debt Securities

Debt 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~~Debt 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.

~~Available-for-Sale~~Held-to-Maturity

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

Available-for-sale debt securities are stated at fair value, with the unrealized gains and losses reported inas a separate component of ~~accumulated other comprehensive income (loss),~~AOCI, 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 isare 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 debt securities are available-for-sale as of December 31, ~~2017~~2019 and ~~2016.~~2018.

Equity Securities

~~Table~~Beginning January 1, 2018, upon adoption of ~~Contents~~

ASU 2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities," equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in income. For periods prior to January 1, 2018, equity securities were classified as available-for-sale and stated at fair value with unrealized gains and losses reported as a separate component of AOCI, net of tax. Equity securities without readily determinable fair values are recorded at cost less any impairment, if any.

Loans

Loans Held for Sale

Through our ~~MCA~~mortgage correspondent aggregation ("MCA") program, we commit to purchase residential mortgage loans from independent correspondent lenders and deliver those loans into the secondary market via whole loan sales to independent third parties or in securitization transactions to third parties such as Ginnie Mae or to ~~GSEs~~government sponsored entities such as Fannie Mae or Freddie ~~Mac.~~Mac ("GSEs"). In some cases, we retain the mortgage servicing rights. Once purchased, these loans are classified as held for sale and are carried at fair value pursuant to our election of the fair value option in accordance with Accounting Standards Codification ("ASC") 825, Financial Instruments ~~("ASC 825")~~. At the commitment date, we enter into a corresponding forward sale commitment with a third party, typically Ginnie Mae or a GSE, to deliver the loans within a specified timeframe. The estimated gain/loss for the entire transaction (from initial purchase commitment to final delivery of loans) is recorded as an asset or liability. ~~Fair~~The fair value of loans held for sale is derived from observable current market prices, when available, and includes the fair value of the mortgage servicing rights. Adjustments to reflect unrealized gains and losses resulting from changes in fair value and realized gains and losses upon ultimate sale of the loans are classified as ~~other non-interest income~~gain/(loss) on sale of loans held for sale in the consolidated statements of income and other comprehensive income.

Residential mortgage loans held for sale are subject to both credit and interest rate risk. Credit risk is managed through underwriting policies and procedures, including collateral requirements, which are generally accepted by the secondary loan markets. Exposure to interest rate fluctuations is partially managed through forward sales contracts, which set the price for loans that will be delivered in the next 60 to 90 days.

Pursuant to Ginnie Mae servicing guidelines, we have the unilateral right, but not the obligation, to repurchase certain delinquent loans securitized in Ginnie Mae pools, if they meet defined delinquent loan criteria. Once the delinquency criteria

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have been met, and regardless of whether the repurchase option has been exercised, we account for these loans as if they had been repurchased and recognize the loans and a corresponding liability as held for sale and other liabilities, respectively, in the consolidated balance sheets. If the loans are actually repurchased, the liability is ~~cash settled~~extinguished and the loans continue to be reported as held for sale. As ana Ginnie Mae approved lender, we may ~~collect~~recover losses incurred on repurchased loans through a claims process with the government agency.

From time to time we hold for sale the guaranteed portion of Small Business Administration 7(a) loans, which are carried at lower of cost or market.

Loans Held for Investment

Loans held for investment ~~(which include equipment leases accounted for as~~(including 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, less cost to sell. Impaired loans, or portions thereof, are charged off when a confirmed loss exists.

Restructured loans are loans on which, due to the borrower’s financial difficulties, we have granted a concession that we would not otherwise consider for borrowers of similar credit quality. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two. Modifications of terms that could potentially qualify as a restructuring include reduction of contractual interest rate, extension of the maturity date at a contractual interest rate lower than the current rate for new debt with similar risk, a reduction of the face amount of debt or forgiveness of either principal or accrued interest. A loan continues to qualify as restructured until a consistent payment history or change in borrower’s financial condition has been evidenced, generally for no less than twelve months. Assuming that the restructuring agreement specifies an interest rate at the time of the restructuring that is greater than or equal to the rate that we are willing to accept for a new extension of credit with comparable risk, then the loan no longer has to be considered a restructuring if it is in compliance with the modified terms in calendar years after the year of the restructure.

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 collectability is questionable, then cash payments are applied to principal. A loan is placed back on accrual status when both principal and interest are current and it is probable that we will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.

Loans held for investment includes legal ownership interests in mortgage loans that we purchase through our mortgage warehouse lending division. The ownership interests are purchased from unaffiliated mortgage originators who are seeking additional funding through sale of the undivided ownership interests to facilitate their ability to originate loans. The mortgage originator has no obligation to offer and we have no obligation to purchase these interests. The originator closes mortgage loans consistent with underwriting standards established by approved investors, and, at the time of the sale to the investor, our ownership interest and that of the originator are delivered by us to the investor selected by the originator and approved by us. We typically purchase up to a 99% ownership interest in each mortgage with the originator owning the remaining percentage. These mortgage ownership interests are generally held by us for a period of less than 30 days and more typically 10-20 days. Because of conditions in agreements with originators designed to reduce transaction risks, under ASC 860, Transfers and Servicing of Financial Assets (“ASC 860”), the ownership interests do not qualify as participating interests. Under ASC 860, the ownership interests are deemed to be loans to the originators and payments we receive from investors are deemed to be payments made by or on behalf of the originator to repay the loan deemed made to the originator. Because we have an actual, legal ownership interest in the underlying residential mortgage loan, these interests are ~~not~~reported as extensions of credit to the originators that are secured by the mortgage loans as collateral.

Due to market conditions or events of default by the investor or the originator, we could be required to purchase the remaining interests in the mortgage loans and hold them beyond the expected 10-20 days. Mortgage loans acquired under these conditions would require mark-to-market adjustments to income and could require ~~future~~further allocations of the allowance for loan losses or be

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subject to charge off in the event the loans become impaired. ~~Mortgage loan interests purchased and disposed~~

Table of ~~as expected receive no allocation of the allowance for loan losses due to the minimal loss experience with these assets.~~Contents

Allowance for Loan Losses

The allowance for loan losses is comprised of general reserves and specific reserves for impaired loans, ~~and an additional qualitative reserve~~all based on our estimate of losses inherent in the portfolio at the balance sheet ~~date, but not yet identified with specified loans. We regularly evaluate our~~date. In order to determine the allowance for loan losses, to maintain an appropriate level to absorb estimated loan losses inherent in the loan portfolio. Factors contributing to the determination of the allowance include the creditworthiness of the borrower, changes in the value of pledged collateral, and general economic conditions. All loanall loans are assigned a credit grade. Loan commitments ~~rated~~graded substandard or worse and greater than $500,000 are specifically reviewed for loss potential. ~~For loans~~Loans deemed to be impaired, as well as restructured loans and loans formerly reported as restructured, are assigned a specific ~~allocation is assigned~~reserve based on the losses expected to be realized from those loans. For purposes of determining the general reserve, the remainder of the portfolio is segregated by product types to recognize differing risk profiles among ~~categories,~~portfolio segments, 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 of each loan and risk-weighted by product type to calculate ~~the~~a required reserve. A similar process is employed to calculate a reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and letters of credit, and any needed reserve is recorded in other liabilities. Even though portions of the allowance may be allocated to specific loans, the entire allowance is available for any credit that, in management’s judgment, should be charged off.

We have several pass credit grades that are assigned to loans based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to watch credits which have all the characteristics of an acceptable credit risk but warrant more than the normal level of monitoring. Within our criticized/classified credit grades are special mention, substandard, and doubtful. Special mention loans are those that are currently protected by the sound worth and paying capacity of the borrower, but that are potentially weak and constitute an additional credit risk. These loans have the potential to deteriorate to a substandard grade due to the existence of financial or administrative deficiencies. Substandard loans have a well-defined weakness or weaknesses that ~~jeopardize~~jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Some substandard loans are inappropriately protected by the sound worth and paying capacity of the borrower and of the collateral pledged and may be considered impaired. Substandard loans can be accruing or can be on non-accrual depending on the circumstances of the individual loans. Loans classified as doubtful have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection or liquidation in full highly questionable and improbable. The possibility of loss is extremely high. All doubtful loans are on non-accrual.

The allowance allocation percentages assigned to each credit grade have been developed based primarily on an analysis of our historical loss rates. The ~~allocations~~level of the allowance reflects management’s continuing evaluation of conditions likely to impact the amount of losses expected to be incurred in the Bank’s loan portfolio. Such conditions include, without limitation, credit quality indicators such as amounts and percentages of loans classified as past due, criticized and non-performing, conditions internal to the Bank such as the skill and experience of lending and credit personnel and effectiveness of credit review processes, the rate of portfolio growth, the extent of hold limits and loan concentrations, such as loans to specific borrowers, loans to groups of affiliated borrowers, loans to borrowers in defined industry groups and loans to borrowers, and collateral, in defined geographic locations. Conditions external to the Bank that may impact incurred losses that are ~~adjusted for certain qualitative factors, including~~also considered by management in the evaluation of the allowance include the general health of the national economy and regional economies where the Bank operates, international economic conditions, ~~changes in~~domestic and international political events that may impact the Bank’s loan portfolio, regulatory developments deemed relevant to risk assessment and classification of credits and circumstances that may have negative consequences for industries or specific borrowers where the Bank has exposure.

Management’s assessment of the allowance begins with a review of historical credit ~~policies~~loss experience as a baseline before consideration of current environmental issues both internal and ~~lending standards. Changes in~~external to the ~~trend and severity of problem loans can~~Bank that might reasonably cause the ~~estimation~~measure of ~~losses~~incurred loss to differ from ~~past~~historical experience. ~~In addition,~~The Bank’s allowance methodology employs a loss migration technique to determine historical loss percentages applicable to all defined credit risk grades. The methodology also calculates historical loss percentages by portfolio segment and computes segment weights as a measure of the relative risk of loans in each segment compared to the entire portfolio. Management may adjust segment weights by applying overlays to specific portfolio segments whereby historical loss experience may not be a measure reflective of incurred losses for the specific portfolio segment. These overlays are quantified by management at the portfolio segment level and added or subtracted from historical loss rates. These processes allow for a continuous review of not only absolute historical loss percentages but also an assessment of credit risk grade migration, positive and negative, and changes in portfolio composition as defined by portfolio segment.

Because credit risk grade migration, both positive and negative, can significantly trail triggering events such as change in economic conditions, commodity prices or interest rates, changes in collateral values or changes in regulatory interpretation or applicable laws or standards impacting the Bank's lending activities, management has identified certain measures that are believed to offer guidance as leading, concurrent and trailing indicators respectively of general economic health that in turn are thought to be relevant to the measure of incurred loss in the Bank’s loan portfolio (individually referred to as "Q Factors"). Each individual Q Factor is individually quantified by management and then aggregated into a single qualitative adjustment (referred to as the "Q Factor adjustment"). This Q Factor adjustment is added or subtracted from historical loss rates, as relevant, to compute an appropriate reserve based upon actual portfolio composition as defined by portfolio segment and credit risk grade composition.

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The single Q Factor adjustment and application of any management overlay to model calculated segment weights reflects management’s determination that the allowance ~~considers the results of reviews performed by our Credit Review group as reflected in their confirmations of assigned credit grades within the portfolio. The portion~~model is calculating an appropriate level 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~~context of all known loan portfolio quality and ~~application of the allowance allocation percentages. Examples of risks that support the Bank's maintaining an additional qualitative reserve include economic uncertainties and unpredictable~~concentration issues as well as other environmental factors that ~~produce~~are reasonably believed to cause the measure of incurred loss, inclusive of unidentified losses ~~including those resulting~~inherent in the current portfolio, to differ from ~~borrowers' submission of financial information or inaccurate certification of collateral values. These situations, while not common, do not necessarily correlate well with~~ historical loss trends or general economic conditions. Our methodology used to calculate the allowance considers historical losses, however, the historical loss rates for specific product types or credit risk grades may not fully incorporate the effects of uncertainty regarding the economy or other unpredictable events.experience.

The methodology used in the periodic review of the appropriateness of the allowance, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality. ~~The changes~~Changes are reflected in the general allowance and in specific reserves as the collectability of classified loans is evaluated with new information. As our portfolio has matured, historical loss ratios have been closely ~~monitored, and our~~monitored. Our reserve appropriateness relies primarily on our loss history. The review of the appropriateness of the allowance is performed by executive management and presented to the audit and risk committees of our board of directors for their review. The committees report to the board as part of the board's review on a quarterly basis of the Company's consolidated financial statements.

Other Real Estate Owned

Other real estate owned (“OREO”), which is included in other assets on the consolidated balance sheet, consists of real estate that has been foreclosed. ~~Real estate that has been foreclosed~~When foreclosure occurs, the acquired asset is recorded at ~~the~~ fair value ~~of the real estate,~~ less selling costs, generally based on appraised value, which may result in partial charge-off of the loan through a charge to the allowance for loan losses, if necessary. Subsequent write-downs required for declines in value are recorded through a valuation allowance, or taken directly to the asset, ~~charged to~~and are recorded in allowance and other ~~non-interest expense.~~

~~Table~~carrying costs for OREO in the consolidated statements of ~~Contents~~

~~Premises~~income 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.other comprehensive income. Gains or losses on ~~disposals~~sale of ~~premises and equipment~~OREO are ~~included~~recorded in other non-interest income in the consolidated statements of income ~~statements.~~and other comprehensive income.

~~Marketing~~Mortgage Servicing Rights, Net

Mortgage servicing rights ("MSRs") are created by selling mortgage loans with servicing rights retained. We identify classes of servicing rights based upon the nature of the underlying assumptions used to value the asset along with the risks associated with the underlying asset. Based upon these criteria we have one class of MSRs, residential.

MSRs are recognized based on the estimated fair value of the mortgage loans and ~~Software~~

~~Marketing costs~~the related servicing rights at the date of sale using values derived from a valuation model. MSRs are ~~expensed~~reported on the consolidated balance sheets at amortized cost, less a valuation allowance if the fair value of identified strata within the MSR portfolio are determined to have a fair value that is less than amortized cost. MSRs are amortized proportionally over the estimated life of the projected net servicing revenue and are periodically evaluated for impairment. Loan servicing fee income represents income earned for servicing mortgage loans owned by investors and includes mortgage servicing fees and other ancillary servicing income. Servicing fees are recorded as ~~incurred. Ongoing maintenance~~income when earned and ~~enhancements~~are reported in non-interest income on the consolidated statements of ~~websites~~income and other comprehensive income. MSR valuation allowance expense and servicing related expenses are ~~expensed as incurred. Costs incurred~~recorded 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~~servicing related expenses in the consolidated ~~balance sheets.~~statements of income and other comprehensive income.

Goodwill and Other Intangible Assets, Net

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.~~relationships purchased as part of business acquisitions. Intangible assets with definite useful lives are amortized over their estimated life. Goodwill and intangible assets are tested for impairment ~~in October on an annual basis~~at least 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~~Premises and Equipment, Net

~~We have determined that all of our lending divisions~~Premises and ~~subsidiaries meet~~equipment are stated at cost less accumulated depreciation. Depreciation is computed using the ~~aggregation criteria of ASC 280,~~ ~~Segment Reporting, since all offer similar products and services, operate with similar processes, and have similar customers.~~

~~Stock-based Compensation~~

~~We account for all stock-based compensation transactions in accordance with ASC 718,~~ ~~Compensation — Stock Compensation~~ ~~(“ASC 718”), which requires that stock compensation transactions be recognized as compensation expense in~~straight-line method over the ~~consolidated statement of income and other comprehensive income based on their fair values on the measurement date, which is the date~~estimated useful lives of the ~~grant.~~

~~Accumulated Other Comprehensive Income~~

~~Unrealized gains~~assets. Furniture and equipment is generally depreciated over three to five years, while leasehold improvements are generally depreciated over the term of their respective lease. Gains or losses on ~~our available-for-sale securities (after applicable income tax expense or benefit)~~disposals of premises and equipment are included in ~~accumulated~~ other ~~comprehensive~~non-interest income ~~net. Accumulated other comprehensive income (loss), net is reported~~ in the ~~accompanying consolidated statements of stockholders’ equity and~~ consolidated statements of income and other comprehensive income.

~~Income Taxes~~Software

~~The Company~~Costs incurred in connection with development or purchase of internal use software and ~~its subsidiary file~~cloud computing arrangements, including in-substance software licenses, are capitalized. Amortization is computed on a ~~consolidated federal income tax return. We utilize~~straight-line basis over 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~~estimated useful life of the asset, which generally ranges from one to five years. Capitalized software is included in other 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 allowance is provided against deferred tax assets unless it is more likely than not that such deferred tax assets will be realized.consolidated balance sheets.

~~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 15 — Earnings Per Share.

~~Fair Values of Financial Instruments~~

~~ASC 820,~~ ~~Fair Value Measurements and Disclosures~~ (“ASC 820”), defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.

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~~Mortgage Servicing Rights~~

Mortgage servicing rights are created by selling purchased or originated mortgage loans with servicing rights retained. We identify classes of servicing rights based upon the nature of the underlying assumptions used to value the asset along with the risks associated with the underlying asset. Based upon these criteria we have one class of MSRs, residential.

Originated MSRs are recognized based on the estimated fair value of the mortgage loans and the related servicing rights at the date of sale using values derived from a valuation model managed by an independent third party. MSRs are amortized proportionally over the estimated life of the projected net servicing revenue and are periodically evaluated for impairment. MSRs are reported on the consolidated balance sheets at amortized cost, less a valuation allowance if the fair value of identified strata within the MSR portfolio are determined to have a fair value that is less than amortized cost. Loan servicing fee income represents income earned for servicing mortgage loans owned by investors and includes mortgage servicing fees and other ancillary servicing income. Servicing fees are recorded as income when earned and are reported in other non-interest income on the consolidated statements of income and other comprehensive income. For additional information on MSRs, see Note 5 - Certain Transfers of Financial Assets.

Financial Instruments with Off-Balance Sheet Risk

The Company has undertaken certain guarantee obligations in the ordinary course of business which include liabilities with off-balance sheet risk. We consider the following arrangements to be guarantees: commitments to extend credit, standby letters of credit and indemnification agreements included within third party contractual arrangements. ~~For additional information on commitments and contingencies, see Note 13 - Financial Instruments with Off-Balance Sheet Risk.~~

~~Derivative Financial Instruments~~

All contracts that satisfy the definition of a derivative are recorded at fair value in other assets and other liabilities in the consolidated balance sheets. We record the derivatives on a net basis when a right of offset exists, based on transactions with a single counterparty that are subject to a legally enforceable master netting agreement. For additional information on derivative financial instruments, see Note 20 - Derivative Financial Instruments.

~~(2) Securities~~

~~The following is a summary of securities (in thousands):~~

December 31, 2017

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair
Value
Available-for-sale securities:
Residential mortgage-backed securities $ 10,297
$ 648
$ —
$ 10,945
Equity securities(1) 12,556
425
(415 ) 12,566
$ 22,853
$ 1,073
$ (415 ) $ 23,511

December 31, 2016

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair
Value
Available-for-sale securities:
Residential mortgage-backed securities $ 14,680
$ 972
$ —
$ 15,652
Municipals 275
—
—
275
Equity securities(1) 9,280
27
(360 ) 8,947
$ 24,235
$ 999
$ (360 ) $ 24,874


~~(1)~~	~~Equity securities consist of Community Reinvestment Act funds and investments related to our non-qualified deferred compensation plan.~~

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~~The amortized cost and estimated fair value of securities are presented below by contractual maturity (in thousands, except percentage data):~~

December 31, 2017

Less Than
One Year

After One
Through
Five Years

After Five
Through
Ten Years

After Ten
Years
Total
Available-for-sale:
Residential mortgage-backed securities:(1)
Amortized cost $ 409
$ 819
$ 1,502
$ 7,567
$ 10,297
Estimated fair value 418
916
1,636
7,975
10,945
Weighted average yield(3) 4.59 % 6.02 % 5.32 % 3.45 % 3.97 %
Equity securities:(4)
Amortized cost 12,556
—
—
—
12,556
Estimated fair value 12,566
—
—
—
12,566
Total available-for-sale securities:
Amortized cost $ 22,853
Estimated fair value $ 23,511

December 31, 2016

Less Than
One Year

After One
Through
Five Years

After Five
Through
Ten Years

After Ten
Years
Total
Available-for-sale:
Residential mortgage-backed securities:(1)
Amortized cost $ 9
$ 2,047
$ 3,147
$ 9,477
$ 14,680
Estimated fair value 9
2,104
3,495
10,044
15,652
Weighted average yield(3) 5.50 % 4.70 % 5.55 % 2.84 % 3.68 %
Municipals:(2)
Amortized cost 275
—
—
—
275
Estimated fair value 275
—
—
—
275
Weighted average yield(3) 5.61 % —
—
—
5.61 %
Equity securities:(4)
Amortized cost 9,280
—
—
—
9,280
Estimated fair value 8,947
—
—
—
8,947
Total available-for-sale securities:
Amortized cost $ 24,235
Estimated fair value $ 24,874


~~(1)~~	~~Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.~~


~~(2)~~	~~Yields have been adjusted to a tax equivalent basis assuming a 35% federal tax rate.~~


~~(3)~~	~~Yields are calculated based on amortized cost.~~


~~(4)~~	~~These equity securities do not have a stated maturity.~~

Securities with carrying values of approximately $8.8 million and $13.6 million were pledged to secure certain borrowings and deposits at December 31, 2017 and 2016, respectively. See Note 9 — Borrowing Arrangements for discussion of securities securing borrowings. Of the pledged securities at December 31, 2017 and 2016, approximately $1.6 million and $3.4 million, respectively, were pledged for certain deposits.

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The following table discloses, as of December 31, 2017 and December 31, 2016, 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):

December 31, 2017 Less Than 12 Months 12 Months or Longer Total

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss
Equity securities $ 1,015
$ (6 ) $ 6,091
$ (409 ) $ 7,106
$ (415 )

December 31, 2016 Less Than 12 Months 12 Months or Longer Total
Fair
Value Unrealized
Loss Fair
Value Unrealized
Loss Fair
Value Unrealized
Loss
Equity securities $ 1,015
$ (6 ) $ 6,146
$ (354 ) $ 7,161
$ (360 )

At December 31, 2017 and December 31, 2016, we owned two securities with an unrealized loss position. These securities are publicly traded equity funds and are subject to market pricing volatility. We do not believe that this unrealized loss is “other than temporary.” We have evaluated the near-term prospects of the investments in relation to the severity and duration of the impairment and based on that evaluation have the ability and intent to hold the investments until recovery of fair value.

~~Unrealized gains or losses on our available-for-sale securities (after applicable income tax expense or benefit) are included in accumulated other comprehensive income, net.~~

~~(3) Loans Held for Investment and Allowance for Loan Losses~~

~~Loans held for investment are summarized by category as follows (in thousands):~~

December 31,

2017 2016
Commercial $ 9,189,811
$ 7,291,545
Mortgage finance 5,308,160
4,497,338
Construction 2,166,208
2,098,706
Real estate 3,794,577
3,462,203
Consumer 48,684
34,587
Equipment leases 264,903
185,529
Gross loans held for investment 20,772,343
17,569,908
Deferred income (net of direct origination costs) (97,931 ) (71,559 )
Allowance for loan losses (184,655 ) (168,126 )
Total loans held for investment $ 20,489,757
$ 17,330,223

~~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 and take into account the risk of oil and gas price volatility. Our commercial loans and leases are underwritten after carefully evaluating and understanding the borrower’s ability to operate profitably. Our underwriting standards are designed to promote relationship banking rather than to make loans on a 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, or more frequently, as needed, and are supported by accounts receivable, inventory, equipment and other assets of our clients’ businesses.

~~Mortgage Finance Loans.~~ Our mortgage finance loans consist of ownership interests purchased in single-family residential mortgages funded through our mortgage warehouse lending division. We have agreements with mortgage lenders and purchase interests in individual loans they originate. The ownership interests collateralizing our mortgage finance loans are typically held on our balance sheet for 10 to 20 days, and substantially all loans are conforming loans. All mortgage finance loans are underwritten consistently with established programs for permanent financing with financially sound investors. Balances as of December 31, 2017 and 2016 are stated net of $171.2 million and $839.0 million participations sold, respectively.

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~~Construction Loans.~~ Our construction loan portfolio consists primarily of single- and multi-family residential properties and commercial projects used in manufacturing, warehousing, service or retail businesses. Our construction loans generally have terms of one to three years. We typically make construction loans to developers, builders and contractors that have an established record of successful project completion and loan repayment and have a substantial equity investment in the borrowers. Loan amounts are derived primarily from the Bank's evaluation of expected cash flows available to service debt from stabilized projects under hypothetically stressed conditions. Construction loans are also based in part upon estimates of costs and value associated with the completed project. Sources of repayment for these types of loans may be permanent loans from other lenders, sales of developed property, or an interim loan commitment from us until permanent financing is obtained. The nature of these loans makes ultimate repayment sensitive to overall economic conditions. Borrowers may not be able to correct conditions of default in loans, increasing risk of exposure to classification, non-performing status, reserve allocation and actual credit loss and foreclosure. These loans typically have floating rates and require commitment fees.

~~Real Estate Loans.~~ A portion of our real estate loan portfolio is comprised of loans secured by properties other than market risk or investment-type real estate. Market risk loans are real estate loans where the primary source of repayment is expected to come from the sale, permanent financing or lease of the real property collateral. We generally provide temporary financing for commercial and residential property. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Our real estate loans generally have maximum terms of five to seven years, and we provide loans with both floating and fixed rates. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. Appraised values may be highly variable due to market conditions and the impact of the inability of potential purchasers and lessees to obtain financing and a lack of transactions at comparable values.

~~At December 31, 2017 and 2016, we had a blanket floating lien on certain real estate-secured loans, mortgage finance loans and also certain securities used as collateral for FHLB borrowings.~~

~~Summary of Loan Losses~~

The allowance for loan losses is comprised of general reserves, specific reserves for impaired loans and an additional qualitative reserve based on our estimate of losses inherent in the portfolio at the balance sheet date, but not yet identified with specified loans. We believe the allowance at December 31, 2017 to be appropriate, given management's assessment of losses inherent in the portfolio as of the evaluation date, the significant growth in the loan and lease portfolio, current economic conditions in our market areas and other factors.

~~The following tables summarize the credit risk profile of our loan portfolio by internally assigned grades and non-accrual status as of December 31, 2017 and 2016 (in thousands):~~

Commercial
Mortgage
Finance
Construction Real Estate Consumer Equipment Leases Total
December 31, 2017
Grade:
Pass $ 8,967,471
$ 5,308,160
$ 2,152,654
$ 3,706,541
$ 48,591
$ 249,865
$ 20,433,282
Special mention 19,958
—
13,554
53,652
—
495
87,659
Substandard- accruing 102,651
—
—
32,671
93
14,543
149,958
Non-accrual 99,731
—
—
1,713
—
—
101,444
Total loans held for investment $ 9,189,811
$ 5,308,160
$ 2,166,208
$ 3,794,577
$ 48,684
$ 264,903
$ 20,772,343

Commercial
Mortgage
Finance
Construction Real Estate Consumer Equipment Leases Total
December 31, 2016
Grade:
Pass $ 6,941,310
$ 4,497,338
$ 2,074,859
$ 3,430,346
$ 34,249
$ 181,914
$ 17,160,016
Special mention 69,447
—
10,901
21,932
—
3,532
105,812
Substandard-accruing 115,848
—
12,787
7,516
138
—
136,289
Non-accrual 164,940
—
159
2,409
200
83
167,791
Total loans held for investment $ 7,291,545
$ 4,497,338
$ 2,098,706
$ 3,462,203
$ 34,587
$ 185,529
$ 17,569,908

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The following tables detail activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2017 and 2016 (in thousands). Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

Commercial
Mortgage
Finance
Construction
Real
Estate
Consumer Equipment Leases Additional Qualitative Reserve Total
December 31, 2017
Allowance for loan losses
Beginning balance $ 128,768
$ —
$ 13,144
$ 19,149
$ 241
$ 1,124
$ 5,700
$ 168,126
Provision for loan losses 19,590
—
6,084
15,353
226
2,408
2,690
46,351
Charge-offs 34,145
—
59
290
180
—
—
34,674
Recoveries 4,593
—
104
75
70
10
—
4,852
Net charge-offs (recoveries) 29,552
—
(45 ) 215
110
(10 ) —
29,822
Ending balance $ 118,806
$ —
$ 19,273
$ 34,287
$ 357
$ 3,542
$ 8,390
$ 184,655
Period end amount allocated to:
Loans individually evaluated for impairment $ 24,316
$ —
$ —
$ 101
$ —
$ —
$ —
$ 24,417
Loans collectively evaluated for impairment 94,490
—
19,273
34,186
357
3,542
8,390
160,238
Ending balance $ 118,806
$ —
$ 19,273
$ 34,287
$ 357
$ 3,542
$ 8,390
$ 184,655

Commercial
Mortgage
Finance
Construction
Real
Estate
Consumer Equipment Leases Additional Qualitative Reserve Total
December 31, 2016
Allowance for loan losses
Beginning balance $ 112,446
$ —
$ 6,836
$ 13,381
$ 338
$ 3,931
$ 4,179
$ 141,111
Provision for loan losses 63,516
—
6,274
6,233
(71 ) (2,884 ) 1,521
74,589
Charge-offs 56,558
—
—
528
47
—
—
57,133
Recoveries 9,364
—
34
63
21
77
—
9,559
Net charge-offs (recoveries) 47,194
—
(34 ) 465
26
(77 ) —
47,574
Ending balance $ 128,768
$ —
$ 13,144
$ 19,149
$ 241
$ 1,124
$ 5,700
$ 168,126
Period end amount allocated to:
Loans individually evaluated for impairment $ 34,405
$ —
$ 24
$ 133
$ 30
$ 13
$ —
$ 34,605
Loans collectively evaluated for impairment 94,363
—
13,120
19,016
211
1,111
5,700
133,521
Ending balance $ 128,768
$ —
$ 13,144
$ 19,149
$ 241
$ 1,124
$ 5,700
$ 168,126

The table below presents the activity in the allowance for off-balance sheet credit losses related to losses on unfunded commitments for the years ended December 31, 2017 and 2016 (in thousands). This allowance is recorded in other liabilities in the consolidated balance sheet.

Year Ended December 31,
2017 2016
Beginning balance $ 11,422
$ 9,011
Provision for off-balance sheet credit losses (2,351 ) 2,411
Ending balance $ 9,071
$ 11,422

We have traditionally maintained an additional qualitative reserve component to compensate for the uncertainty and complexity in estimating loan and lease losses including factors and conditions that may not be fully reflected in the determination and application of the allowance allocation percentages. The increase in the additional qualitative reserve at December 31, 2017 was primarily driven by a $4.5 million provision in the third quarter of 2017 reflecting our assessment of the potential impact to our loan portfolio from Hurricanes Harvey and Irma. We believe the level of additional qualitative reserves at December 31, 2017 is warranted due to economic uncertainties and unpredictable factors that have produced losses, including those resulting from borrowers' misstatement of financial information or inaccurate certification of collateral values. Such losses are not necessarily correlated with historical loss trends or general economic conditions. Our methodology used to calculate the

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allowance considers historical losses; however, the historical loss rates for specific product types or credit risk grades may not fully incorporate the effects of uncertainty regarding the economy or other unpredictable events.

Our recorded investment in loans as of December 31, 2017 and 2016 related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the basis of our impairment methodology was as follows (in thousands):

Commercial
Mortgage
Finance
Construction
Real
Estate
Consumer Equipment Leases Total
December 31, 2017
Loans individually evaluated for impairment $ 100,676
$ —
$ —
$ 2,008
$ —
$ —
$ 102,684
Loans collectively evaluated for impairment 9,089,135
5,308,160
2,166,208
3,792,569
48,684
264,903
20,669,659
Total $ 9,189,811
$ 5,308,160
$ 2,166,208
$ 3,794,577
$ 48,684
$ 264,903
$ 20,772,343

Commercial
Mortgage
Finance
Construction
Real
Estate
Consumer Equipment Leases Total
December 31, 2016
Loans individually evaluated for impairment $ 166,669
$ —
$ 159
$ 3,751
$ 200
$ 83
$ 170,862
Loans collectively evaluated for impairment 7,124,876
4,497,338
2,098,547
3,458,452
34,387
185,446
17,399,046
Total $ 7,291,545
$ 4,497,338
$ 2,098,706
$ 3,462,203
$ 34,587
$ 185,529
$ 17,569,908

Generally we place loans on non-accrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining unpaid principal amount of the loan is deemed to be fully collectible. If collectability is questionable, then cash payments are applied to principal. We recognized $1.3 million in interest income on non-accrual loans during 2017 compared to $1.4 million in 2016 and $1.6 million in 2015. Additional interest income that would have been recorded if the loans had been current during the years ended December 31, 2017, 2016 and 2015 totaled $19.0 million, $7.9 million and $7.0 million, respectively. As of December 31, 2017, none of our non-accrual loans were earning on a cash basis, compared to $811,000 at December 31, 2016. A loan is placed back on accrual status when both principal and interest are current and it is probable that we will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.

A loan 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 original loan agreement. In accordance with ASC 310, ~~Receivables, we have also included all restructured and formerly restructured loans in our impaired loan totals.~~

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~~The following tables detail our impaired loans, by portfolio class, as of December 31, 2017 and 2016 (in thousands):~~

December 31, 2017

Recorded
Investment

Unpaid
Principal
Balance

Related
Allowance

Average
Recorded
Investment

Interest
Income
Recognized
With no related allowance recorded:
Commercial
Business loans $ 16,835
$ 18,257
$ —
$ 22,964
$ —
Energy loans 21,426
22,602
—
36,579
—
Construction
Market risk —
—
—
—
—
Real estate
Market risk —
—
—
—
—
Commercial 1,096
1,096
—
2,166
—
Secured by 1-4 family —
—
—
—
—
Consumer —
—
—
—
—
Equipment leases —
—
—
—
—
Total impaired loans with no allowance recorded $ 39,357
$ 41,955
$ —
$ 61,709
$ —
With an allowance recorded:
Commercial
Business loans $ 18,645
$ 19,020
$ 2,544
$ 16,960
$ —
Energy loans 43,770
55,875
21,772
50,867
6
Construction
Market risk —
—
—
27
—
Real estate
Market risk 295
295
6
485
—
Commercial 499
499
75
166
—
Secured by 1-4 family 118
118
20
516
—
Consumer —
—
—
33
—
Equipment leases —
—
—
14
—
Total impaired loans with an allowance recorded $ 63,327
$ 75,807
$ 24,417
$ 69,068
$ 6
Combined:
Commercial
Business loans $ 35,480
$ 37,277
$ 2,544
$ 39,924
$ —
Energy loans 65,196
78,477
21,772
87,446
6
Construction
Market risk —
—
—
27
—
Real estate
Market risk 295
295
6
485
—
Commercial 1,595
1,595
75
2,332
—
Secured by 1-4 family 118
118
20
516
—
Consumer —
—
—
33
—
Equipment leases —
—
—
14
—
Total impaired loans $ 102,684
$ 117,762
$ 24,417
$ 130,777
$ 6

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December 31, 2016

Recorded
Investment

Unpaid
Principal
Balance

Related
Allowance

Average
Recorded
Investment

Interest
Income
Recognized
With no related allowance recorded:
Commercial
Business loans $ 23,868
$ 27,992
$ —
$ 12,361
$ —
Energy loans 46,753
54,522
—
54,075
—
Construction
Market risk —
—
—
2,778
—
Real estate
Market risk —
—
—
—
—
Commercial 2,083
2,083
—
4,483
38
Secured by 1-4 family —
—
—
—
—
Consumer —
—
—
—
—
Equipment leases —
—
—
403
—
Total impaired loans with no allowance recorded $ 72,704
$ 84,597
$ —
$ 74,100
$ 38
With an allowance recorded:
Commercial
Business loans $ 21,303
$ 21,303
$ 7,055
$ 22,277
$ —
Energy loans 74,745
88,987
27,350
73,637
24
Construction
Market risk 159
159
24
53
—
Real estate
Market risk 1,342
1,342
20
3,000
—
Commercial —
—
—
—
—
Secured by 1-4 family 326
326
113
435
—
Consumer 200
200
30
67
—
Equipment leases 83
83
13
548
—
Total impaired loans with an allowance recorded $ 98,158
$ 112,400
$ 34,605
$ 100,017
$ 24
Combined:
Commercial
Business loans $ 45,171
$ 49,295
$ 7,055
$ 34,638
$ —
Energy loans 121,498
143,509
27,350
127,712
24
Construction

Market risk 159
159
24
2,831
—
Real estate

Market risk 1,342
1,342
20
3,000
—
Commercial 2,083
2,083
—
4,483
38
Secured by 1-4 family 326
326
113
435
—
Consumer 200
200
30
67
—
Equipment leases 83
83
13
951
—
Total impaired loans $ 170,862
$ 196,997
$ 34,605
$ 174,117
$ 62

~~Average impaired loans outstanding during the years ended December 31, 2017, 2016 and 2015 totaled $130.8 million, $174.1 million and $102.3 million, respectively.~~

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~~The table below provides an age analysis of our loans held for investment as of December 31, 2017 (in thousands):~~

30-59 Days
Past Due

60-89 Days
Past Due

Greater Than
90 Days(1)

Total Past
Due
Non-accrual Current Total
Commercial
Business loans $ 12,346
$ 13,029
$ 6,984
$ 32,359
$ 34,535
$ 7,992,918
$ 8,059,812
Energy 1,100
—
—
1,100
65,196
1,063,703
1,129,999
Mortgage finance loans —
—
—
—
—
5,308,160
5,308,160
Construction
Market risk 239
—
—
239
—
2,098,446
2,098,685
Commercial —
—
—
—
—
35,786
35,786
Secured by 1-4 family 1,635
—
—
1,635
—
30,102
31,737
Real estate
Market risk 1,724
295
—
2,019
—
2,681,527
2,683,546
Commercial —
—
—
—
1,595
839,787
841,382
Secured by 1-4 family 174
139
1,392
1,705
118
267,826
269,649
Consumer 100
74
—
174
—
48,510
48,684
Equipment leases 636
16
53
705
—
264,198
264,903
Total loans held for investment $ 17,954
$ 13,553
$ 8,429
$ 39,936
$ 101,444
$ 20,630,963
$ 20,772,343


~~(1)~~	Loans past due 90 days and still accruing includes premium finance loans of $5.5 million. These loans are generally secured by obligations of insurance carriers to refund premiums on canceled insurance policies. The refund of premiums from the insurance carriers can take 180 days or longer from the cancellation date.

Restructured loans are loans on which, due to the borrower’s financial difficulties, we have granted a concession that we would not otherwise consider for borrowers of similar credit quality. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two. Modifications of terms that could potentially qualify as a restructuring include reduction of contractual interest rate, extension of the maturity date at a contractual interest rate lower than the current rate for new debt with similar risk, or a reduction of the face amount of debt, or forgiveness of either principal or accrued interest. As of December 31, 2017 and December 31, 2016, we did not have any loans considered restructured that were not on non-accrual. Of the non-accrual loans at December 31, 2017 and 2016, $18.8 million and $18.1 million, respectively, met the criteria for restructured. These loans had no unfunded commitments at their respective balance sheet dates. A loan continues to qualify as restructured until a consistent payment history or change in borrower’s financial condition has been evidenced, generally no less than twelve months. Assuming that the restructuring agreement specifies an interest rate at the time of the restructuring that is greater than or equal to the rate that we are willing to accept for a new extension of credit with comparable risk, then the loan no longer has to be considered a restructuring if it is in compliance with modified terms in calendar years after the year of the restructure.

~~Table of Contents~~

~~The following tables summarize, as of December 31, 2017 and 2016, loans that have been restructured during 2017 and 2016 (in thousands, except number of contracts):~~

December 31, 2017

Number of
Contracts

Pre-Restructuring
Outstanding Recorded
Investment

Post-Restructuring
Outstanding Recorded
Investment
Commercial business loans 3
$ 7,527
$ 7,640
Energy loans 1
$ 1,070
$ —
Total new restructured loans in 2017 4
$ 8,597
$ 7,640

December 31, 2016

Number of
Contracts

Pre-Restructuring
Outstanding Recorded
Investment

Post-Restructuring
Outstanding Recorded
Investment
Energy loans 2
$ 14,235
$ 12,236
Total new restructured loans in 2016 2
$ 14,235
$ 12,236

The restructured loans generally include terms to temporarily place the loan on interest only, extend the payment terms or reduce the interest rate. We did not forgive any principal on the above loans. The $957,000 decrease in the post-restructuring recorded investment in 2017 and the $2.0 million decrease in the post-restructuring recorded investment in 2016 were due to paydowns. At December 31, 2017, $7.6 million of the above loans restructured in 2017 are on non-accrual. The restructuring of the loans did not have a significant impact on our allowance for loan losses at December 31, 2017 or 2016.

~~The following table provides information on how loans were modified as restructured loans during the year ended December 31, 2017 and 2016 (in thousands):~~

December 31,

2017 2016
Extended maturity $ 712
$ —
Adjusted payment schedule 6,928
—
Combination of maturity extension and payment schedule adjustment —
12,236
Total $ 7,640
$ 12,236

~~As of December 31, 2017 and 2016, we did not have any loans that were restructured within the last 12 months that subsequently defaulted.~~

~~(4) OREO and Valuation Allowance for Losses on OREO~~

~~The table below presents a summary of the activity related to OREO (in thousands):~~

Year ended December 31,

2017 2016 2015
Beginning balance $ 18,961
$ 278
$ 568
Additions —
18,822
1,267
Sales (1,108 ) (139 ) (1,557 )
Valuation allowance for OREO —
—
—
Direct write-downs (6,111 ) —
—
Ending balance $ 11,742
$ 18,961
$ 278

When foreclosure occurs, the acquired asset is recorded at fair value less selling costs, generally based on appraised value, which may result in partial charge-off of the loan. Subsequent write-downs required for declines in value are recorded through a valuation allowance or taken directly against the asset and charged to other non-interest expense. During 2017, we recorded a $6.1 million write-down on one asset.

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~~(5) Certain Transfers of Financial Assets~~

Through our MCA business, we commit to purchase residential mortgage loans from independent correspondent lenders and deliver those loans into the secondary market via whole loans sales to independent third parties or in securitization transactions to Ginnie Mae and GSEs such as Fannie Mae and Freddie Mac. We have elected to carry these loans at fair value based on sales commitments and market quotes. Gains and losses on the sale of mortgage loans held for sale and changes in the fair value of the loans held for sale are included in other non-interest income on the consolidated income statement.

~~The table below presents the unpaid principal balance of loans held for sale and related fair values at December 31, 2017 and 2016 (in thousands):~~

December 31,
2017 2016
Outstanding balance(1) $ 1,009,271
$ 980,414
Fair value(1) 1,007,695
968,929
Fair value over (under) outstanding balance $ (1,576 ) $ (11,485 )


~~(1)~~	~~Does not include $3.3 million of Small Business Administration ("SBA") loans held for sale carried at lower of cost or market as of December 31, 2017.~~

No loans held for sale were on non-accrual as of December 31, 2017 or December 31, 2016. At December 31, 2017, we had $19.7 million in loans held for sale that were 90 days or more past due, compared to none at December 31, 2016. Of this $19.7 million, $19.0 million are loans with government guarantees that we purchased and sold into securitized Ginnie Mae pools. Pursuant to Ginnie Mae servicing guidelines, we have the unilateral right, but not the obligation, to repurchase these loans if they meet defined delinquent loan criteria, and therefore must record any delinquent loans as held for sale on our balance sheet regardless of whether the repurchase option has been exercised.

~~The table below presents a reconciliation of the changes in loans held for sale for the years December 31, 2017 and 2016 (in thousands):~~

Year Ended December 31,
2017 2016
Beginning balance $ 968,929
$ 86,075
Loans purchased 5,556,964
3,327,482
Payments and loans sold (5,524,798 ) (2,433,348 )
Change in fair value 9,909
(11,280 )
Ending balance(1) $ 1,011,004
$ 968,929

~~(1) Includes $3.3 million of SBA loans held for sale carried at lower of cost or market at December 31, 2017.~~

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We generally retain the right to service the loans sold, creating MSRs which are recorded as assets on our balance sheet. A summary of MSR activity for the years ended December 31, 2017 and 2016 is as follows (in thousands):

Year Ended December 31,
2017 2016
MSRs:
Balance, beginning of year $ 28,536
$ 423
Capitalized servicing rights 67,970
29,816
Amortization (8,356 ) (1,703 )
Balance, end of period $ 88,150
$ 28,536
Valuation allowance:
Balance, beginning of year $ —
$ —
Increase in valuation allowance 2,823
—
Balance, end of period $ 2,823
$ —
MSRs, net(1) $ 85,327
$ 28,536
MSRs, fair value $ 86,321
$ 30,877

~~(1) MSRs are reported on the consolidated balance sheets at amortized cost.~~

At December 31, 2017 and 2016, our servicing portfolio of residential mortgage loans had an outstanding principal balance of $7.0 billion and $2.2 billion, respectively. In connection with the servicing of these loans, we hold deposits in the name of investors representing escrow funds for taxes and insurance, as well as collections in transit to investors. These escrow funds are segregated and held in separate non-interest-bearing bank accounts at the Bank. These deposits, included in total non-interest-bearing deposits on the consolidated balance sheets, were $73.4 million at December 31, 2017 and $21.0 million at December 31, 2016.

The estimated fair value of the MSR assets is obtained from an independent third party and reviewed by management on a quarterly basis. MSRs typically do not trade in an active, open market with readily observable prices; as such, the fair value of MSRs is determined using a discounted cash flow model to calculate the present value of the estimated future net servicing income. The assumptions utilized in the discounted cash flow model are based on market data for comparable assets, where available. Each quarter, management and the independent third party discuss the key assumptions used in the discounted cash flow model and make adjustments as necessary to estimate the fair value of the MSRs. At December 31, 2017, the estimated fair value of MSRs was adjusted in anticipation of a sale of Ginnie Mae MSRs in the first quarter of 2018, which resulted in a $2.8 million impairment charge. As of December 31, 2017 and December 31, 2016, management used the following assumptions to determine the fair value of MSRs:

December 31,
2017 2016
Average discount rates 9.90 % 9.96 %
Expected prepayment speeds 9.99 % 7.91 %
Weighted-average life, in years 7.0
8.0

~~A sensitivity analysis of changes in the fair value of our MSR portfolio resulting from certain key assumptions is presented in the following table (in thousands):~~

December 31,
2017 2016
50 bp adverse change in prepayment speed $ (11,896 ) $ (2,833 )
100 bp adverse change in prepayment speed (28,226 ) (6,812 )

These sensitivities are hypothetical and actual results may differ materially due to a number of factors. The effect on fair value of a 10% variation in assumptions generally cannot be determined with confidence because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may be correlated with changes in other factors, which could impact the sensitivity analysis as presented.

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In conjunction with the sale and securitization of loans held for sale, we may be exposed to liability resulting from recourse agreements and repurchase agreements. If it is determined subsequent to our sale of a loan that the loan sold is in breach of the representations or warranties made in the applicable sale agreement, we may have an obligation to either (a) repurchase the loan for the unpaid principal balance, accrued interest and related advances, (b) indemnify the purchaser against any loss it suffers or (c) make the purchaser whole for the economic benefits of the loan.

Our repurchase, indemnification and make whole obligations vary based upon the terms of the applicable agreements, the nature of the asserted breach and the status of the mortgage loan at the time a claim is made. We establish reserves for estimated losses of this nature inherent in the origination of mortgage loans by estimating the losses inherent in the population of all loans sold based on trends in claims and actual loss severities experienced. The reserve will include accruals for probable contingent losses in addition to those identified in the pipeline of claims received. The estimation process is designed to include amounts based on actual losses experienced from actual repurchase activity.

Our estimated exposure related to loans previously sold was $1.3 million at December 31, 2017 and $835,000 at December 31, 2016 and is recorded in other liabilities in the consolidated balance sheets. We incurred $31,000 in losses due to repurchase, indemnification and make-whole obligations during the year ended December 31, 2017 compared to none in 2016.

~~(6) Goodwill and Other Intangible Assets~~

~~Goodwill and other intangible assets at December 31, 2017 and 2016 are summarized as follows (in thousands):~~

Gross Goodwill
and Intangible
Assets

Accumulated
Amortization

Net
Goodwill
and
Intangible
Assets
December 31, 2017
Goodwill $ 15,468
$ (374 ) $ 15,094
Intangible assets—customer relationships and trademarks 9,006
(5,060 ) 3,946
Total goodwill and intangible assets $ 24,474
$ (5,434 ) $ 19,040
December 31, 2016
Goodwill $ 15,468
$ (374 ) $ 15,094
Intangible assets—customer relationships and trademarks 9,006
(4,588 ) 4,418
Total goodwill and intangible assets $ 24,474
$ (4,962 ) $ 19,512

Amortization expense related to intangible assets totaled $472,000 in 2017, $448,000 in 2016 and $628,000 in 2015. The estimated aggregate future amortization expense for intangible assets remaining as of December 31, 2017 is as follows (in thousands):

2018 $ 470
2019 470
2020 432
2021 405
2022 405
Thereafter 1,764
$ 3,946

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~~(7) Premises and Equipment~~

~~Premises and equipment at December 31, 2017 and 2016 are summarized as follows (in thousands):~~

December 31,

2017 2016
Premises $ 25,790
$ 22,887
Furniture and equipment 32,234
24,159
58,024
47,046
Accumulated depreciation (32,848 ) (27,271 )
Total premises and equipment, net $ 25,176
$ 19,775

~~Depreciation expense for the above premises and equipment was approximately $6.9 million, $6.0 million and $4.6 million in 2017, 2016 and 2015, respectively.~~

~~(8) Deposits~~

~~Deposits at December 31, 2017 and 2016 were as follows (in thousands):~~

December 31,
2017 2016
Non-interest-bearing demand deposits $ 7,812,660
$ 7,994,201
Interest-bearing deposits
Transaction 2,567,208
1,954,834
Savings 8,214,059
6,625,177
Time 529,253
442,619
Total interest-bearing deposits 11,310,520
9,022,630
Total deposits $ 19,123,180
$ 17,016,831

~~The scheduled maturities of interest-bearing time deposits were as follows at December 31, 2017 (in thousands):~~

2018 $ 492,208
2019 33,289
2020 2,817
2021 246
2022 244
2023 and after 449
$ 529,253

~~At December 31, 2017 and 2016, the Bank had approximately $13.5 million and $15.4 million, respectively, in deposits from related parties, including directors, stockholders and their affiliates.~~

~~At December 31, 2017 and 2016, interest-bearing time deposits of $250,000 or more were approximately $300.5 million and $225.5 million, respectively.~~

~~Table of Contents~~

~~(9) Borrowing Arrangements~~

~~The following table summarizes our borrowings at December 31, 2017, 2016 and 2015 (in thousands):~~

December 31,
2017 2016 2015

Balance Rate(3) Balance Rate(3) Balance Rate(3)
Federal funds purchased(4) $ 359,338
1.45 % $ 101,800
0.80 % $ 74,164
0.55 %
Customer repurchase agreements(1) 5,702
0.03 % 7,775
0.05 % 68,887
0.02 %
FHLB borrowings(2) 2,800,000
1.35 % 2,000,000
0.61 % 1,500,000
0.31 %
Subordinated notes 281,406
5.86 % 281,044
5.87 % 280,682
5.75 %
Trust preferred subordinated debentures 113,406
3.55 % 113,406
2.90 % 113,406
2.47 %
Total borrowings $ 3,559,852
$ 2,504,025
$ 2,037,139

Maximum outstanding at any month end $ 3,559,852
$ 2,511,579
$ 2,042,457


~~(1)~~	~~Securities pledged for customer repurchase agreements were $7.3 million, $10.2 million and $14.2 million at December 31, 2017, 2016 and 2015, respectively.~~

~~(2)~~

FHLB borrowings are collateralized by a blanket floating lien on certain real estate secured loans, mortgage finance assets and also certain pledged securities. The weighted-average interest rates of FHLB borrowings for the years ended December 31, 2017, 2016 and 2015 were 1.08%, 0.43% and 0.18%, respectively. The average balance of FHLB borrowings for the years ended December 31, 2017, 2016 and 2015 were $1.4 billion, $1.4 billion and $1.2 billion, respectively.


~~(3)~~	~~Interest rate as of period end.~~


~~(4)~~	The weighted-average interest rates on Federal funds purchased for the years ended December 31, 2017, 2016 and 2015 were 1.20%, 0.57% and 0.29%, respectively. The average balances of Federal funds purchased for the years ended December 31, 2017, 2016 and 2015 were $215.9 million, $90.9 million and $98.8 million, respectively.

~~The following table summarizes our other borrowing capacities net of balances outstanding at December 31, 2017, 2016 and 2015 (in thousands):~~

Our unsecured, revolving, non-amortizing line of credit has maximum availability of $130.0 million, matured on December 19, 2017 and was renewed on December 19, 2017 with a maturity date of December 18, 2018. The loan proceeds may be used for general corporate purposes including funding regulatory capital infusions into the Bank. The loan agreement contains customary financial covenants and restrictions. There were no borrowings outstanding as of December 31, 2017 or December 31, 2016. We did not borrow against this line of credit during the year ended December 31, 2017. The average borrowings during the year ended December 31, 2016 were $6.8 million.

~~Table of Contents~~

~~The scheduled maturities of our borrowings at December 31, 2017, excluding accrued interest, were as follows (in thousands):~~

Within One
Year

After One
But Within
Three Years

After Three
But Within
Five Years

After Five
Years
Total
Federal funds purchased and customer repurchase agreements $ 365,040
$ —
$ —
$ —
$ 365,040
FHLB borrowings 2,800,000
—
—
—
2,800,000
Subordinated notes —
—
—
281,406
281,406
Trust preferred subordinated debentures —
—
—
113,406
113,406
Total borrowings $ 3,165,040
$ —
$ —
$ 394,812
$ 3,559,852

~~(10) Long-Term Debt~~

From November 2002 to September 2006 various Texas Capital Statutory Trusts were created and subsequently issued floating rate trust preferred securities in various private offerings totaling $113.4 million. As of December 31, 2017, the details of the trust preferred subordinated debentures are summarized below (dollars in thousands):

Texas Capital
Bancshares
Statutory Trust I Texas Capital
Statutory
Trust II Texas Capital
Statutory
Trust III Texas Capital
Statutory
Trust IV Texas Capital
Statutory Trust V
Date issued November 19, 2002 April 10, 2003 October 6, 2005 April 28, 2006 September 29, 2006
Trust preferred securities issued $10,310 $10,310 $25,774 $25,774 $41,238
Floating or fixed rate securities Floating Floating Floating 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 December 2036

On September 21, 2012, we issued $111.0 million of subordinated notes. The notes mature in September 2042 and bear interest at a rate of 6.50% per annum, payable quarterly. The indenture governing the notes contains customary covenants and restrictions.

On January 31, 2014, the Bank issued $175.0 million of subordinated notes in an offering to institutional investors exempt from registration under Section 3(a)(2) of the Securities Act of 1933 and 12 C.F.R. Part 16. The notes mature in January 2026 and bear interest at a rate of 5.25% per annum, payable semi-annually. The notes are unsecured and are subordinate to the Bank’s obligations to its depositors, its obligations under banker’s acceptances and letters of credit, certain obligations to Federal Reserve Banks and the FDIC and the Bank’s obligations to its other creditors, except any obligations which expressly rank on a parity with or junior to the notes. The notes qualify as Tier 2 capital for regulatory capital purposes, subject to applicable limitations.

~~Interest payments on all long-term debt are deductible for federal income tax purposes.~~

~~Table of Contents~~

~~(11) Income Taxes~~

The Tax Cut and Jobs Act (the "Tax Act") enacted in December 2017 reduced the federal corporate income tax rate from 35% to 21% effective January 1, 2018. As a result of the Tax Act, we recorded a $17.6 million write-off of our net deferred tax asset, which was recorded as additional income tax expense during 2017.

We reported gross deferred tax assets of $63.0 million and $89.7 million at December 31, 2017 and 2016, respectively, which related 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 assets are included in other assets in the consolidated balance sheets.

~~Income tax expense/(benefit) consists of the following for the years ended (in thousands):~~

Year ended December 31,
2017 2016 2015
Current:
Federal $ 94,112
$ 86,612
$ 80,957
State 3,257
2,412
2,245
Total 97,369
89,024
83,202
Deferred
Federal 31,276
(2,946 ) (3,561 )
State —
—
—
Total 31,276
(2,946 ) (3,561 )
Total expense
Federal 125,388
83,666
77,396
State 3,257
2,412
2,245
Total $ 128,645
$ 86,078
$ 79,641

~~The tax effect of unrealized gains and losses on available-for-sale securities is recorded to other comprehensive income and is not a component of income tax expense/(benefit).~~

~~Table of Contents~~

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. The table below summarizes significant components of our deferred tax assets and liabilities utilizing federal corporate income tax rates of 21% as of December 31, 2017 and 35% as of December 31, 2016 (in thousands):

December 31,
2017 2016
Deferred tax assets:
Allowance for credit losses $ 42,213
$ 64,009
Loan origination fees 10,084
13,536
Stock compensation 4,460
5,761
Non-accrual interest 1,680
2,537
Deferred lease expense 911
1,519
Other 3,686
2,322
Total deferred tax assets 63,034
89,684
Deferred tax liabilities:
Loan origination costs (1,304 ) (1,722 )
Leases (6,850 ) (7,962 )
MSRs (17,619 ) (10,973 )
Depreciation (7,354 ) (6,941 )
Unrealized gain on securities (138 ) (223 )
Other (2,068 ) (2,971 )
Total deferred tax liabilities (35,333 ) (30,792 )
Net deferred tax asset $ 27,701
$ 58,892

We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of our deferred tax asset was $17.6 million.

~~ASC 740-10,~~ ~~Income Taxes — Accounting for Uncertainties in Income Taxes~~ (“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 are 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 are derecognized in the first subsequent financial reporting period in which that threshold is no longer met. ASC 740-10 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties.

~~We file income tax returns in the U.S. federal jurisdiction and several U.S. state jurisdictions. We are no longer subject to U.S. federal income tax examinations for years before 2014.~~

~~Table of Contents~~

~~The reconciliation of our effective income tax rate to the U.S. federal statutory tax rate is as follows:~~

Year ended December 31,
2017 2016 2015
U.S. statutory rate 35 % 35 % 35 %
State taxes 1 % 1 % 1 %
Non-deductible expenses 1 % 1 % 1 %
Deferred tax asset write-off 5 % — % — %
Non-taxable income (1 )% (1 )% (1 )%
Other (1 )% — % (1 )%
Effective tax rate 40 % 36 % 35 %

~~(12) Stock-Based Compensation and 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 $8.4 million, $6.8 million, and $6.3 million for the years ended December 31, 2017, 2016 and 2015, 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 meet 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. In 2006, stockholders approved the 2006 ESPP, which allocated 400,000 shares for purchase. As of December 31, 2017, 2016 and 2015, 132,285, 124,572 and 113,910 shares had been purchased on behalf of the employees under the 2006 ESPP.

We have stock-based compensation plans under which equity-based compensation grants are made by the board of directors, or its designated committee. Grants are subject to vesting requirements. Under the plans, we may grant, among other things, non-qualified stock options, incentive stock options, restricted stock, restricted stock units (“RSUs”), stock appreciation rights (“SARs”), cash-based performance units or any combination thereof to employees and non-employee directors. A total of 2,550,000 shares are authorized for grant under the plans. Total shares remaining available for grant under the plans at December 31, 2017 were 2,169,324.

We also offer a non-qualified deferred compensation plan for our executives and key members of management in order to assist us in attracting and retaining these individuals. Participants in the plan may elect to defer up to 75% of their annual salary and/or short-term incentive payout into deferral accounts that mirror the gains or losses of investments selected by the participants. The plan allows us to make discretionary contributions on behalf of a participant as well as matching contributions. We made discretionary contributions of $260,000 in 2017 compared to none in 2016. No matching contributions were made in 2017 or 2016. All participant contributions to the plan and any related earnings are immediately vested and may be withdrawn upon the participant's separation from service, death or disability or upon a date specified by the participant. The deferrals are recorded to salaries and benefits as a reduction and a corresponding accrual is recorded in other liabilities.

~~Table of Contents~~

~~A summary of our SAR activity and related information for 2017, 2016 and 2015 is as follows. These rights are time based and generally vest ratably over a period of five years.~~

December 31, 2017 December 31, 2016 December 31, 2015

SARs
Weighted
Average
Exercise
Price
SARs Weighted
Average
Exercise
Price SARs Weighted
Average
Exercise
Price
SARs outstanding at beginning of year 125,863
$ 31.68
360,544
$ 25.73
445,009
$ 24.83
SARs granted —
—
—
—
—
—
SARs exercised (51,500 ) 33.94
(234,681 ) 22.54
(84,465 ) 20.97
SARs forfeited —
—
—
—
—
—
SARs outstanding at year-end 74,363
$ 30.12
125,863
$ 31.68
360,544
$ 25.73
SARs vested and exercisable at year-end 60,463
$ 26.02
94,463
$ 26.73
307,144
$ 22.49
Weighted average remaining contractual life of SARs vested 2.82
3.62
2.36
Compensation expense $ 265,000
$ 307,000
$ 367,000

Unrecognized compensation expense $ 127,000
$ 392,000
$ 699,000

Weighted average period over which unrecognized compensation expense is expected to be recognized (in years) 0.75
1.52
2.40
Fair value of shares vested during the year $ 294,000
$ 337,000
$ 436,000

Weighted average remaining contractual life of SARs currently outstanding (in years) 3.35
4.32
3.08
Intrinsic value of SARs exercised $ 3,802,000
$ 4,881,000
$ 8,291,000

~~Table of Contents~~

A summary of our RSU activity and related information for 2017, 2016 and 2015 is as follows. Grants of RSUs include both performance-based and time-based vesting conditions and generally vest over a three-year period.

December 31, 2017 December 31, 2016 December 31, 2015

RSUs
Weighted
Average
Grant Date Fair Value
RSUs Weighted
Average
Grant Date Fair Value RSUs Weighted
Average
Grant Date Fair Value
RSUs outstanding at beginning of year 425,055
$ 51.28
333,174
$ 48.60
295,165
$ 42.93
RSUs granted 121,243
80.40
213,577
51.75
145,952
51.96
RSUs exercised (102,057 ) 48.93
(94,296 ) 42.87
(95,743 ) 38.05
RSUs forfeited (20,509 ) 54.75
(27,400 ) 51.18
(12,200 ) 43.89
RSUs outstanding at year-end 423,732
$ 60.01
425,055
$ 51.28
333,174
$ 48.60
Compensation expense $ 7,790,000
$ 4,771,000
$ 4,230,000

Unrecognized compensation expense $ 18,730,000
$ 17,167,000
$ 13,038,000

Weighted average period over which unrecognized compensation expense is expected to be recognized (in years) 3.15
3.37
3.30
Weighted average remaining contractual life of RSUs currently outstanding 8.33
8.65
8.29

In 2016, we began granting shares of restricted stock ("RSAs"). A summary of our restricted stock activity and related information for 2017 and 2016 is as follows. These restricted shares are time-vested and generally vest ratably over a period of five years.

December 31, 2017 December 31, 2016
Number of Shares Weighted
Average
Grant Date Fair Value Number of Shares Weighted
Average
Grant Date Fair Value
RSAs with restrictions outstanding at beginning of year 1,472
$ 33.97
—
$ —
RSAs granted 641
78.00
1,472
33.97
RSAs lapsed restrictions (491 ) 33.97
—
—
RSAs with restrictions outstanding at year-end 1,622
$ 51.37
1,472
$ 33.97
Compensation expense $ 24,000
$ 15,000

Unrecognized compensation expense $ 61,000
$ 35,000

Weighted average period over which unrecognized compensation expense is expected to recognized (in years) 2.10
2.10
Weighted average remaining contractual life of RSUs currently outstanding 8.69
9.13

~~Total compensation cost for all share-based arrangements, net of taxes, was $5.3 million, $3.3 million and $3.0 million for the years ended December 31, 2017, 2016 and 2015, respectively.~~

We granted a total of 121,260 cash-based performance units in 2017, with a total of 390,350 outstanding at December 31, 2017 all of which are time-based and vest ratably over a period of four years. We granted a total of 224,071 and 146,153 cash-based performance units in 2016 and 2015. Since these units have a cash payout feature, they are accounted for under the liability method and the related expense is based on the stock price at period end. Compensation cost for the units was $13.9 million, $8.5 million and $7.7 million for the years ended December 31, 2017, 2016 and 2015 respectively. At December 31, 2017, the weighted average remaining contractual life of the units was 7.97 years.

~~Total compensation cost for all cash-based arrangements, net of taxes, for the years ended December 31, 2017, 2016 and 2015 was $9.1 million, $5.5 million and $5.0 million, respectively.~~

~~Table of Contents~~

~~(13) Financial Instruments with Off-Balance Sheet Risk~~

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit that involve varying degrees of credit risk in excess of the amount recognized in the consolidated balance sheets. The Bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the borrower.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s ~~credit-worthiness~~creditworthiness 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, 2017~~In conjunction with the sale and ~~2016, commitments~~securitization of loans held for sale and their related servicing rights, we may be exposed to ~~extend credit~~liability resulting from recourse and ~~standby and commercial letters~~repurchase agreements. If it is determined subsequent to our sale of ~~credit were as follows (in thousands):~~

December 31,
2017 2016
Commitments to extend credit $ 6,957,847
$ 5,704,381
Standby letters of credit 230,958
171,266

~~At December 31, 2017 and 2016, we had $9.1 million and $11.4 million, respectively, in allowance for off-balance sheet credit losses~~a loan or its related ~~to these off-balance sheet commitments recorded in other liabilities~~servicing rights that a breach of the representations or warranties made in the ~~consolidated~~applicable sale agreement has occurred, which may include guarantees that prepayments will not occur within a specified and customary time frame, we may have an obligation to either (a) repurchase the loan for the unpaid principal balance, ~~sheets.~~accrued interest and related advances, (b) indemnify the purchaser against any loss it suffers or (c) make the purchaser whole for the economic benefits of the loan and its related servicing rights.

~~(14) Regulatory Restrictions~~

~~The Company~~Our repurchase, indemnification and make-whole obligations vary based upon the terms of the applicable agreements, the nature of the asserted breach and the ~~Bank are subject~~status of the mortgage loan at the time a claim is made. We establish reserves for estimated losses of this nature inherent in the origination of mortgage loans by estimating the losses inherent in the population of all loans sold based on trends in claims and actual loss severities experienced. The reserve will include accruals for probable contingent losses in addition to ~~various regulatory capital requirements administered by~~those identified in the ~~federal banking agencies. Failure~~pipeline of claims received. The estimation process is designed to ~~meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators~~include amounts based on actual losses experienced from actual activity.

Leases

ASU 2016-02 "Leases (Topic 842)" ("ASU 2016-02") requires that ~~if undertaken, could have a direct material effect~~lessees and lessors recognize lease assets and lease liabilities on the ~~Company’s~~balance sheet 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 regulatorsdisclose key information about ~~components, risk weightings and other factors.~~

The Basel III regulatory capital framework (the "Basel III Capital Rules") adopted by U.S. federal regulatory authorities, among other things, (i) establishes the capital measure called "Common Equity Tier 1" ("CET1"), (ii) specifies that Tier 1 capital consist of CET1 and "Additional Tier 1 Capital" instruments meeting stated requirements, (iii) requires that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) defines the scope of the deductions/adjustments to the capital measures. The Basel III Capital Rulesleasing arrangements. ASU 2016-02 became effective for us on January 1, ~~2015 with certain~~2019. ASU 2016-02 provides for a modified retrospective transition ~~provisions fully phasing in over a~~approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period ~~ending on January 1, 2019.~~

~~Additionally, the Basel III Capital Rules require that we maintain a capital conservation buffer with respect to each~~presented or as of the ~~CET1, Tier~~beginning of the period of adoption with the option to elect certain practical expedients. We elected to apply ASU 2016-02 as of the beginning of the period of adoption (January 1, 2019) and ~~total capital to risk-weighted assets, which provides~~have not restated comparative periods. Of the optional practical expedients available under ASU 2016-02, we adopted all expedients except for ~~capital levels that exceed~~ the ~~minimum risk-based capital adequacy requirements. The capital conservation buffer is subject to~~hindsight practical expedient. As a ~~three year phase-in period that began on January 1, 2016~~result of implementing ASU 2016-02, we recognized an operating lease right-of-use ("ROU") asset of $64 million and ~~will be fully phased-in~~an operating lease liability of $74 million on January 1, 2019, with no impact on our consolidated statements of income or consolidated statements of cash flows compared to the prior lease accounting model.

Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at ~~2.5%. The required phase-in capital conservation buffer during 2017 was 1.25%. A financial institution with~~lease commencement based on the present value of the remaining lease payments using a ~~conservation buffer~~discount rate that represents our incremental borrowing rate at the lease commencement date, which is based on our collateralized borrowing capabilities over a similar term as the related lease payments. ROU assets are further adjusted for lease incentives.

Our operating leases relate primarily to office space and bank branches. Operating leases in which we are the lessee are recorded as operating lease ROU assets and operating lease liabilities, included in other assets and other liabilities, respectively, on our consolidated balance sheets. Operating lease expense, which is comprised of ~~less than~~amortization of the ~~required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers.~~

~~Quantitative measures established by regulation to ensure capital adequacy require the Company~~ROU asset and the ~~Bank to maintain minimum amounts~~implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and ~~ratios of CET1, Tier 1 and total capital to risk-weighted assets, and of Tier 1 capital to average assets, each as defined~~is recorded in net occupancy expense in the ~~regulations. Management believes, as~~consolidated statements of ~~December 31, 2017, that the Company~~income and ~~the Bank meet all capital adequacy requirements to which they are subject.~~other comprehensive income. See Note 7 – Leases for additional information.

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~~call report,~~Revenue Recognition

ASC 606, Revenue from Contracts with Customers ("ASC 606"), establishes principles for reporting information about the ~~Bank met~~nature, amount, timing and uncertainty of revenue and cash flows arising from the ~~capital ratios necessary~~entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, derivatives and investment securities, as well ~~capitalized. The regulatory authorities can apply changes~~as revenue related to our mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within our disclosures. Descriptions of our revenue-generating activities that are within the scope of ASC 606, which are presented in ~~classification~~our income statements as components of non-interest income are as follows:

Service charges on deposit accounts - these represent general service fees for monthly account maintenance and activity- or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed, which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payments for such performance obligations are generally received at the time the performance obligations are satisfied.

Wealth management and trust fee income - this represents monthly fees due from wealth management customers as consideration for managing the customers' assets. Wealth management and trust services include custody of assets, investment management, escrow services, fees for trust services and ~~such changes may retroactively subject~~similar fiduciary activities. Revenue is recognized when our performance obligation is completed each month, which is generally the ~~Company~~time that payment is received. Also included are fees received from a third party broker-dealer as part of a revenue-sharing agreement for fees earned from customers that we refer to ~~changes in capital ratios. Any such change could reduce one or more capital ratios below well-capitalized status. In addition, a change may result in imposition of additional assessments~~the third party. These fees are paid to us by the ~~FDIC~~third party on a quarterly basis and recognized ratably throughout the quarter as our performance obligation is satisfied.

Brokered loan fees - these represent fees for the administration and funding of purchased mortgage loan interests as well as facility renewal and application fees received from mortgage originator customers in our mortgage warehouse lending business. Also included are fees received from independent correspondent mortgage lenders as consideration for our purchase of individual residential mortgage loans through our MCA business. Revenue related to the mortgage warehouse lending business is recognized when the related loan interest is disposed (i.e., through sale or ~~could result in regulatory actions that could have~~payoff) or upon receipt of the facility renewal or application. Revenue related to our MCA business is recognized at the time a ~~material effect~~loan is purchased.

Other non-interest income primarily includes items such as letter of credit fees, bank owned life insurance income, dividends on ~~condition~~FHLB and ~~results of operations.~~

~~Because our Bank had less than $15.0 billion in total consolidated assets as of December 31, 2009, we are allowed to continue to classify our trust preferred securities, all~~FRB stock and other general operating income, none of which ~~were issued prior~~are subject to ~~May 19, 2010,~~the requirements of ASC 606.

Stock-based Compensation

We account for all stock-based compensation transactions in accordance with ASC 718, Compensation — Stock Compensation (“ASC 718”), which requires that stock compensation transactions be recognized as ~~Tier 1 capital.~~compensation expense in the consolidated statements of income and other comprehensive income based on their fair values on the measurement date, which is the date of the grant.

Income Taxes

The ~~table below summarizes our actual~~Company and ~~required capital ratios under~~its subsidiary file a consolidated federal income tax return. We utilize the ~~Basel III Capital Rules (dollars~~liability method in ~~thousands):~~

Actual Minimum Capital Required - Basel III Phase-In Schedule Minimum capital Required - Basel III Fully Phased-In Required to be Considered Well Capitalized
Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio
As of December 31, 2017:
CET1
    Company $ 2,033,830
8.45 % $ 1,384,448
5.75 % $ 1,685,464
7.00 % N/A
N/A
    Bank 1,992,152
8.28 % 1,383.475
5.75 % 1,684.231
7.00 % 1,563,929
6.50 %
Total capital (to risk-weighted assets)
    Company 2,768,153
11.50 % 2,227.221
9.250 % 2,528.196
10.50 % N/A
N/A
    Bank 2,567,961
10.67 % 2,225.591
9.250 % 2,526.347
10.50 % 2,406,044
10.00 %
Tier 1 capital (to risk-weighted assets)
    Company 2,293,016
9.52 % 1,745.659
7.25 % 2,046.635
8.50 % N/A
N/A
    Bank 2,151,338
8.94 % 1,744.382
7.25 % 2,045.138
8.50 % 1,924,835
8.00 %
Tier 1 capital (to average assets)(1)
    Company 2,293,016
9.15 % 1,002,494
4.00 % 1,002,494
4.00 % N/A
N/A
    Bank 2,151,338
8.59 % 1,002,144
4.00 % 1,002,144
4.00 % 1,252,680
5.00 %
As of December 31, 2016:
CET1
    Company $ 1,841,219
8.97 % $ 1,052,205
5.125 % $ 1,437,159
7.00 % N/A
N/A
    Bank 1,735,496
8.45 % 1,051.989
5.125 % 1,436.863
7.00 % 1,334,244
6.50 %
Total capital (to risk-weighted assets)
    Company 2,561,663
12.48 % 1,770.766
8.625 % 2,155.715
10.50 % N/A
N/A
    Bank 2,297,528
11.19 % 1,770.421
8.625 % 2,155.295
10.50 % 2,052,683
10.00 %
Tier 1 capital (to risk-weighted assets)
    Company 2,101,071
10.23 % 1,360.154
6.625 % 1,745.103
8.50 % N/A
N/A
    Bank 1,895,348
9.23 % 1,359.888
6.625 % 1,744.762
8.50 % 1,642,147
8.00 %
Tier 1 capital (to average assets)(1)
    Company 2,101,071
9.34 % 900,268
4.00 % 900,268
4.00 % N/A
N/A
    Bank 1,895,348
8.42 % 900,070
4.00 % 900,070
4.00 % 1,125,087
5.00 %

~~(1)~~

~~The Tier 1 capital ratio (to average assets) is not impacted by~~accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based upon the Basel III Capital Rules; however, it should be noted that the Federal Reserve Board and the FDIC may require the Company and the Bank, respectively, to maintain a Tier 1 capital ratio (to average assets) above the required minimum.

~~Our mortgage finance loan volumes can increase significantly at month-end, causing a meaningful~~ difference between ~~ending balance~~the values of the assets and ~~average balance for any period. At December 31, 2017, our total mortgage finance loans were $5.3 billion compared to~~liabilities as reflected in the ~~average~~financial statements and their related tax basis using enacted tax rates in effect for the year ~~ended December 31, 2017 of $4.1 billion.~~in which the differences are expected to be recovered or settled. As ~~CET1, Tier 1 and total capital ratios~~changes in tax law or rates are calculated using quarter-end risk-weighted assets and our mortgage finance loans are 100% risk-weighted (excluding MCA mortgage loans held for sale, which receive lower risk weights), the quarter-end fluctuation in these balances can significantly impact our reported ratios. Due to the actual risk profile and liquidity of this asset class, we manage capital allocated to mortgage finance loans based on changing trends in average balances and do not believe that the quarter-end balance is

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~~representative of risk characteristics that would justify higher allocations. However, we monitor our capital allocation to confirm that all capital levels remain above well-capitalized levels.~~

Dividends that may be paid by banks are routinely restricted by various regulatory authorities. The amount that can be paid in any calendar year without prior approval of our Bank’s regulatory agencies cannot exceed the lesser of the net profits (as defined) for that year plus the net profits for the preceding two calendar years, or retained earnings. The Basel III Capital Rules further limit the amount of dividends that may be paid by our Bank. No dividends were declared or paid on our common stock during 2017, 2016 or 2015.

~~The required reserve balances at the Federal Reserve at December 31, 2017 and 2016 were approximately $197.3 million and $221.9 million, respectively.~~

~~(15) Earnings Per Share~~

~~The following table presents the computation of basic and diluted earnings per share (in thousands except share data):~~

Year ended December 31,
2017 2016 2015
Numerator:
Net income $ 197,063
$ 155,119
$ 144,854
Preferred stock dividends 9,750
9,750
9,750
Net income available to common stockholders $ 187,313
$ 145,369
$ 135,104
Denominator:
Denominator for basic earnings per share—weighted average shares 49,587,169
46,239,210
45,808,440
Effect of employee stock-based awards(1) 239,008
128,228
211,168
Effect of warrants to purchase common stock 433,657
398,464
418,264
Denominator for dilutive earnings per share—adjusted weighted average shares and assumed conversions 50,259,834
46,765,902
46,437,872
Basic earnings per common share $ 3.78
$ 3.14
$ 2.95
Diluted earnings per common share $ 3.73
$ 3.11
$ 2.91


~~(1)~~	SARs and RSUs outstanding of 13,500, 150,416 and 64,700 in 2017, 2016 and 2015, respectively, have not been included in diluted earnings per share because to do so would have been antidilutive for the periods presented.

~~(16) Fair Value Disclosures~~

~~We determine the fair market values of our~~enacted, deferred tax assets and liabilities ~~measured at fair value on a recurring and nonrecurring basis using~~are adjusted through the ~~fair value hierarchy as prescribed in~~ provision for income taxes. A valuation allowance is provided against deferred tax assets unless it is more likely than not that such deferred tax assets will be realized.

Fair Values of Financial Instruments

ASC 820, Fair Value Measurements and Disclosures~~. The standard describes three levels of inputs that may be used to measure~~ (“ASC 820”), defines fair value, ~~as provided below.~~


~~Level 1~~	Quoted prices in active markets for identical assets or liabilities. This category includes the assets and liabilities related to our non-qualified deferred compensation plan where values are based on quoted market prices for identical equity securities in an active market.

~~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, municipal bonds, and Community Reinvestment Act funds. This category also includes loans held for sale and derivative assets and liabilities where values are obtained from independent pricing services using observable market data.

~~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 includes impaired loans and OREO where collateral values have been based on third party appraisals; however, due to current economic

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~~conditions, comparative sales data typically used in appraisals may be unavailable or more subjective due to lack of market activity.~~

~~Assets and liabilities measured at~~establishes a framework for measuring fair value ~~at December 31, 2017~~under GAAP and ~~2016 are as follows (in thousands):~~

Fair Value Measurements Using
December 31, 2017 Level 1 Level 2 Level 3
Available for sale securities:(1)
Residential mortgage-backed securities $ —
$ 10,945
$ —
Municipals —
—
—
Equity securities(2) 5,460
7,106
—
Loans held for sale(3) —
1,007,695
—
Loans held for investment(4)(6) —
—
21,216
OREO(5)(6) —
—
11,742
Derivative assets(7) —
16,719
—
Derivative liabilities(7) —
17,377
—
Non-qualified deferred compensation plan liabilities(8) 5,587
—
—

December 31, 2016
Available for sale securities:(1)
Residential mortgage-backed securities $ —
$ 15,652
$ —
Municipals —
275
—
Equity securities(2) 1,786
7,161
—
Loans held for sale(3) —
968,929
—
Loans held for investment(4)(6) —
—
52,323
OREO(5)(6) —
—
18,961
Derivative assets(7) —
37,878
—
Derivative liabilities(7) —
26,240
—
Non-qualified deferred compensation plan liabilities(8) 1,811
—
—


~~(1)~~	~~Securities are measured at fair value on a recurring basis, generally monthly.~~


~~(2)~~	~~Equity securities consist of Community Reinvestment Act funds and investments related to our non-qualified deferred compensation plan.~~


~~(3)~~	~~Loans held for sale, excluding SBA loans which are carried at lower of cost or market, are measured at fair value on a recurring basis, generally monthly.~~


~~(4)~~	~~Includes impaired loans that have been measured for impairment at the fair value of the loan’s collateral.~~


~~(5)~~	~~OREO is transferred from loans to OREO at fair value less selling costs.~~


~~(6)~~	~~Loans held for investment and OREO are measured on a nonrecurring basis, generally annually or more often as warranted by market and economic conditions~~


~~(7)~~	~~Derivative assets and liabilities are measured at fair value on a recurring basis, generally quarterly.~~


~~(8)~~	Non-qualified deferred compensation plan liabilities represent the fair value of the obligation to the employee, which corresponds to the fair value of the invested assets, and are measured at fair value on a recurring basis, generally monthly.

~~Level 3 Valuations~~

~~Financial~~enhances disclosures about fair value measurements. In general, fair values of financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. Currently, we measure fair value for certain loans and OREO on a nonrecurring basis as described below.

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~~Loans held for investment~~

During the years ended December 31, 2017 and 2016, certain impaired loans held for investment were re-evaluated and reported at fair value through a specific valuation allowance allocation of the allowance for loan losses based upon the fair value of the underlying collateral. The $21.2 million total above includes impaired loans at December 31, 2017 with a carrying value of $32.2 million that were reduced by specific valuation allowance allocations totaling $11.0 million for a total reported fair value of $21.2 million based on collateral valuations utilizing Level 3 valuation inputs. The $52.3 million total above includes impaired loans at December 31, 2016 with a carrying value of $74.1 million that were reduced by specific valuation allowance allocations totaling $21.8 million for a total reported fair value of $52.3 million based on collateral valuations utilizing Level 3 valuation inputs. Fair values were based on third party appraisals.

~~OREO~~

Certain foreclosed assets, upon initial recognition, are recorded at fair value less estimated selling costs. At December 31, 2017 and 2016, OREO had a carrying value of $11.7 million and $19.0 million, respectively, with no specific valuation allowance. The fair value of OREO was computed based on third party appraisals, which are Level 3 valuation inputs.

~~Fair Value of Financial Instruments~~

Generally accepted accounting principles require disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to estimate that value. In casesquoted market prices, where available. If such quoted market prices are not available, fair ~~values are~~value is based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. ~~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, 2017 December 31, 2016

Carrying
Amount

Estimated
Fair Value
Carrying
Amount Estimated
Fair Value
Financial assets:
   Level 1 inputs:
Cash and cash equivalents $ 2,905,591
$ 2,905,591
$ 2,839,352
$ 2,839,352
Securities, available-for-sale 5,460
5,460
1,786
1,786
   Level 2 inputs:
Securities, available-for-sale 18,051
18,051
23,088
23,088
Loans held for sale 1,011,004
1,011,004
968,929
968,929
Derivative assets 16,719
16,719
37,878
37,878
   Level 3 inputs:
Loans held for investment, net 20,489,757
20,480,802
17,330,223
17,347,199
Financial liabilities:
   Level 2 inputs:
Federal funds purchased 359,338
359,338
101,800
101,800
Customer repurchase agreements 5,702
5,702
7,775
7,775
Other borrowings 2,800,000
2,800,000
2,000,000
2,000,000
Subordinated notes 281,406
322,415
281,044
304,672
Derivative liabilities 17,377
17,377
26,240
26,240
   Level 3 inputs:
Deposits 19,123,180
19,124,121
17,016,831
17,017,221
Trust preferred subordinated debentures 113,406
113,406
113,406
113,406

~~The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:~~

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~~Cash and cash equivalents~~

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximate their fair value, and these financial instruments are characterized as Level 1 assets in the fair value hierarchy.

~~Securities available-for-sale~~

Within the securities available-for-sale portfolio, we hold equity securities related to our non-qualified deferred compensation plan which are valued using quoted market prices for identical equity securities in an active market. These financial instruments are classified as Level 1 assets in the fair value hierarchy. The fair value of the remaining investment portfolio is based on prices obtained from independent pricing services which are based on quoted market prices for the same or similar securities, and these financial instruments are characterized as Level 2 assets in the fair value hierarchy. We have obtained documentation from the primary pricing service we use about their processes and controls over pricing. In addition, on a quarterly basis we independently verify the prices that we receive from the service provider using two additional independent pricing sources. Any significant differences are investigated and resolved.

~~Loans held for sale~~

~~Fair value for loans held for sale is derived from quoted market prices for similar loans, and these financial instruments are characterized as Level 2 assets in the fair value hierarchy.~~

~~Loans held for investment, net~~

Loans held for investment are characterized as Level 3 assets in the fair value hierarchy. For variable-rate loans held for investment 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 held for investment 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.

~~Derivatives~~

The estimated fair value of the interest rate swaps and caps is obtained from independent pricing services based on quoted market prices for similar derivative contracts and these financial instruments are characterized as Level 2 assets and liabilities in the fair value hierarchy. On a quarterly basis, we independently verify the fair value using an additional independent pricing source. Any significant differences are investigated and resolved. Foreign currency forward contracts are valued based upon quoted market prices obtained from independent pricing services for similar derivative contracts. As such, these financial instruments are characterized as Level 2 assets and liabilities in the fair value hierarchy. The derivative instruments related to the loans held for sale portfolio include loan purchase commitments and forward sales commitments. Loan purchase commitments are valued based upon the fair value of the underlying mortgage loans to be purchased, which is based on observable market data for similar loans. Forward sales commitments are valued based upon the quoted market prices from brokers. As such, these loan purchase commitments and forward sales commitments are classified as Level 2 assets or liabilities in the fair value hierarchy.

~~Deposits~~

Deposits are characterized as Level 3 liabilities in the fair value hierarchy. The carrying amounts for variable-rate money market accounts approximate their fair value. The fair value of fixed-term certificates of deposit 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, customer repurchase agreements, other borrowings, subordinated notes and trust preferred subordinated debentures~~

The carrying value reported in the consolidated balance sheets for Federal funds purchased, customer repurchase agreements and other short-term, floating rate borrowings approximates their fair value, and these financial instruments are characterized as Level 2 liabilities in the fair value hierarchy. The fair value of any fixed rate short-term borrowings and trust preferred subordinated debentures are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar borrowings, and these financial instruments are characterized as Level 3 liabilities in the fair value hierarchy. The subordinated notes are publicly, though infrequently, traded and are valued based on market prices, and are characterized as Level 2 liabilities in the fair value hierarchy.

~~(17) Commitments and Contingencies~~

We lease various premises under operating leases with various expiration dates extending through April 2027. Rent expense incurred under operating leases totaled approximately $15.3 million, $13.9 million and $15.3 million for the years ended December 31, 2017, 2016 and 2015, respectively.

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~~Minimum future lease payments under operating leases are as follows (in thousands):~~

Year ending December 31,
Minimum
Payments
2018 $ 16,446
2019 16,137
2020 15,286
2021 12,805
2022 12,138
2023 and thereafter 17,299
$ 90,111

~~(18) Parent Company Only~~

~~Summarized financial information for Texas Capital Bancshares, Inc. – Parent Company Only follows (in thousands):~~

~~Balance Sheet~~

December 31,

2017 2016
Assets
Cash and cash equivalents $ 144,635
$ 220,499
Loans held for investment (net of unearned income) 7,500
—
Investment in subsidiaries 2,184,601
1,927,392
Other assets 86,300
85,560
Total assets $ 2,423,036
$ 2,233,451
Liabilities and Stockholders’ Equity
Other liabilities $ 1,244
$ 1,284
Subordinated notes 108,513
108,412
Trust preferred subordinated debentures 113,406
113,406
Total liabilities 223,163
223,102
Preferred stock 150,000
150,000
Common stock 496
495
Additional paid-in capital 971,457
965,620
Retained earnings 1,077,500
893,827
Treasury stock (8 ) (8 )
Accumulated other comprehensive income 428
415
Total stockholders’ equity 2,199,873
2,010,349
Total liabilities and stockholders’ equity $ 2,423,036
$ 2,233,451

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~~Statement of Earnings~~

Year ended December 31,
2017 2016 2015
Interest on loans $ 3,271
$ 3,250
$ 3,250
Dividend income 10,400
10,400
10,400
Other income 108
90
76
Total income 13,779
13,740
13,726
Other non-interest income 13
152
8
Interest expense 10,908
10,525
9,867
Salaries and employee benefits 489
431
499
Legal and professional 1,700
1,429
1,640
Other non-interest expense 1,761
1,594
1,637
Total expense 14,858
13,979
13,643
Income (loss) before income taxes and equity in undistributed income of subsidiary (1,066 ) (87 ) 91
Income tax expense (benefit) (371 ) (33 ) 33
Income (loss) before equity in undistributed income of subsidiary (695 ) (54 ) 58
Equity in undistributed income of subsidiary 194,118
151,445
141,041
Net income 193,423
151,391
141,099
Preferred stock dividends 9,750
9,750
9,750
Net income available to common stockholders $ 183,673
$ 141,641
$ 131,349

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~~Statements of Cash Flows~~

Year ended December 31,
2017 2016 2015
(in thousands)
Operating Activities
Net income $ 193,423
$ 151,391
$ 141,099
Adjustments to reconcile net income to net cash used in operating activities:
Equity in undistributed income of subsidiary (194,118 ) (151,445 ) (141,041 )
Amortization 101
101
100
Increase in other assets (739 ) (10 ) (2,223 )
Excess tax benefits from stock-based compensation arrangements —
(2,013 ) (1,499 )
Increase in other liabilities (40 ) 165
(209 )
Net cash used in operating activities of continuing operations (1,373 ) (1,811 ) (3,773 )
Investing Activities
Net increase in loans held for investment (7,500 ) —
—
Investments in and advances to subsidiaries (55,000 ) (57,000 ) (110,000 )
Net cash used in investing activities (62,500 ) (57,000 ) (110,000 )
Financing Activities
Proceeds from sale of stock related to stock-based awards (2,241 ) (2,481 ) (1,239 )
Proceeds from sale of common stock —
236,467
—
Preferred dividends paid (9,750 ) (9,750 ) (9,750 )
Net other borrowings —
—
—
Excess tax benefits from stock-based compensation arrangements —
2,013
1,499
Net cash provided by (used in) financing activities (11,991 ) 226,249
(9,490 )
Net increase (decrease) in cash and cash equivalents (75,864 ) 167,438
(123,263 )
Cash and cash equivalents at beginning of year 220,499
53,061
176,324
Cash and cash equivalents at end of year $ 144,635
$ 220,499
$ 53,061

~~(19) Related Party Transactions~~

~~See Note 8 for a description of deposits from related parties.~~

~~(20)~~ Derivative Financial Instruments

~~The~~All contracts that satisfy the definition of a derivative are recorded at fair value ~~of derivative positions outstanding is included~~ in ~~accrued interest receivable and~~ other assets and other liabilities in the ~~accompanying~~ consolidated balance ~~sheets~~sheets. We record the derivatives on a net basis when a right of offset exists ~~based on transactions~~ with a single counterparty that ~~are~~is subject to a legally enforceable master netting agreement.

We enter into interest rate derivative contracts 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.

We also enter into foreign currency forward contracts that are not designed as hedging instruments. These derivative instruments relate to transactions in which we enter into a contract with a customer to buy or sell a foreign currency at a future date for a specified price while at the same time entering into an offsetting contract with a financial institution to buy or sell the same currency at the same future date for a specified price. These transactions allow our customers to manage their exposure to foreign currency exchange rate fluctuations.

~~Table~~ Because we act as an intermediary for our customer, changes in the fair value of ~~Contents~~

the underlying derivative instruments substantially offset each other and do not have a material impact on our results of operations.

We also enter into loan purchase commitment contracts with mortgage originators to purchase residential mortgage loans at a future date, as well as forward sales commitment contracts to sell residential mortgage loans at a future date, as part of our MCA program. The objective of these transactions is to mitigate our exposure to interest rate risk associated with the purchase of mortgage loans held for sale. Any changes in fair value are recorded in other non-interest expense in the consolidated statements of income and other comprehensive income.

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, have similar customers and are collectively reviewed by the chief operating decision maker.

(2) Earnings Per Share

The following table presents the computation of basic and diluted earnings per share:



	Year ended December 31,
(in thousands except per share data)	2019		2018		2017
Numerator:
Net income	$	322,866	$	300,824	$	197,063
Preferred stock dividends	9,750		9,750		9,750
Net income available to common stockholders	$	313,116	$	291,074	$	187,313
Denominator:
Denominator for basic earnings per share—weighted average shares	50,286,300		49,936,702		49,587,169
Effect of employee stock-based awards(1)	132,904		218,275		239,008
Effect of warrants to purchase common stock	—		117,895		433,657
Denominator for dilutive earnings per share—adjusted weighted average shares and assumed conversions	50,419,204		50,272,872		50,259,834
Basic earnings per common share	$	6.23	$	5.83	$	3.78
Diluted earnings per common share	$	6.21	$	5.79	$	3.73


(1)	SARs and RSUs outstanding of 86,308, 27,100 and 13,500 in 2019, 2018 and 2017, respectively, have not been included in diluted earnings per share because to do so would have been antidilutive for the periods presented.

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(3) Investment Securities

Available-for-Sale Debt Securities

The following is a summary of available-for-sale debt securities:



(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
December 31, 2019
Available-for-sale debt securities:
Residential mortgage-backed securities	$	4,991	$	275	$	—		$	5,266
Tax-exempt asset-backed securities	183,225		13,802		—			197,027
Credit risk transfer securities	14,713		—		(2,749		)	11,964
	$	202,929	$	14,077	$	(2,749	)	$	214,257

December 31, 2018
Available-for-sale debt securities:
Residential mortgage-backed securities	$	6,874	$	368	$	—		$	7,242
Tax-exempt asset-backed securities	95,518		286		—			95,804
	$	102,392	$	654	$	—		$	103,046

During the first quarter of 2019, we acquired a $92.0 million tax-exempt security backed with underlying cash flows from municipal revenue bonds, as well as $15.0 million in credit risk transfer ("CRT") securities. The securities were all recorded as available-for-sale upon acquisition and subsequently marked to fair value as of December 31, 2019.

CRT securities represent unsecured obligations issued by GSEs such as Freddie Mac and are designed to transfer mortgage credit risk from the GSE to private investors. CRT securities are structured to be subject to the performance of a reference pool of mortgage loans in which we share in 50% of the first losses with the GSE. If the reference pool incurs losses, the amount we will recover on the notes is reduced by our share of the amount of such losses, which could potentially be up to 100% of the amount outstanding. The CRT securities are generally interest-only for an initial period of time and are restricted from being transferred until a future date.

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The amortized cost and estimated fair value of available-for-sale debt securities are presented below by contractual maturity:



(in thousands, except percentage data)	Less Than One Year			After One Through Five Years			After Five Through Ten Years			After Ten Years			Total
December 31, 2019
Available-for-sale:
Residential mortgage-backed securities:(1)
Amortized cost	$	—		$	1,005		$	—		$	3,986		$	4,991
Estimated fair value	—			1,088			—			4,178			5,266
Weighted average yield(3)	—		%	5.54		%	—		%	4.31		%	4.55		%
Tax-exempt asset-backed securities:(1)
Amortized Cost	—			—			—			183,225			183,225
Estimated fair value	—			—			—			197,027			197,027
Weighted average yield(2)(3)	—		%	—		%	—		%	4.20		%	4.20		%
CRT securities:(1)
Amortized Cost	—			—			—			14,713			14,713
Estimated fair value	—			—			—			11,964			11,964
Weighted average yield(3)	—		%	—		%	—		%	1.71		%	1.71		%
Total available-for-sale debt securities:
Amortized cost													$	202,929
Estimated fair value													$	214,257

December 31, 2018
Available-for-sale:
Residential mortgage-backed securities:(1)
Amortized cost	$	3		$	1,573		$	—		$	5,298		$	6,874
Estimated fair value	4			1,668			—			5,570			7,242
Weighted average yield(3)	6.50		%	5.54		%	—		%	4.53		%	4.76		%
Tax-exempt asset-backed securities:(1)
Amortized Cost	—			—			—			95,518			95,518
Estimated fair value	—			—			—			95,804			95,804
Weighted average yield(2)(3)	—		%	—		%	—		%	4.25		%	4.25		%
Total available-for-sale debt securities:
Amortized cost													$	102,392
Estimated fair value													$	103,046


(1)	Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.


(2)	Yields have been adjusted to a tax equivalent basis assuming a 21% federal tax rate.


(3)	Yields are calculated based on amortized cost.

The following table discloses our available-for-sale debt 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:



December 31, 2019	Less Than 12 Months					12 Months or Longer				Total
(in thousands)	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
CRT securities	$	11,964	$	(2,749	)	$	—	$	—	$	11,964	$	(2,749	)

At December 31, 2019, the CRT securities were the only available-for-sale debt securities in an unrealized loss position. There were no available-for-sale debt securities in an unrealized loss position at December 31, 2018.

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We conduct periodic reviews of securities with unrealized losses to evaluate whether the impairment is other-than-temporary. Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in AOCI for available-for-sale debt securities. When we have the intent to sell or we believe we will more likely than not be required to sell an available-for-sale debt security, the entire excess of its amortized cost basis over its fair value is recognized in earnings. For available-for-sale debt securities that we do not intend to sell and are not likely to be required to sell, only the credit-related impairment is recognized in earnings and any non-credit-related impairment is recorded in AOCI.

Based on the results of our periodic review of available-for-sale debt securities in an unrealized loss position at March 31, 2019, we recorded a $331,000 other-than-temporary credit-related impairment on the CRT securities, reducing the amortized cost of the securities. The loss was measured as the excess of the amortized cost basis of the security over the present value of cash flows expected to be collected and was recorded in other non-interest expense. Based on the results of our periodic review at December 31, 2019, no additional other-than-temporary credit-related impairment was recorded on the CRT securities, as the remaining loss position is not believed to be other-than-temporary. Our periodic review at December 31, 2019 included an evaluation of the near-term prospects of the investments in relation to the severity and duration of the unrealized losses. Based on that evaluation we have determined that we have the ability and intent to hold the investments until recovery of fair value.

Available-for-sale debt securities with carrying values of approximately $3.5 million and $1.2 million were pledged to secure certain customer repurchase agreements and deposits, respectively, at December 31, 2019. The comparative amounts at December 31, 2018 were $4.8 million and $1.7 million, respectively.

Equity Securities

Equity securities consist of Community Reinvestment Act funds and investments related to our non-qualified deferred compensation plan. At December 31, 2019 and December 31, 2018, we had $25.6 million and $17.2 million, respectively, in equity securities recorded at fair value. The following is a summary of unrealized and realized gains/(losses) recognized on equity securities and included in other non-interest income in the consolidated statements of income:



		Year Ended December 31,
(in thousands)		2019		2018
Net gains/(losses) recognized during the period	$	2,383	$	(975	)
Less: Realized net gains/(losses) recognized during the period on equity securities sold	119			460
Unrealized net gains/(losses) recognized during the period on equity securities still held	$	2,264	$	(1,435	)

(4) Loans Held for Investment and Allowance for Loan Losses

Loans held for investment are summarized by portfolio segment as follows:



	December 31,
(in thousands)	2019			2018
Commercial	$	10,230,828		$	10,373,288
Mortgage finance(1)	8,169,849			5,877,524
Construction	2,563,339			2,120,966
Real estate	3,444,701			3,929,117
Consumer	71,463			63,438
Equipment leases	256,462			312,191
Gross loans held for investment	24,736,642			22,676,524
Deferred income (net of direct origination costs)	(90,380		)	(108,450		)
Allowance for loan losses	(195,047		)	(191,522		)
Total loans held for investment, net	$	24,451,215		$	22,376,552


(1)	Balances at December 31, 2019 and December 31, 2018 are stated net of $682.7 million and $193.0 million of participations sold, respectively.

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Summary of Loan Loss Experience

The following tables summarize the credit risk profile of our loans held for investment by internally assigned grades and non-accrual status:



(in thousands)	Commercial		Mortgage Finance		Construction		Real Estate		Consumer		Equipment Leases		Total
December 31, 2019
Grade:
Pass	$	9,751,645	$	8,169,849	$	2,540,059	$	3,364,554	$	71,289	$	255,171	$	24,152,567
Special mention	198,269		—		6,590		52,919		140		1,062		258,980
Substandard-accruing	67,454		—		16,690		15,528		—		39		99,711
Non-accrual	213,460		—		—		11,700		34		190		225,384
Total loans held for investment	$	10,230,828	$	8,169,849	$	2,563,339	$	3,444,701	$	71,463	$	256,462	$	24,736,642

December 31, 2018
Grade:
Pass	$	10,034,597	$	5,877,524	$	2,099,955	$	3,850,811	$	61,815	$	309,775	$	22,234,477
Special mention	120,531		—		21,011		47,644		—		2,223		191,409
Substandard-accruing	140,297		—		—		28,205		1,568		193		170,263
Non-accrual	77,863		—		—		2,457		55		—		80,375
Total loans held for investment	$	10,373,288	$	5,877,524	$	2,120,966	$	3,929,117	$	63,438	$	312,191	$	22,676,524

The allowance for loan losses is comprised of general reserves and specific reserves for impaired loans based on our estimate of losses inherent in the portfolio at the balance sheet date. For further discussion of the components of the allowance for loan losses as well as details regarding how the estimate of inherent losses is determined, refer to the Allowance for Loan Losses subheading in Note 1 – Operations and Summary of Significant Accounting Policies. We believe the allowance at December 31, 2019 to be appropriate, given management's assessment of losses inherent in the portfolio as of the evaluation date, the growth in the loan and lease portfolio, current economic conditions in our market areas and other factors.

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The following table details activity in the allowance for loan losses, as well as the recorded investment in loans held for investment, by portfolio segment and disaggregated on the basis of our impairment methodology. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.



(in thousands)	Commercial		Mortgage Finance		Construction			Real Estate			Consumer			Equipment Leases			Additional Qualitative Reserve			Total
Year ended December 31, 2019
Allowance for loan losses:
Beginning balance	$	129,442	$	—	$	19,242		$	33,353		$	425		$	1,829		$	7,231		$	191,522
Provision for loan losses	106,345		2,265		(4,469		)	(17,189		)	(441		)	(1,486		)	(7,231		)	77,794
Charge-offs	76,958		—		—			662			—			19			—			77,639
Recoveries	3,290		—		—			—			69			11			—			3,370
Net charge-offs (recoveries)	73,668		—		—			662			(69		)	8			—			74,269
Ending balance	$	162,119	$	2,265	$	14,773		$	15,502		$	53		$	335		$	—		$	195,047
Period end allowance for loan losses allocated to:
Loans individually evaluated for impairment	$	59,832	$	—	$	—		$	549		$	7		$	36		$	—		$	60,424
Loans collectively evaluated for impairment	102,287		2,265		14,773			14,953			46			299			—			134,623
Total	$	162,119	$	2,265	$	14,773		$	15,502		$	53		$	335		$	—		$	195,047
Period end loans allocated to:
Loans individually evaluated for impairment	$	213,460	$	—	$	—		$	11,700		$	34		$	190		$	—		$	225,384
Loans collectively evaluated for impairment	10,017,368		8,169,849		2,563,339			3,433,001			71,429			256,272			—			24,511,258
Total	$	10,230,828	$	8,169,849	$	2,563,339		$	3,444,701		$	71,463		$	256,462		$	—		$	24,736,642

Year ended December 31, 2018
Allowance for loan losses:
Beginning balance	$	118,806	$	—	$	19,273		$	34,287		$	357		$	3,542		$	8,390		$	184,655
Provision for loan losses	87,860		—		(31		)	(1,003		)	397			(1,427		)	(1,159		)	84,637
Charge-offs	79,692		—		—			—			767			319			—			80,778
Recoveries	2,468		—		—			69			438			33			—			3,008
Net charge-offs (recoveries)	77,224		—		—			(69		)	329			286			—			77,770
Ending balance	$	129,442	$	—	$	19,242		$	33,353		$	425		$	1,829		$	7,231		$	191,522
Period end allowance for loan losses allocated to:
Loans individually evaluated for impairment	$	8,252	$	—	$	—		$	48		$	10		$	—		$	—		$	8,310
Loans collectively evaluated for impairment	121,190		—		19,242			33,305			415			1,829			7,231			183,212
Total	$	129,442	$	—	$	19,242		$	33,353		$	425		$	1,829		$	7,231		$	191,522
Period end loans allocated to:
Loans individually evaluated for impairment	$	78,428	$	—	$	—		$	8,857		$	55		$	—		$	—		$	87,340
Loans collectively evaluated for impairment	10,294,860		5,877,524		2,120,966			3,920,260			63,383			312,191			—			22,589,184
Total	$	10,373,288	$	5,877,524	$	2,120,966		$	3,929,117		$	63,438		$	312,191		$	—		$	22,676,524

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The following tables detail our impaired loans held for investment by portfolio segment. In accordance with ASC 310, Receivables, we have also included all restructured and formerly restructured loans in our impaired loan totals.



(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2019
With no related allowance recorded:
Commercial
Business loans	$	35,932	$	51,172	$	—	$	20,074	$	—
Energy loans	57,722		58,519		—		15,692		—
Real estate
Market risk	8,500		8,806		—		4,980		—
Commercial	881		881		—		5,100		—
Secured by 1-4 family	1,218		1,218		—		1,226		—
Consumer	—		—		—		—		—
Equipment leases	—		—		—		—		—
Total impaired loans with no allowance recorded	$	104,253	$	120,596	$	—	$	47,072	$	—
With an allowance recorded:
Commercial
Business loans	$	52,479	$	55,422	$	29,467	$	27,288	$	—
Energy loans	67,327		87,067		30,365		51,232		—
Real estate
Market risk	870		870		499		2,257		—
Commercial	—		—		—		—		—
Secured by 1-4 family	231		231		50		621		—
Consumer	34		34		7		63		—
Equipment leases	190		190		36		16		—
Total impaired loans with an allowance recorded	$	121,131	$	143,814	$	60,424	$	81,477	$	—
Combined:
Commercial
Business loans	$	88,411	$	106,594	$	29,467	$	47,362	$	—
Energy loans	125,049		145,586		30,365		66,924		—
Real estate
Market risk	9,370		9,676		499		7,237		—
Commercial	881		881		—		5,100		—
Secured by 1-4 family	1,449		1,449		50		1,847		—
Consumer	34		34		7		63		—
Equipment leases	190		190		36		16		—
Total impaired loans	$	225,384	$	264,410	$	60,424	$	128,549	$	—

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(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2018
With no related allowance recorded:
Commercial
Business loans	$	23,367	$	55,008	$	—	$	16,426	$	133
Energy loans	12,188		13,363		—		17,135		—
Real estate
Market risk	—		—		—		—		—
Commercial	7,388		7,388		—		3,215		—
Secured by 1-4 family	1,233		1,233		—		734		—
Consumer	—		—		—		—		—
Equipment leases	—		—		—		—		—
Total impaired loans with no allowance recorded	$	44,176	$	76,992	$	—	$	37,510	$	133
With an allowance recorded:
Commercial
Business loans	$	17,529	$	17,564	$	4,679	$	41,307	$	—
Energy loans	25,344		28,105		3,573		25,672		—
Real estate
Market risk	—		—		—		49		—
Commercial	—		—		—		83		—
Secured by 1-4 family	236		236		48		188		—
Consumer	55		55		10		54		—
Equipment leases	—		—		—		275		—
Total impaired loans with an allowance recorded	$	43,164	$	45,960	$	8,310	$	67,628	$	—
Combined:
Commercial
Business loans	$	40,896	$	72,572	$	4,679	$	57,733	$	133
Energy loans	37,532		41,468		3,573		42,807		—
Real estate
Market risk	—		—		—		49		—
Commercial	7,388		7,388		—		3,298		—
Secured by 1-4 family	1,469		1,469		48		922		—
Consumer	55		55		10		54		—
Equipment leases	—		—		—		275		—
Total impaired loans	$	87,340	$	122,952	$	8,310	$	105,138	$	133

Average impaired loans outstanding during the years ended December 31, 2019, 2018 and 2017 totaled $128.5 million, $105.1 million and $130.8 million, respectively. For the year ended December 31, 2019, we recognized 0 interest income on non-accrual loans, compared to $133,000 and $6,000, for the years ended December 31, 2018 and 2017 respectively. Additional interest income that would have been recorded if the loans had been current during the years ended December 31, 2019, 2018 and 2017 totaled $12.0 million, $8.5 million and $19.0 million, respectively. As of December 31, 2019 and 2018, NaN of our non-accrual loans were earning interest income on a cash basis.

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The table below provides an age analysis of our loans held for investment:



(in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due(1)		Total Past Due		Non-accrual		Current		Total
December 31, 2019
Commercial
Business loans	$	8,746	$	9,299	$	17,285	$	35,330	$	88,411	$	8,681,989	$	8,805,730
Energy	—		—		—		—		125,049		1,300,049		1,425,098
Mortgage finance loans	—		—		—		—		—		8,169,849		8,169,849
Construction
Market risk	—		—		—		—		—		2,457,986		2,457,986
Commercial	—		—		—		—		—		93,764		93,764
Secured by 1-4 family	—		—		—		—		—		11,589		11,589
Real estate
Market risk	10,786		—		—		10,786		9,370		2,238,384		2,258,540
Commercial	—		495		193		688		881		810,149		811,718
Secured by 1-4 family	104		179		106		389		1,449		372,605		374,443
Consumer	—		212		—		212		34		71,217		71,463
Equipment leases	304		—		—		304		190		255,968		256,462
Total loans held for investment	$	19,940	$	10,185	$	17,584	$	47,709	$	225,384	$	24,463,549	$	24,736,642


(1)	Loans past due 90 days and still accruing includes premium finance loans of $8.5 million. These loans are generally secured by obligations of insurance carriers to refund premiums on canceled insurance policies. The receipt of the refund of premiums from the insurance carriers can take 180 days or longer from the cancellation date.

As of December 31, 2019 and December 31, 2018, we did not have any loans considered restructured that were not on non-accrual. Of the non-accrual loans at December 31, 2019 and 2018, $35.1 million and $20.0 million, respectively, met the criteria for restructured. These loans had no unfunded commitments at their respective balance sheet dates.

The following table details the recorded investment at December 31, 2019 and 2018 of loans that have been restructured during the years ended December 31, 2019 and 2018 by type of modification:



	Extended Maturity			Adjusted Payment Schedule			Total
(in thousands, except number of contracts)	Number of Contracts	Balance at Period End		Number of Contracts	Balance at Period End		Number of Contracts		Balance at Period End
Year Ended December 31, 2019
Commercial
Business loans	1	$	1,753	3	$	21,193	4		$	22,946
Energy loans	1	3,935		—	—		1		3,935
Total	2	$	5,688	3	$	21,193	$	5	$	26,881

Year Ended December 31, 2018
Commercial
Business loans	—	$	—	2	$	2,411	$	2	$	2,411
Energy loans	—	—		5	10,047		5		10,047
Total	—	$	—	7	$	12,458	$	7	$	12,458

Restructured loans generally include terms to temporarily place the loan on interest only, extend the payment terms or reduce the interest rate. We did not forgive any principal on the above restructured loans. At December 31, 2019, all of the above loans restructured in 2019 were on non-accrual. The restructuring of the loans did not have a significant impact on our allowance for

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loan losses at December 31, 2019 or 2018. As of December 31, 2019 and 2018, we did not have any loans that were restructured within the last 12 months that subsequently defaulted.

(5) OREO and Valuation Allowance for Losses on OREO

The table below presents a summary of the activity related to OREO:



	Year ended December 31,
(in thousands)	2019			2018			2017
Beginning balance	$	79		$	11,742		$	18,961
Additions	—			—			—
Sales	(79		)	(11,663		)	(1,108		)
Valuation allowance for OREO	—			—			—
Direct write-downs	—			—			(6,111		)
Ending balance	$	—		$	79		$	11,742

During 2017, we recorded a $6.1 million write-down on one asset. In 2018, we sold this asset and recorded a $2.0 million gain on sale. The gain on sale was recorded in other non-interest income.

(6) Certain Transfers of Financial Assets

The table below presents a reconciliation of the changes in loans held for sale:



	Year Ended December 31,
(in thousands)	2019			2018
Outstanding balance(1):
Beginning balance	$	1,949,785		$	1,012,580
Loans purchased and originated	10,183,057			6,753,709
Payments and loans sold	(9,564,480		)	(5,816,504		)
Ending balance	2,568,362			1,949,785
Fair value adjustment:
Beginning balance	19,689			(1,576		)
Increase/(decrease) to fair value	(10,917		)	21,265
Ending balance	8,772			19,689
Loans held for sale at fair value	$	2,577,134		$	1,969,474


(1)	Includes $5.8 million and $299,000 of loans held for sale that are carried at lower of cost or market as of December 31, 2019 and 2018, respectively, as well as $3.3 million as of December 31, 2017.

NaN loans held for sale were on non-accrual as of December 31, 2019 or December 31, 2018. At December 31, 2019 and December 31, 2018, we had $8.2 million and $16.8 million, respectively, in loans held for sale that were 90 days or more past due. The $8.2 million in loans held for sale that were 90 days or more past due at December 31, 2019 included $6.0 million in loans guaranteed by U.S. government agencies that were purchased out of Ginnie Mae securities and recorded as loans held for sale, at fair value, on the balance sheet. Interest on these past due loans accrues at the debenture rate guaranteed by the U.S. government. Also included in the $8.2 million were $1.9 million in loans that, pursuant to Ginnie Mae servicing guidelines, we have the unilateral right, but not the obligation, to repurchase if defined delinquent loan criteria are met, and therefore must record as held for sale on our balance sheet regardless of whether the repurchase option has been exercised. At December 31, 2018, $16.0 million of the $16.8 million in loans held for sale were loans guaranteed by U.S. government agencies that were purchased out of Ginnie Mae securities and recorded as loans held for sale, at fair value, on the balance sheet.

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From time to time we retain the right to service the loans sold through our MCA program, creating MSRs which are recorded as assets on our balance sheet. A summary of MSR activity is as follows:



	Year Ended December 31,
(in thousands)	2019			2018
MSRs:
Balance, beginning of year	$	42,474		$	88,150
Capitalized servicing rights	39,774			39,149
Amortization	(11,541		)	(9,278		)
Sales	—			(75,547		)
Balance, end of period	$	70,707		$	42,474
Valuation allowance:
Balance, beginning of year	$	—		$	2,823
Increase (decrease) in valuation allowance	5,803			(2,823		)
Balance, end of period	$	5,803		$	—
MSRs, net	$	64,904		$	42,474
MSRs, fair value	$	64,904		$	44,502

At December 31, 2019 and 2018, our servicing portfolio of residential mortgage loans had an outstanding principal balance of $6.7 billion and $3.9 billion, respectively.

In connection with the servicing of these loans, we hold deposits in the name of investors representing escrow funds for taxes and insurance, as well as collections in transit to the investors. These escrow funds are segregated and held in separate non-interest-bearing bank accounts at the Bank. These deposits, included in total non-interest-bearing deposits on the consolidated balance sheets, were $63.7 million at December 31, 2019 and $37.9 million at December 31, 2018.

The estimated fair value of the MSR assets is obtained from an independent third party and reviewed by management on a quarterly basis. MSRs typically do not trade in an active, open market with readily observable prices; as such, the fair value of MSRs is determined using a discounted cash flow model to calculate the present value of the estimated future net servicing income. The assumptions utilized in the discounted cash flow model are based on market data for comparable assets, where available. Each quarter, management and the independent third party review the key assumptions used in the discounted cash flow model and make adjustments as necessary to estimate the fair value of the MSRs. At December 31, 2019, the estimated fair value of MSRs was adjusted as a result of the decline in mortgage interest rates during the year, which resulted in an impairment charge of $5.8 million. There was no impairment at December 31, 2018. The following summarizes the assumptions used by management to determine the fair value of MSRs:



	December 31,
	2019		2018
Average discount rates	9.06	%	9.55	%
Expected prepayment speeds	13.11	%	9.77	%
Weighted-average life, in years	5.8		7.0

A sensitivity analysis of changes in the fair value of our MSR portfolio resulting from certain key assumptions is presented in the following table:



	December 31,
(in thousands)	2019			2018
50 bp adverse change in prepayment speed	$	(10,768	)	$	(6,028	)
100 bp adverse change in prepayment speed	(17,965		)	(11,629		)

These sensitivities are hypothetical and actual results may differ materially due to a number of factors. The effect on fair value of a 10% variation in assumptions generally cannot be determined with confidence because the relationship of the change in assumptions to the change in fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may be correlated with changes in other factors, which could impact the sensitivity analysis as presented.

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In conjunction with the sale and securitization of loans held for sale, we may be exposed to liability resulting from repurchase, indemnification and make-whole agreements. Our estimated exposure related to those agreements totaled $3.6 million and $1.6 million at December 31, 2019 and December 31, 2018, respectively, and is recorded in other liabilities in the consolidated balance sheets. We incurred $9.0 million in losses due to make-whole obligations during the year ended December 31, 2019 compared to $258,000 in 2018. The increase in make-whole obligation losses is primarily related to an increase in early payoffs resulting from the declining interest rate environment.

(7) Leases

Our leases relate primarily to office space and bank branches with remaining lease terms of generally 1 to 13 years. Certain lease arrangements contain extension options which typically range from 5 to 10 years at the then fair market rental rates. As these extension options are not generally considered reasonably certain of exercise, they are not included in the lease term. As of December 31, 2019, operating lease ROU assets and liabilities were $80.0 million and $95.9 million, respectively. We do not currently have any significant finance leases in which we are the lessee.

The table below summarizes our net lease cost:



(in thousands)	Year Ended December 31, 2019
Operating lease cost	$	14,844
Short-term lease cost	19
Variable lease cost	3,918
Sublease income	(126		)
Net lease cost	$	18,656
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	14,711
Non-cash changes in ROU assets	$	98,369
Non-cash changes in lease liabilities(1)	$	108,189


(1)	Includes $87.9 million in lease liabilities from new ROU assets obtained during the year ended December 31, 2019.

The table below summarizes other information related to our operating leases:



	December 31, 2019
Weighted-average remaining lease term - operating leases, in years	7.2
Weighted-average discount rate - operating leases	2.75	%

The table below summarizes the maturity of remaining lease liabilities:



(in thousands)	December 31, 2019
2020	$	16,586
2021	17,136
2022	16,338
2023	16,377
2024	11,619
2025 and thereafter	28,018
Total lease payments	106,074
Less: Interest	(10,187		)
Present value of lease liabilities	$	95,887

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(8) Goodwill and Other Intangible Assets

Goodwill and other intangible assets are summarized as follows:



(in thousands)	Gross Goodwill and Intangible Assets		Accumulated Amortization			Net Goodwill and Intangible Assets
December 31, 2019
Goodwill	$	15,468	$	(374	)	$	15,094
Intangible assets—customer relationships and trademarks	9,006		(6,001		)	3,005
Total goodwill and intangible assets	$	24,474	$	(6,375	)	$	18,099
December 31, 2018
Goodwill	$	15,468	$	(374	)	$	15,094
Intangible assets—customer relationships and trademarks	9,006		(5,530		)	3,476
Total goodwill and intangible assets	$	24,474	$	(5,904	)	$	18,570

Amortization expense related to intangible assets totaled $471,000 in 2019, $470,000 in 2018 and $472,000 in 2017. The estimated aggregate future amortization expense for intangible assets remaining as of December 31, 2019 is as follows:



(in thousands)
2020	$	432
2021	405
2022	405
2023	382
2024	268
Thereafter	1,113
Total	$	3,005

(9) Premises and Equipment

Premises and equipment are summarized as follows:



	December 31,
(in thousands)	2019			2018
Premises	$	30,181		$	27,999
Furniture and equipment	42,176			35,130
Total cost	72,357			63,129
Accumulated depreciation	(41,145		)	(39,327		)
Total premises and equipment, net	$	31,212		$	23,802

Depreciation expense for the above premises and equipment was approximately $9.2 million, $9.0 million and $6.9 million in 2019, 2018 and 2017, respectively.

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(10) Deposits

Deposits are summarized as follows:



	December 31,
(in thousands)	2019		2018
Non-interest-bearing demand deposits	$	9,438,459	$	7,317,161
Interest-bearing deposits
Transaction	3,651,128		3,051,535
Savings	10,517,975		8,222,893
Time	2,871,031		2,014,524
Total interest-bearing deposits	17,040,134		13,288,952
Total deposits	$	26,478,593	$	20,606,113

The scheduled maturities of interest-bearing time deposits were as follows at December 31, 2019:



(in thousands)
2020	$	2,810,219
2021	49,275
2022	6,648
2023	271
2024	1,763
2025 and after	2,855
Total	$	2,871,031

At December 31, 2019 and 2018, interest-bearing time deposits of $250,000 or more were approximately $347.7 million and $270.2 million, respectively.

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(11) Short-Term and Other Borrowings

The following table summarizes our short-term and other borrowings:



(dollar amounts in thousands)	Federal Funds Purchased			Customer Repurchase Agreements			FHLB Borrowings
December 31, 2019
Amount outstanding at year-end	$	132,270		$	9,496		$	2,400,000
Interest rate at year-end	1.66		%	0.61		%	1.68		%
Average balance outstanding during the year	$	502,604		$	11,655		$	2,523,836
Weighted-average interest rate during the year	2.36		%	0.51		%	2.31		%
Maximum month-end outstanding during the year	$	905,473		$	14,208		$	5,000,000
December 31, 2018
Amount outstanding at year-end	$	629,169		$	12,005		$	3,900,000
Interest rate at year-end	2.54		%	0.09		%	2.56		%
Average balance outstanding during the year	$	323,140		$	9,812		$	1,769,452
Weighted-average interest rate during the year	2.02		%	0.09		%	2.05		%
Maximum month-end outstanding during the year	$	629,169		$	13,835		$	4,000,000
December 31, 2017
Amount outstanding at year-end	$	359,338		$	5,702		$	2,800,000
Interest rate at year-end	1.45		%	0.03		%	1.35		%
Average balance outstanding during the year	$	215,895		$	6,590		$	1,395,753
Weighted-average interest rate during the year	1.20		%	0.04		%	1.08		%
Maximum month-end outstanding during the year	$	544,203		$	8,727		$	2,800,000

The following table summarizes our other borrowing capacities net of balances outstanding. As of December 31, 2019, all are scheduled to mature within one year.



	December 31,
(in thousands)	2019		2018		2017
FHLB borrowing capacity relating to loans	$	8,964,019	$	4,568,842	$	3,890,995
FHLB borrowing capacity relating to securities	589		721		2,071
Total FHLB borrowing capacity(1)	$	8,964,608	$	4,569,563	$	3,893,066
Unused federal funds lines available from commercial banks	$	1,432,000	$	620,000	$	885,000
Unused Federal Reserve borrowings capacity	$	3,637,238	$	4,933,965	$	4,114,594
Unused revolving line of credit(2)	$	130,000	$	130,000	$	130,000


(1)	FHLB borrowings are collateralized by a blanket floating lien on certain real estate secured loans, mortgage finance assets and also certain pledged securities.


(2)	Unsecured revolving, non-amortizing line of credit with maturity date of December 15, 2020. Proceeds may be used for general corporate purposes, including funding regulatory capital infusions into the Bank. The loan agreement contains customary financial covenants and restrictions. NaN borrowings were made against this line of credit during 2019, 2018, or 2017.

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(12) Long-Term Debt

From November 2002 to September 2006 various Texas Capital Statutory Trusts were created and subsequently issued floating rate trust preferred securities in various private offerings totaling $113.4 million. As of December 31, 2019, the details of the trust preferred subordinated debentures are summarized below:



(dollar amounts in thousands)	Texas Capital Bancshares Statutory Trust I	Texas Capital Statutory Trust II	Texas Capital Statutory Trust III	Texas Capital Statutory Trust IV	Texas Capital Statutory Trust V
Date issued	November 19, 2002	April 10, 2003	October 6, 2005	April 28, 2006	September 29, 2006
Trust preferred securities issued	$10,310	$10,310	$25,774	$25,774	$41,238
Floating or fixed rate securities	Floating	Floating	Floating	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	December 2036

On September 21, 2012, the Company issued $111.0 million of subordinated notes. The notes mature in September 2042 and bear interest at a rate of 6.50% per annum, payable quarterly. The indenture governing the notes contains customary covenants and restrictions.

(13) Financial Instruments with Off-Balance Sheet Risk

The table below presents our financial instruments with off-balance sheet risk, as well as the activity in the allowance for off-balance sheet credit losses related to those financial instruments. This allowance is recorded in other liabilities on the consolidated balance sheet.



	Year Ended December 31,
(in thousands)	2019			2018
Beginning balance of allowance for off-balance sheet credit losses	$	11,434		$	9,071
Provision for off-balance sheet credit losses	(2,794		)	2,363
Ending balance of allowance for off-balance sheet credit losses	$	8,640		$	11,434

Commitments to extend credit - period end balance	$	8,066,655		$	8,030,198
Standby letters of credit - period end balance	$	261,405		$	236,537

(14) 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 adverse 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.

The Basel III regulatory capital framework (the "Basel III Capital Rules") adopted by U.S. federal regulatory authorities, among other things, (i) establishes the capital measure called "Common Equity Tier 1" ("CET1"), (ii) specifies that Tier 1 capital consist of CET1 and "Additional Tier 1 Capital" instruments meeting stated requirements, (iii) requires that most deductions/adjustments to regulatory capital measures be made to CET1 and not to other components of capital and (iv) defines the scope of the deductions/adjustments to the capital measures. The Basel III Capital Rules became effective for us on January 1, 2015 with certain transition provisions that became fully phased in on January 1, 2019.

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Additionally, the Basel III Capital Rules require that we maintain a capital conservation buffer with respect to each of CET1, Tier 1 and total capital to risk-weighted assets, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. The capital conservation buffer was subject to a three year phase-in period that began on January 1, 2016 and became fully phased-in on January 1, 2019 at 2.5%. The required capital conservation buffer during 2018 was 1.875%. A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of CET1, Tier 1 and total capital to risk-weighted assets, and of Tier 1 capital to average assets, each as defined in the regulations. Management believes, as of December 31, 2019, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

Financial institutions are categorized as well capitalized or adequately capitalized, based on minimum total risk-based, Tier 1 risk-based, CET1 and Tier 1 leverage ratios. As shown in the table below, the Company’s capital ratios exceeded the regulatory definition of "well capitalized" as of December 31, 2019 and 2018. Based upon the information in its most recently filed call report, the Bank met the capital ratios necessary to be well capitalized. The regulatory authorities can apply changes in classification of assets and such changes may retroactively subject the Company to changes in capital ratios. Any such change could reduce one or more capital ratios below well-capitalized status. In addition, a change may result in imposition of additional assessments by the FDIC or could result in regulatory actions that could have a material effect on our condition and results of operations.

Because the Bank had less than $15.0 billion in total consolidated assets as of December 31, 2009, we are allowed to continue to classify our trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1 capital.

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The table below summarizes our actual and required capital ratios under the Basel III Capital Rules:



	Actual				Minimum Capital Required - Basel III Phase-In Schedule				Minimum capital Required - Basel III Fully Phased-In				Required to be Considered Well Capitalized
(dollars in thousands)	Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount	Ratio
December 31, 2019
CET1
Company	$	2,653,999	8.88	%	$	1,344,825	4.50	%	$	2,091,591	7.00	%	N/A	N/A
Bank	2,676,513		8.96	%	1,344,131		4.50	%	2,090,870		7.00	%	1,941,522	6.50	%
Total capital (to risk-weighted assets)
Company	3,398,345		11.37	%	2,390,801		8.00	%	3,137,926		10.50	%	N/A	N/A
Bank	3,262,144		10.92	%	2,389,565		8.00	%	3,136,305		10.50	%	2,986,957	10.00	%
Tier 1 capital (to risk-weighted assets)
Company	2,912,529		9.75	%	1,793,101		6.00	%	2,540,226		8.50	%	N/A	N/A
Bank	2,835,043		9.49	%	1,792,174		6.00	%	2,538,913		8.50	%	2,389,565	8.00	%
Tier 1 capital (to average assets)(1)
Company	2,912,529		8.42	%	1,383,640		4.00	%	1,383,640		4.00	%	N/A	N/A
Bank	2,835,043		8.20	%	1,383,190		4.00	%	1,383,190		4.00	%	1,728,988	5.00	%
December 31, 2018
CET1
Company	$	2,330,599	8.58	%	$	1,732,501	6.38	%	$	1,902,354	7.00	%	N/A	N/A
Bank	2,340,988		8.62	%	1,731,955		6.38	%	1,901,755		7.00	%	1,765,915	6.50	%
Total capital (to risk-weighted assets)
Company	3,074,097		11.31	%	2,683,679		9.88	%	2,853,532		10.50	%	N/A	N/A
Bank	2,925,872		10.77	%	2,682,833		9.88	%	2,852,632		10.50	%	2,716,793	10.00	%
Tier 1 capital (to risk-weighted assets)
Company	2,589,374		9.53	%	2,140,149		7.88	%	2,310,002		8.50	%	N/A	N/A
Bank	2,499,763		9.20	%	2,139,474		7.88	%	2,309,274		8.50	%	2,173,434	8.00	%
Tier 1 capital (to average assets)(1)
Company	2,589,374		9.87	%	1,049,694		4.00	%	1,049,694		4.00	%	N/A	N/A
Bank	2,499,763		9.53	%	1,049,296		4.00	%	1,049,296		4.00	%	1,311,620	5.00	%


(1)	The Tier 1 capital ratio (to average assets) is not impacted by the Basel III Capital Rules; however, the Federal Reserve and the FDIC may require the Company and the Bank, respectively, to maintain a Tier 1 capital ratio (to average assets) above the required minimum.

Our mortgage finance loan volumes can increase significantly at month-end, causing a meaningful difference between ending balance and average balance for any period. At December 31, 2019, our mortgage finance loans were $8.2 billion compared to the average for the quarter ended December 31, 2019 of $7.9 billion. As CET1, Tier 1 and total capital ratios are calculated using quarter-end risk-weighted assets and our mortgage finance loans are 100% risk-weighted (excluding MCA mortgage loans held for sale, which receive lower risk weights), the period-end fluctuation in these balances can significantly impact our reported ratios. Due to the actual risk profile and liquidity of this asset class, we manage capital allocated to mortgage finance loans based on changing trends in average balances and do not believe that the period-end balance is representative of risk characteristics that would justify higher allocations. However, we monitor our capital allocation to confirm that all capital levels remain above well-capitalized levels.

The required reserve balances at the Federal Reserve at December 31, 2019 and 2018 were approximately $283.4 million and $157.7 million, respectively.

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(15) Stock-Based Compensation and 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 $9.5 million, $9.6 million, and $8.4 million for the years ended December 31, 2019, 2018 and 2017, 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.

We also offer a non-qualified deferred compensation plan for our executives and key members of management in order to assist us in attracting and retaining these individuals. Participants in the plan may elect to defer up to 75% of their annual salary and/or short-term incentive payout into deferral accounts that mirror the gains or losses of investments selected by the participants. The plan allows us to make discretionary contributions on behalf of a participant as well as matching contributions. We made matching contributions of $1.0 million in both 2019 and 2018 and made discretionary contributions of $260,000 in 2017. All participant contributions to the plan and any related earnings are immediately vested and may be withdrawn upon the participant's separation from service, death or disability or upon a date specified by the participant. Salary deferrals are recorded as salaries and employee benefits expense in the consolidated statements of income with an offsetting payable to participants in other liabilities on the consolidated balance sheets.

We have an Employee Stock Purchase Plan (“ESPP”). Employees are eligible for the ESPP when they meet certain requirements concerning period of credited service and minimum hours worked. Eligible employees may contribute a between 1% and 10% of eligible compensation up to the Section 423 of the Internal Revenue Code limit of $25,000. In 2006, stockholders approved the ESPP, which allocated 400,000 shares for purchase. As of December 31, 2019, 2018 and 2017, 155,933, 143,348 and 132,285 shares had been purchased on behalf of employees under the ESPP.

We have stock-based compensation plans under which equity-based compensation grants are made by the board of directors, or its designated committee. Grants are subject to vesting requirements. Under the plans, we may grant, among other things, non-qualified stock options, incentive stock options, restricted stock, restricted stock units (“RSUs”), stock appreciation rights (“SARs”), cash-settled performance units or any combination thereof to employees and non-employee directors. A total of 2,550,000 shares are authorized for grant under the plans. Total shares remaining available for grant under the plans at December 31, 2019 were 1,772,070.

A summary of our SAR activity and related information is as follows. Grants of SARs include time-based vesting conditions that generally vest ratably over a period of five years.



	December 31, 2019					December 31, 2018					December 31, 2017
	SARs			Weighted Average Exercise Price		SARs			Weighted Average Exercise Price		SARs			Weighted Average Exercise Price
SARs outstanding at beginning of year	41,350			$	29.13	74,363			$	30.12	125,863			$	31.68
SARs exercised	(20,150		)	24.07		(33,013		)	31.35		(51,500		)	33.94
SARs outstanding at year-end	21,200			$	33.95	41,350			$	29.13	74,363			$	30.12
SARs vested and exercisable at year-end	21,200			$	33.95	39,750			$	27.81	60,463			$	26.02
Weighted average remaining contractual life of SARs vested (in years)				2.14					2.33					2.82
Weighted average remaining contractual life of SARs outstanding (in years)				2.14					2.44					3.35
Compensation expense	$	6,000				$	121,000				$	265,000
Unrecognized compensation expense	$	—				$	6,000				$	127,000
Weighted average period over which unrecognized compensation expense is expected to be recognized (in years)				0.00					0.17					0.75
Fair value of shares vested during the year	$	37,000				$	211,000				$	294,000
Intrinsic value of SARs exercised	$	724,000				$	1,919,000				$	3,802,000

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A summary of our RSU activity and related information is as follows. Grants of RSUs include time-based vesting conditions that generally vest ratably over a period of three to five years. Additionally, from time to time, grants of RSUs with both time-based and performance-based vesting conditions are made that generally vest at the end of a three or four year period.



	December 31, 2019					December 31, 2018					December 31, 2017
	RSUs			Weighted Average Grant Date Fair Value		RSUs			Weighted Average Grant Date Fair Value		RSUs			Weighted Average Grant Date Fair Value
RSUs outstanding at beginning of year	349,533			$	69.11	423,732			$	60.01	425,055			$	51.28
RSUs granted	386,913			59.28		95,891			88.07		121,243			80.40
RSUs vested	(140,666		)	59.97		(121,507		)	54.97		(102,057		)	48.93
RSUs forfeited	(37,468		)	62.73		(48,583		)	63.60		(20,509		)	54.75
RSUs outstanding at year-end	558,312			$	64.95	349,533			$	69.11	423,732			$	60.01
Compensation expense	$	11,733,000				$	8,803,000				$	7,790,000
Unrecognized compensation expense	$	25,305,000				$	16,538,000				$	18,730,000
Weighted average period over which unrecognized compensation expense is expected to be recognized (in years)				3.09					2.90					3.15

New non-employee directors receive grants of restricted common stock as to which restrictions lapse ratably over a period of three years. Compensation expense for these grants was $36,000, $62,000 and $61,000 for the years ended December 31, 2019, 2018 and 2017, respectively.

Total compensation cost for all share-based arrangements was $11.8 million, $9.0 million and $8.1 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Cash-settled units totaling 163,856 were outstanding at December 31, 2019, all of which are time-based and vest ratably over a period of four years. We granted 138,773 and 121,260 cash-settled units in 2018 and 2017, respectively. No grants were made in 2019. Since these units have a cash payout feature, they are accounted for under the liability method with related expense based on the stock price at period end. Compensation cost for the cash-settled units was $5.8 million, $8.0 million and $13.9 million for the years ended December 31, 2019, 2018 and 2017, respectively.

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(16) Income Taxes

Income tax expense/(benefit) consists of the following:



	Year ended December 31,
(in thousands)	2019		2018			2017
Current:
Federal	$	69,427	$	82,556		$	94,112
State	4,072		3,808			3,257
Total	73,499		86,364			97,369
Deferred:
Federal	10,796		(6,400		)	31,276
State	—		—			—
Total	10,796		(6,400		)	31,276
Total expense:
Federal	80,223		76,156			125,388
State	4,072		3,808			3,257
Total	$	84,295	$	79,964		$	128,645

The reconciliation of our effective income tax rate to the U.S. federal statutory tax rate is as follows:



	Year ended December 31,
	2019		2018		2017
U.S. statutory rate	21	%	21	%	35	%
State taxes	1	%	1	%	1	%
Non-deductible expenses	1	%	1	%	1	%
Deferred tax asset remeasurement write-off	—	%	—	%	5	%
Non-taxable income	(1	)%	(1	)%	(1	)%
Other	(1	)%	(1	)%	(1	)%
Effective tax rate	21	%	21	%	40	%

The tax effect of unrealized gains and losses on available-for-sale debt securities is recorded to other comprehensive income and is not a component of income tax expense/(benefit).

We are no longer subject to U.S. federal income tax examinations for years before 2016 or state and local income tax examinations for years before 2015.

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The table below summarizes significant components of our deferred tax assets and liabilities utilizing the federal corporate income tax rate of 21%. Management believes it is more likely than not that all of the deferred tax assets will be realized. Our net deferred tax assets are included in other assets in the consolidated balance sheets.



	December 31,
(in thousands)	2019			2018
Deferred tax assets:
Allowance for credit losses	$	44,383		$	44,224
Operating lease liabilities	20,894			—
Loan origination fees	10,638			11,328
Stock compensation	3,605			3,363
Non-accrual interest	2,351			1,724
Non-qualified deferred compensation	4,027			2,211
Other	2,544			2,517
Total deferred tax assets	88,442			65,367
Deferred tax liabilities:
Loan origination costs	(2,686		)	(2,049		)
Leases	(7,912		)	(9,000		)
Operating lease ROU assets	(19,644		)	—
MSRs	(13,818		)	(9,184		)
Depreciation	(17,602		)	(8,233		)
Unrealized gain on securities	(2,379		)	(138		)
Other	(3,337		)	(2,662		)
Total deferred tax liabilities	(67,378		)	(31,266		)
Net deferred tax asset	$	21,064		$	34,101

(17) Fair Value Disclosures

We determine the fair market values of our assets and liabilities measured at fair value on a recurring and nonrecurring basis using the fair value hierarchy as prescribed in ASC 820. 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 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 3

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Assets and liabilities measured at fair value are as follows:



	Fair Value Measurements Using
(in thousands)	Level 1		Level 2		Level 3
December 31, 2019
Available-for-sale debt securities:(1)
Residential mortgage-backed securities	$	—	$	5,266	$	—
Tax-exempt asset-backed securities	—		—		197,027
CRT Securities	—		—		11,964
Equity securities(1)(2)	18,484		7,130		—
Loans held for sale(3)	—		2,564,281		7,043
Loans held for investment(4)(6)	—		—		109,585
Derivative assets(7)	—		48,684		—
Derivative liabilities(7)	—		51,310		—
Non-qualified deferred compensation plan liabilities(8)	18,484		—		—

December 31, 2018
Available-for-sale debt securities:(1)
Residential mortgage-backed securities	$	—	$	7,242	$	—
Tax-exempt asset-backed securities	—		—		95,804
Equity securities(1)(2)	10,262		6,908		—
Loans held for sale(3)	—		1,952,760		16,415
Loans held for investment(4)(6)	—		—		29,885
OREO(5)(6)	—		—		79
Derivative assets(7)	—		21,806		—
Derivative liabilities(7)	—		41,375		—
Non-qualified deferred compensation plan liabilities(8)	10,148		—		—


(1)	Securities are measured at fair value on a recurring basis, generally monthly, except for tax-exempt asset-backed securities and CRT securities which are measured quarterly.


(2)	Equity securities consist of Community Reinvestment Act funds and investments related to our non-qualified deferred compensation plan.


(3)	Loans held for sale purchased through our MCA program are measured at fair value on a recurring basis, generally monthly.


(4)	Includes impaired loans that have been measured for impairment at the fair value of the loan’s collateral.


(5)	OREO is transferred from loans to OREO at fair value less selling costs.


(6)	Loans held for investment and OREO are measured on a nonrecurring basis, generally annually or more often as warranted by market and economic conditions.


(7)	Derivative assets and liabilities are measured at fair value on a recurring basis, generally quarterly.


(8)	Non-qualified deferred compensation plan liabilities represent the fair value of the obligation to the employee, which generally correspond to the fair value of the invested assets, and are measured at fair value on a recurring basis, generally monthly.

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Level 3 Valuations

The following table presents a reconciliation of the level 3 fair value category measured at fair value on a recurring basis:



								Net Realized/Unrealized Gains (Losses)
(in thousands)	Balance at Beginning of Period		Purchases / Additions		Sales / Reductions			Realized			Unrealized			Balance at End of Period
Year ended December 31, 2019
Available-for-sale debt securities:(1)
Tax-exempt asset-backed securities	$	95,804	$	92,010	$	(4,302	)	$	—		$	13,515		$	197,027
CRT Securities	$	—	$	15,044	$	—		$	(331	)	$	(2,749	)	$	11,964
Loans held for sale(2)	$	16,415	$	321	$	(10,690	)	$	190		$	807		$	7,043

Year ended December 31, 2018
Tax-exempt asset-backed securities(1)	$	—	$	95,521	$	(3	)	$	—		$	286		$	95,804
Loans held for sale(2)	$	—	$	38,430	$	(20,591	)	$	(173	)	$	(1,251	)	$	16,415


(1)	Unrealized gains/(losses) on available-for-sale debt securities are recorded in AOCI. Realized gains/(losses) are recorded in other non-interest income.


(2)	Realized and unrealized gains/(losses) on loans held for sale are recorded in gain/(loss) on sale of loans held for sale.

Tax-exempt asset-backed securities

The fair value of tax-exempt asset-backed securities is based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs, the most significant of which were a discount rate and weighted-average life. At December 31, 2019, a discount rate of 2.99% and a weighted-average life of 7.0 years were utilized to determine the fair value of these securities, compared to 4.21% and 9.2 years, respectively, at December 31, 2018.

CRT securities

The fair value of CRT securities is based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs, the most significant of which were a discount rate and weighted-average life. At December 31, 2019, a discount rate of 4.54% and a weighted-average life of 9.3 years were utilized to determine the fair value of these securities.

Loans held for sale

The fair value of loans held for sale using Level 3 inputs include loans that cannot be sold through normal sale channels and thus require significant management judgment or estimation when determining the fair value. The fair value of such loans is generally based upon quoted prices of comparable loans with a liquidity discount applied. At December 31, 2019, the fair value of these loans was calculated using a weighted-average discounted price of 94.1%, compared to 92.9% at December 31, 2018.

Loans held for investment

Certain impaired loans held for investment are reported at fair value through a specific valuation allowance allocation of the allowance for loan losses based upon the fair value of the underlying collateral. The $109.6 million fair value of loans held for investment at December 31, 2019 reported above includes impaired loans held for investment with a carrying value of $145.4 million that were reduced by specific valuation allowance allocations totaling $35.8 million based on collateral valuations utilizing Level 3 inputs. The $29.9 million fair value of loans held for investment at December 31, 2018 reported above includes impaired loans with a carrying value of $32.2 million that were reduced by specific valuation allowance allocations totaling $2.3 million based on collateral valuations utilizing Level 3 inputs.

OREO

Certain foreclosed assets, upon initial recognition, are recorded at fair value less estimated selling costs. At December 31, 2019 and 2018, OREO had a carrying value of $0 and $79,000, respectively, with no specific valuation allowance. The fair value of OREO was computed based on third party appraisals, which are Level 3 valuation inputs.

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Fair Value of Financial Instruments

GAAP requires 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:



	December 31, 2019				December 31, 2018
(in thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Level 1 inputs:
Cash and cash equivalents	$	4,425,583	$	4,425,583	$	3,080,065	$	3,080,065
Investment securities	18,484		18,484		10,262		10,262
Level 2 inputs:
Investment securities	12,396		12,396		14,150		14,150
Loans held for sale	2,570,091		2,570,091		1,953,059		1,953,059
Derivative assets	48,684		48,684		21,806		21,806
Level 3 inputs:
Investment securities	208,991		208,991		95,804		95,804
Loans held for sale	7,043		7,043		16,415		16,415
Loans held for investment, net	24,451,215		24,478,586		22,376,552		22,347,876
Financial liabilities:
Level 2 inputs:
Federal funds purchased	132,270		132,270		629,169		629,169
Customer repurchase agreements	9,496		9,496		12,005		12,005
Other borrowings	2,400,000		2,400,000		3,900,000		3,900,000
Subordinated notes	282,129		292,302		281,767		283,349
Trust preferred subordinated debentures	113,406		113,406		113,406		113,406
Derivative liabilities	51,310		51,310		41,375		41,375
Level 3 inputs:
Deposits	26,478,593		29,357,121		20,606,113		20,608,494

The estimated fair value for cash and cash equivalents, variable rate loans and variable rate debt approximates carrying value. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

Investment Securities

Within the investment securities portfolio, we hold equity securities related to our non-qualified deferred compensation plan that are valued using quoted market prices for identical equity securities in an active market, and are classified as Level 1 assets in the fair value hierarchy. The fair value of the remaining equity securities and residential mortgage-backed securities in our investment portfolio are based on prices obtained from independent pricing services that are based on quoted market prices for the same or similar securities, and are characterized as Level 2 assets in the fair value hierarchy. We have obtained documentation from our primary pricing service regarding their processes and controls applicable to pricing investment securities, and on a quarterly basis we independently verify the prices that we receive from the service provider using two additional independent pricing sources. We also hold tax-exempt asset-backed securities and CRT securities that are valued using a discounted cash flow model, which utilizes Level 3 inputs, and are classified as Level 3 assets in the fair value hierarchy.

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Loans Held for Sale

Fair value for loans held for sale is derived from quoted market prices for similar loans, in which case they are characterized as Level 2 assets in the fair value hierarchy, or is derived from third party pricing models, in which case they are characterized as Level 3 assets in the fair value hierarchy.

Derivatives

The estimated fair value of interest rate swaps and caps is obtained from independent pricing services based on quoted market prices for similar derivative contracts and these financial instruments are characterized as Level 2 assets and liabilities in the fair value hierarchy. On a quarterly basis, we independently verify the fair value using an additional independent pricing source. Foreign currency forward contracts are valued based upon quoted market prices obtained from independent pricing services for similar derivative contracts. As such, these financial instruments are characterized as Level 2 assets and liabilities in the fair value hierarchy. The derivative instruments related to the loans held for sale portfolio include loan purchase commitments and forward sales commitments. Loan purchase commitments are valued based upon the fair value of the underlying mortgage loans to be purchased, which is based on observable market data for similar loans. Forward sales commitments are valued based upon quoted market prices from brokers. As such, these loan purchase commitments and forward sales commitments are characterized as Level 2 assets or liabilities in the fair value hierarchy.

(18) Derivative Financial Instruments

The notional amounts and estimated fair values of derivative positions outstanding ~~at December 31, 2017 and 2016~~ are presented in the following ~~table (in thousands):~~table:



	December 31, 2019								December 31, 2018
			Estimated Fair Value								Estimated Fair Value
(in thousands)	Notional Amount		Asset Derivative			Liability Derivative			Notional Amount		Asset Derivative			Liability Derivative
Non-hedging derivatives:
Financial institution counterparties:
Commercial loan/lease interest rate swaps	$	1,548,234	$	182		$	46,518		$	1,579,328	$	7,978		$	16,719
Commercial loan/lease interest rate caps	639,163		32			—			606,950		1,109			4
Foreign currency forward contracts	2,219		169			—			39,737		2,263			59
Customer counterparties:
Commercial loan/lease interest rate swaps	1,548,234		46,518			182			1,579,328		16,719			7,978
Commercial loan/lease interest rate caps	639,163		—			32			606,950		4			1,109
Foreign currency forward contracts	2,219		—			169			39,737		59			2,263
Economic hedging interest rate derivatives:
Loan purchase commitments	214,012		1,965			4			167,984		1,442			6
Forward sale commitments	2,654,653		—			4,587			1,928,527		—			21,005
Gross derivatives			48,866			51,492					29,574			49,143
Offsetting derivative assets/liabilities			(182		)	(182		)			(7,768		)	(7,768		)
Net derivatives included in the consolidated balance sheets			$	48,684		$	51,310				$	21,806		$	41,375

December 31, 2017 December 31, 2016
Estimated Fair Value Estimated Fair Value

Notional
Amount
Asset Derivative Liability Derivative
Notional
Amount
Asset Derivative Liability Derivative
Non-hedging derivatives:
Financial institution counterparties:
Commercial loan/lease interest rate swaps $ 1,393,764
$ 4,736
$ 15,482
$ 1,144,367
$ 1,754
$ 25,421
Commercial loan/lease interest rate caps 242,700
421
7
210,996
819
—
Foreign currency forward contracts 2,466
4
69
—
—
—
Customer counterparties:
Commercial loan/lease interest rate swaps 1,393,764
15,482
4,736
1,144,367
25,421
1,754
Commercial loan/lease interest rate caps 242,700
7
421
210,996
—
819
Foreign currency forward contracts 2,466
69
4
—
—
—
Economic hedging interest rate derivatives:
Loan purchase commitments 253,815
635
190
237,805
1,351
—
Forward sale commitments 1,086,224
—
1,103
1,218,000
10,287
—
Gross derivatives 21,354
22,012
39,632
27,994
Offsetting derivative assets/liabilities (4,635 ) (4,635 ) (1,754 ) (1,754 )
Net derivatives included in the consolidated balance sheets $ 16,719
$ 17,377
$ 37,878
$ 26,240

The weighted-average ~~receive~~received and ~~pay~~paid interest rates for interest rate swaps outstanding ~~at December 31, 2017 and 2016~~ were as follows:



	December 31, 2019 Weighted-Average Interest Rate				December 31, 2018 Weighted-Average Interest Rate
	Received		Paid		Received		Paid
Non-hedging interest rate swaps	3.94	%	3.26	%	4.24	%	4.20	%

December 31, 2017
Weighted-Average Interest Rate
December 31, 2016
Weighted-Average Interest Rate

Received Paid Received Paid
Non-hedging interest rate swaps 3.59 % 4.34 % 3.17 % 4.58 %

The weighted-average strike rate for outstanding interest rate caps was ~~2.40%~~3.29% at December 31, ~~2017~~2019 and ~~2.45%~~3.20% at December 31, ~~2016.~~2018.

Our credit exposure on derivative instruments is limited to the net favorable value and interest payments by each counterparty. In ~~such~~some cases collateral may be required from the counterparties involved if the net value of the derivative instruments ~~exceed~~exceeds a nominal ~~amount considered to be immaterial.~~amount. Our credit exposure associated with these instruments, net of any collateral pledged, was approximately ~~$16.7~~

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$48.7 million at December 31, ~~2017~~2019 and approximately ~~$37.9~~$18.7 million at December 31, ~~2016, which primarily relates to transactions with Bank customers.~~2018. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap and cap values, as well as for changes in the value of forward ~~sales~~sale commitments. At December 31, ~~2017,~~2019, we had ~~$15.2~~$56.6 million in cash collateral pledged for these derivatives, of which ~~$14.0~~$54.3 million was included in interest-bearing deposits in other banks and ~~$1.2~~$2.3 million was included in accrued interest receivable and other assets. At December 31, ~~2016,~~2018, we had ~~$24.8~~$25.3 million in cash collateral pledged for these derivatives, ~~all~~ of which $11.2 million was included in interest-bearing ~~deposits.~~deposits and $14.1 million was included in accrued interest receivable and other assets.

We also enter into credit risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are either a participant or a lead bank. The risk participation agreements entered into by us as a participant bank provide credit protection to the financial institution counterparty should the borrower fail to perform on its interest rate derivative contract with that financial institution. We ~~have 15~~are party to 12 risk participation agreements where we are a participant bank with a notional amount of ~~$157.1~~$146.7 million at December 31, ~~2017.~~2019, compared to 13 risk participation agreements having a notional amount of $149.1 million at December 31, 2018. The maximum estimated exposure to these agreements, assuming 100% default by all obligors, was approximately ~~$221,000~~$3.6 million at December 31, ~~2017.~~2019 and $1.5 million at December 31, 2018. The fair value of these exposures was insignificant to the consolidated financial ~~statements.~~statements at both December 31, 2019 and December 31, 2018. Risk participation agreements entered into by us as the lead bank

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provide credit protection to us should the borrower fail to perform on its interest rate derivative contract with us. We ~~have 10~~are party to 12 risk participation agreements where we are the lead bank ~~with~~having a notional amount of ~~$86.3~~$145.9 million at December 31, ~~2017.~~2019, compared to 9 agreements having a notional amount of $114.8 million at December 31, 2018.

~~(21) Stockholders’ Equity~~(19) Related Party Transactions

OnDuring 2019 and 2018, we have had transactions with our directors, executive officers and their affiliates and our employees. These transactions were made in the ordinary course of business and include extensions of credit and deposit transactions. The Bank had approximately $13.0 million in deposits from related parties, including directors, stockholders and their affiliates at December ~~2, 2016, we completed a sale of 3.45~~31, 2019 and $13.5 million shares of our common stock in a public offering. Net proceeds from the sale totaled $236.4 million. The additional equity was used for general corporate purposes, including repayment of $20.0 million of short-term debt and as additional capital to support continued loan growth.at December 31, 2018.

~~(22)~~(20) Parent Company Only

Summarized financial information for Texas Capital Bancshares, Inc. – Parent Company Only are as follows:

Balance Sheet



	December 31,
(in thousands)	2019			2018
Assets
Cash and cash equivalents	$	71,462		$	89,561
Loans held for investment (net of unearned income)	10,500			7,500
Investment in subsidiaries	2,878,330			2,534,341
Other assets	88,639			87,451
Total assets	$	3,048,931		$	2,718,853
Liabilities and Stockholders’ Equity
Other liabilities	$	1,768		$	1,471
Subordinated notes	108,715			108,614
Trust preferred subordinated debentures	113,406			113,406
Total liabilities	223,889			223,491
Preferred stock	150,000			150,000
Common stock	503			502
Additional paid-in capital	988,357			978,042
Retained earnings	1,677,240			1,366,308
Treasury stock	(8		)	(8		)
Accumulated other comprehensive income	8,950			518
Total stockholders’ equity	2,825,042			2,495,362
Total liabilities and stockholders’ equity	$	3,048,931		$	2,718,853

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Statement of Earnings



	Year ended December 31,
(in thousands)	2019			2018			2017
Interest on loans	$	3,401		$	3,398		$	3,271
Dividend income	10,400			10,400			10,400
Other income	151			142			108
Total income	13,952			13,940			13,779
Other non-interest income	17			7			13
Interest expense	12,342			12,031			10,908
Salaries and employee benefits	607			588			489
Legal and professional	3,093			2,020			1,700
Other non-interest expense	1,889			2,013			1,761
Total expense	17,931			16,652			14,858
Income (loss) before income taxes and equity in undistributed income of subsidiary	(3,962		)	(2,705		)	(1,066		)
Income tax expense (benefit)	(861		)	(587		)	(371		)
Income (loss) before equity in undistributed income of subsidiary	(3,101		)	(2,118		)	(695		)
Equity in undistributed income of subsidiary	323,783			300,758			194,118
Net income	320,682			298,640			193,423
Preferred stock dividends	9,750			9,750			9,750
Net income available to common stockholders	$	310,932		$	288,890		$	183,673

Statements of Cash Flows



	Year ended December 31,
(in thousands)	2019			2018			2017
Operating Activities
Net income	$	320,682		$	298,640		$	193,423
Adjustments to reconcile net income to net cash used in operating activities:
Equity in undistributed income of subsidiary	(323,783		)	(300,758		)	(194,118		)
Amortization	101			101			101
Increase in other assets	(1,187		)	(1,152		)	(739		)
Increase (decrease) in other liabilities	297			227			(40		)
Net cash used in operating activities	(3,890		)	(2,942		)	(1,373		)
Investing Activities
Net increase in loans held for investment	(3,000		)	—			(7,500		)
Investments in and advances to subsidiaries	—			(40,000		)	(55,000		)
Net cash used in investing activities	(3,000		)	(40,000		)	(62,500		)
Financing Activities
Proceeds from sale of stock related to stock-based awards	(1,459		)	(2,382		)	(2,241		)
Preferred dividends paid	(9,750		)	(9,750		)	(9,750		)
Net cash used in financing activities	(11,209		)	(12,132		)	(11,991		)
Net increase (decrease) in cash and cash equivalents	(18,099		)	(55,074		)	(75,864		)
Cash and cash equivalents at beginning of year	89,561			144,635			220,499
Cash and cash equivalents at end of year	$	71,462		$	89,561		$	144,635

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(21) Quarterly Financial Data (unaudited)

The tables below summarize our quarterly financial ~~information for the years December 31, 2017 and 2016 (in thousands except per share and average share data):~~information:


	2017 Selected Quarterly Financial Data								2019 Selected Quarterly Financial Data
	Fourth		Third		Second		First
(in thousands, except per share data)									Fourth		Third		Second		First
Interest income	$	249,519	$	237,643	$	208,191	$	183,946	$	337,757	$	355,101	$	346,893	$	325,561
Interest expense	38,870		33,282		25,232		20,587		89,372		102,933		103,340		89,947
Net interest income	210,649		204,361		182,959		163,359		248,385		252,168		243,553		235,614
Provision for credit losses	2,000		20,000		13,000		9,000		17,000		11,000		27,000		20,000
Net interest income after provision for credit losses	208,649		184,361		169,959		154,359		231,385		241,168		216,553		215,614
Non-interest income	19,374		19,003		18,769		17,110		17,761		20,301		24,364		30,014
Non-interest expense	133,138		114,830		111,814		106,094		158,690		149,370		141,561		140,378
Income before income taxes	94,885		88,534		76,914		65,375		90,456		112,099		99,356		105,250
Income tax expense	50,143		29,850		25,819		22,833		16,539		23,958		21,387		22,411
Net income	44,742		58,684		51,095		42,542		73,917		88,141		77,969		82,839
Preferred stock dividends	2,437		2,438		2,437		2,438		2,437		2,438		2,437		2,438
Net income available to common stockholders	$	42,305	$	56,246	$	48,658	$	40,104	$	71,480	$	85,703	$	75,532	$	80,401
Basic earnings per share:	$	0.85	$	1.13	$	0.98	$	0.81	$	1.42	$	1.70	$	1.50	$	1.60
Diluted earnings per share:	$	0.84	$	1.12	$	0.97	$	0.80	$	1.42	$	1.70	$	1.50	$	1.60
Average shares
Basic	49,630,000		49,607,000		49,577,000		49,536,000
Diluted	50,312,000		50,251,000		50,230,000		50,234,000



	2018 Selected Quarterly Financial Data
(in thousands, except per share data)	Fourth		Third		Second		First
Interest income	$	321,718	$	301,754	$	286,852	$	253,869
Interest expense	81,045		69,579		55,140		43,569
Net interest income	240,673		232,175		231,712		210,300
Provision for credit losses	35,000		13,000		27,000		12,000
Net interest income after provision for credit losses	205,673		219,175		204,712		198,300
Non-interest income	15,280		25,518		17,279		19,947
Non-interest expense	129,862		136,143		132,131		126,960
Income before income taxes	91,091		108,550		89,860		91,287
Income tax expense	19,200		22,998		18,424		19,342
Net income	71,891		85,552		71,436		71,945
Preferred stock dividends	2,437		2,438		2,437		2,438
Net income available to common stockholders	$	69,454	$	83,114	$	68,999	$	69,507
Basic earnings per share:	$	1.38	$	1.66	$	1.39	$	1.40
Diluted earnings per share:	$	1.38	$	1.65	$	1.38	$	1.38

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2016 Selected Quarterly Financial Data
Fourth Third Second First
Interest income $ 188,671
$ 182,492
$ 172,442
$ 159,803
Interest expense 17,448
15,753
15,373
15,020
Net interest income 171,223
166,739
157,069
144,783
Provision for credit losses 9,000
22,000
16,000
30,000
Net interest income after provision for credit losses 162,223
144,739
141,069
114,783
Non-interest income 18,835
16,716
13,932
11,297
Non-interest expense 106,523
94,799
94,255
86,820
Income before income taxes 74,535
66,656
60,746
39,260
Income tax expense 26,149
23,931
21,866
14,132
Net income 48,386
42,725
38,880
25,128
Preferred stock dividends 2,437
2,438
2,437
2,438
Net income available to common stockholders $ 45,949
$ 40,287
$ 36,443
$ 22,690
Basic earnings per share: $ 0.97
$ 0.88
$ 0.79
$ 0.49
Diluted earnings per share: $ 0.96
$ 0.87
$ 0.78
$ 0.49
Average shares
Basic 47,156,000
45,981,000
45,924,000
45,889,000
Diluted 47,760,000
46,510,000
46,438,000
46,354,000

~~(23) New Accounting Standards~~

~~ASU 2017-12,~~ ~~“Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities”~~ ("ASU 2017-12") amends the hedge accounting recognition and presentation requirements in ASC 815 to improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities to better align the entity’s financial reporting for hedging relationships with those risk management activities and to reduce the complexity of and simplify the application of hedge accounting. ASU 2017-12 will be effective for us on January 1, 2019 and is not expected to have a significant impact on our consolidated financial statements.

~~ASU 2017-09~~ ~~"Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting"~~ ("ASU 2017-09") clarifies when changes to the terms or conditions of a share-based payment must be accounted for as modifications. Under ASU 2017-09, an entity should account for changes to the terms or conditions of a share-based payment as a modification unless all of the following are met: 1) the fair value of the modified award is the same as the fair value of the original award immediately before modification, 2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before modification and 3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before modification. ASU 2017-09 will be effective for us on January 1, 2018, and is not expected to have a significant impact on our consolidated financial statements.

~~ASU 2017-04,~~ ~~“Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment”~~ ("ASU 2017-04") eliminates Step 2 from the goodwill impairment test which required entities to compute the implied fair value of goodwill. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 will be effective for us on January 1, 2020, with early adoption permitted for interim or annual impairment tests beginning in 2017, and is not expected to have a significant impact on our consolidated financial statements.

~~ASU 2016-15~~ ~~"Statement of Cash Flows (Topic 230)"~~ ("ASU 2016-15") is intended to reduce the diversity in practice around how certain transactions are classified within the statement of cash flows. ASU 2016-15 will be effective for us on January 1, 2018 and is not expected to have a significant impact on our consolidated financial statements.

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~~ASU 2016-13~~ ~~"Financial Instruments - Credit Losses (Topic 326)"~~ ("ASU 2016-13") requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. ASU 2016-13 will be effective for us on January 1, 2020. We are evaluating the impact adoption of ASU 2016-13 will have on our consolidated financial statements and disclosures. While we are currently unable to reasonably estimate the impact of adopting ASU 2016-13, we expect that the impact of adoption could be significantly influenced by the composition, characteristics and quality of our loan portfolio as well as the prevailing economic conditions and forecasts as of the adoption date. As part of our evaluation process, we have established a steering committee and working group that includes individuals from various functional areas to assess processes, portfolio segmentation, systems requirements and needed resources to implement this new accounting standard.

~~ASU 2016-02 "Leases (Topic 842)~~" ("ASU 2016-02") requires that lessees and lessors recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. ASU 2016-02 will be effective for us on January 1, 2019. ASU 2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of the earliest period presented with the option to elect certain practical expedients. We are currently evaluating a third party software solution to assist with the accounting under the new standard. Our operating leases relate primarily to office space and bank branches. We expect recorded assets and liabilities to increase upon adoption of the standard as it relates to operating leases in which we are the lessee. See Note 17 - Commitments and Contingencies for a summary of minimum future lease payments under operating leases as of December 31, 2017.

~~ASU 2016-01,~~ ~~"Financial Instruments - Overall (Subtopic 825-10): Recognition of Financial Assets and Financial Liabilities," ("ASU 2016-01")~~ makes targeted amendments to the guidance for recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 will be effective for us on January 1, 2018. ASU 2016-01 requires equity investments, other than equity method investments, to be measured at fair value with changes in fair value recognized in net income. At adoption, any cumulative change in the fair value of these equity securities previously recognized in accumulated other comprehensive income will be recorded as an adjustment to the opening balance of retained earnings, and any further changes to their fair value will be recorded in net income. We do not expect the new guidance to have a material impact on our consolidated financial statements. ASU 2016-01 also emphasizes the existing requirement to use exit prices to measure fair value for disclosure purposes and clarifies that entities should not make use of practicability exception in determining the fair value of loans. Accordingly, we will refine the calculation used to determine the disclosed fair value of our loans held for investment portfolio as part of adopting the standard.

~~ASU 2014-09 "Revenue from Contracts with Customers (Topic 606)"~~ ("ASU 2014-09") implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 establishes a five-step model which entities must follow to recognize revenue and removes inconsistencies and weaknesses in existing guidance. The guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, which comprises a significant portion of our revenue stream. We will adopt ASU 2014-09 effective January 1, 2018 and expect adoption to have no material effect on how we recognize revenue. We also anticipate adoption to have no material impact to our consolidated financial statements and disclosures.

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ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL ~~DISCLOSURE~~DISCLOSURES

None.


ITEM 9A.	CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the supervision and participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based upon that evaluation, we have concluded that, as of the end of such period, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and were effective in ensuring that information

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required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to the Company's management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial ~~reporting.~~reporting, except the following:

During the three months ended March 31, 2019, we converted to a new loan servicing system to replace the existing platform that serviced our $17.1 billion loans held for investment portfolio, excluding mortgage finance loans. The new system was subject to various testing and review procedures before, during and after implementation. As a result of this implementation, we made changes to our processes and procedures which, in turn, resulted in changes to our internal control over financial reporting, including the implementation of additional controls.

Management’s Report on Internal Control over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles.

As of December 31, ~~2017,~~2019, 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 (2013),” 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, ~~2017.~~2019.

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, ~~2017.~~2019. The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, ~~2017,~~2019, is included in this Item under the heading “Report of Independent Registered Public Accounting Firm.”

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Report of Ernst & Young LLP, Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Texas Capital Bancshares, Inc.

Opinion on Internal Control over Financial Reporting

We have audited Texas Capital Bancshares, Inc.’s internal control over financial reporting as of December 31, ~~2017,~~2019, based on ~~the~~ criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Texas Capital Bancshares, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2017,~~2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of ~~Texas Capital Bancshares, Inc.~~the Company as of December 31, ~~2017~~2019 and ~~2016, and~~2018, the related consolidated statements of income and other comprehensive income, ~~stockholders'~~shareholders’ equity and cash flows for each of the three years in the period ended December 31, ~~2017,~~2019, and the related notes and our report dated February ~~14, 2018~~12, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our ~~audits~~audit in accordance with the standards of the PCAOB. 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.

Definition and Limitations of Internal Control over Financial Reporting

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.

Dallas, ~~Texas~~TX

February ~~14, 2018~~12, 2020

98101

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ITEM 9B.	OTHER INFORMATION

None.


ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

~~Information~~The information required by this item ~~is set forth in our definitive proxy materials regarding our annual meeting~~relating to Texas Capital Bancshares, Inc.’s directors, executive officers, code of ~~stockholders to be held April 17, 2018, which proxy materials~~ethics, audit committee and audit committee financial experts of the Company and Section 16(a) beneficial ownership reporting compliance will be included in an amendment to this Annual Report on Form 10-K/A filed ~~with~~within 120 days after the ~~SEC no later than March 8, 2018.~~end of our 2019 fiscal year.


ITEM 11.	EXECUTIVE COMPENSATION

~~Information~~The information required by this item ~~is set forth in~~relating to compensation of our ~~definitive proxy materials regarding our annual meeting of stockholders to be held April 17, 2018, which proxy materials~~directors and executive officers will be included in an amendment to this Annual Report on Form 10-K/A filed ~~with~~within 120 days after the ~~SEC no later than March 8, 2018.~~end of our 2019 fiscal year.


ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

~~Information~~The information required by this item ~~is set forth in our definitive proxy materials regarding our annual meeting~~relating to security ownership of ~~stockholders to be held April 17, 2018, which proxy materials~~certain beneficial owners and management and securities authorized for issuance under equity compensation plans will be included in an amendment to this Annual Report on Form 10-K/A filed ~~with~~within 120 days after the ~~SEC no later than March 8, 2018.~~end of our 2019 fiscal year.


ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

~~Information~~The information required by this item ~~is set forth in our definitive proxy materials regarding our annual meeting~~relating to security ownership of ~~stockholders to be held April 17, 2018, which proxy materials~~certain relationships and related transactions and director independence will be included in an amendment to this Annual Report on Form 10-K/A filed ~~with~~within 120 days after the ~~SEC no later than March 8, 2018.~~end of our 2019 fiscal year.


ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES

~~Information~~The information required by this item ~~is set forth in our definitive proxy materials regarding our annual meeting of stockholders~~relating to ~~be held April 17, 2018, which proxy materials~~principal accountant fees and services will be included in an amendment to this Annual Report on Form 10-K/A filed ~~with~~within 120 days after the ~~SEC no later than March 8, 2018.~~end of our 2019 fiscal year.


ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) Documents filed as part of this report

(1) All financial statements

Independent Registered Public Accounting Firm’s Report of Ernst & Young LLP

(2) All financial statements required by Item 8

Independent Registered Public Accounting Firm’s Report of Ernst & Young LLP

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(3) Exhibits



2.1	Agreement and Plan of Merger, dated December 9, 2019, by and between Texas Capital Bancshares, Inc. and Independent Bank Group, Inc., incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed December 13, 2019
3.1	Certificate of Incorporation, which is incorporated by reference to Exhibit 3.1 to our registration statement on Form 10 dated August 24, 2000
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, 2000
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, 2000
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, 2000
3.5	~~Amended~~Certificate of Amendment of Certificate of Incorporation, which is incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q dated October 30, 2008
3.6	Amendment to amended and Restated Bylaws of Texas Capital Bancshares, Inc. which is incorporated by reference to Exhibit ~~3.5 to our registration statement on Form 10 dated August 24, 2000~~
~~3.6~~	~~First Amendment to Amended and Restated Bylaws of Texas Capital Bancshares, Inc. which is incorporated by reference to Exhibit 5.3~~3.1 to our Current Report on Form 8-K dated July ~~18, 2007~~11, 2019
3.7	Certificate of Designation of 6.50% Non-Cumulative Perpetual Preferred Stock, Series A, which is incorporated by reference to Exhibit 4.1 to our Current Report on form 8-K dated March 28, 2013
3.8	Form of Preferred Stock Certificate for 6.50% Non-Cumulative Perpetual Preferred Stock, Series A, which is incorporated by reference to Exhibit 4.2 to our Current report on Form 8-K dated March 28, 2013
4.1	Description of our common stock and 6.5% Non-Cumulative Perpetual Preferred Stock, Series A, which are registered pursuant to Section 12 of the Securities Exchange Act of 1934*
4.2	Placement Agreement by and between Texas Capital Bancshares Statutory Trust I and SunTrust Capital Markets, Inc., which is incorporated by reference to Exhibit 1.1 to our Current Report on Form 8-K dated December 4, 2002
~~4.2~~4.3	Certificate of Trust of Texas Capital Bancshares Statutory Trust I, dated November 12, 2002 which is incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K dated December 4, 2002
~~4.3~~4.4	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 Exhibit 3.3 to our Current Report on Form 8- K dated December 4, 2002
~~4.4~~4.5	Indenture dated November 19, 2002 which is incorporated by reference to our Current Report on Form 8-K dated December 4, 2002
~~4.5~~4.6	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 Exhibit 4.2 to our Current Report on Form 8-K dated December 4, 2002
~~4.6~~4.7	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 Exhibit 1.1 to our Current Report Form 8-K dated June 11, 2003
~~4.7~~4.8	Certificate of Trust of Texas Capital Statutory Trust II, which is incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K dated June 11, 2003
~~4.8~~4.9	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 Exhibit 3.3 to our Current Report on Form 8-K dated June 11, 2003
~~4.9~~4.1	Indenture between Texas Capital Bancshares, Inc. and Wilmington Trust Company, dated April 10, 2003, which is incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated June 11, 2003
~~4.10~~4.11	Guarantee Agreement between Texas Capital Bancshares, Inc. and Wilmington Trust Company, dated April 10, 2003, which is incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K dated June 11, 2003
~~4.11~~4.12	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 Exhibit 10.1 to our Current Report on Form 8-K dated October 13, 2005
~~4.12~~4.13	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 Exhibit 10.2 to our Current Report on Form 8-K dated October 13, 2005

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~~4.13~~

4.14	Guarantee Agreement between Texas Capital Bancshares, Inc. and Wilmington Trust Company, dated as of October 6, 2005, which is incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K dated October 13, 2005

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~~4.14~~4.15	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 Exhibit 10.1 to our Current Report on Form 8-K dated May 3, 2006
~~4.15~~4.16	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 Exhibit 10.2 to our Current Report on Form 8-K dated May 3, 2006
~~4.16~~4.17	Guarantee Agreement between Texas Capital Bancshares, Inc. and Wilmington Trust Company, dated as of April 28, 2006, which is incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K dated May 3, 2006
~~4.17~~4.18	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 Exhibit 10.1 to our Current Report on Form 8-K dated October 5, 2006
~~4.18~~4.19	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 Exhibit 10.2 to our Current Report on Form 8-K dated October 5, 2006
~~4.19~~4.20	Guarantee Agreement between Texas Capital Bancshares, Inc. and Wilmington Trust Company, dated as of September 29, 2006, which is incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K dated October 5, 2006
~~4.20~~4.21	Subordinated Indenture between Texas Capital Bancshares, Inc. and U.S. Bank National Association, as Trustee, dated September 21, 2012, which is incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated September 18, 2012
~~4.21~~4.22	Issuing and Paying Agency Agreement, dated January 31, 2014, between Texas Capital Bank, N.A., as Issuer, and U.S. Bank National Association, as Agent, which is incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated January 31, 2014.
~~4.22~~4.23	Form of Global 5.25% Subordinated Note due 2026, which is incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K dated January 31, 2014.
10.1	Amended and Restated Executive Employment Agreement between C. Keith Cargill and Texas Capital Bancshares, Inc. dated December 18, 2014, which is incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated December 18, 2014+
10.2	Form of Amended and Restated Executive Employment Agreement for executive officers of Texas Capital Bancshares, Inc., which is incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K dated December 18, 2014+
10.3	Form of Indemnity Agreement for directors and officers of Texas Capital Bancshares, Inc., which is incorporated by reference to Exhibit 10.14 to our Annual Report on Form 10-K dated February 21, 2014+
10.4	Amended and Restated Executive Employment Agreement dated May 30, 2017, between Texas Capital Bancshares, Inc. ~~2005 Long-Term Incentive Plan,~~and Julie Anderson, which is incorporated by reference to Exhibit 10.2 to our ~~registration statement~~Current Report on Form ~~S-8~~8-K dated June ~~3, 2005+~~1, 2017+
10.5	Retirement Transition and Award Agreement effective August 14, 2018 between Texas Capital Bancshares, Inc. and John Hudgens, which is incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated August 6, 2018+
10.6	Retirement Transition effective July 29, 2019 between Texas Capital Bancshares, Inc. and Vince Ackerson, which is incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated July 29, 2019+
10.7	Form of Executive Employment Agreement for executive officers of Texas Capital Bancshares, Inc.+*
10.8	Texas Capital Bancshares, Inc. 2006 Employee Stock Purchase Plan, which is incorporated by reference to Exhibit 10.1 to our ~~registration statement on~~ Form ~~S-8~~8-K dated February 3,2, 2006+
~~10.6~~10.9	Texas Capital Bancshares, Inc. 2010 Long-Term Incentive Plan, which is incorporated by reference to Exhibit A to our ~~registration statement~~Definitive Proxy Statement on ~~Form S-8~~Schedule 14A dated ~~May 19,~~April 8, 2010+
~~10.7~~10.10	Texas Capital Bancshares, Inc. 2015 Long-Term Incentive Plan, which is incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated May 21, 2015+
~~10.8~~10.11	~~Form of Restricted Stock Unit Award Agreement under the~~ Texas Capital Bancshares, Inc. ~~2010 Long-Term Incentive~~Nonqualified Deferred Compensation Plan, which is incorporated by reference to Exhibit 10.19 to our Annual Report on Form 10-K dated February ~~21, 2014+~~17, 2017+
~~10.9~~10.12	Texas Capital Bancshares, Inc. Amended and Restated 2015 Long-Term Incentive Plan, which is incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q dated April 19, 2018+

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10.13	Form of Stock Appreciation Rights Agreement under the Texas Capital Bancshares, Inc. 2010 Long-Term Incentive Plan, which is incorporated by reference to Exhibit 10.20 to our Annual Report on Form 10-K dated February 21, 2014+
~~10.10~~10.14	Form of Performance Award Agreement under the Texas Capital Bancshares, Inc. 2010 Long-Term Incentive Plan, which is incorporated by reference to Exhibit 10.21 to our Annual Report on Form 10-K dated February 21, 2014+

~~101~~

~~Table of Contents~~



~~10.11~~	Form of Restricted Stock Unit Award Agreement for directors under the Texas Capital Bancshares, Inc. 2015 Long-Term Incentive Plan, which is incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q dated July 23, 2015+
~~10.12~~	Form of Restricted Stock Unit Award Agreement for executive officers under the Texas Capital Bancshares, Inc. 2015 Long-Term Incentive Plan, which is incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q dated July 23, 2015+
~~10.13~~	Special Retention Restricted Stock Unit Award Agreement between Julie Anderson and Texas Capital Bancshares, Inc. dated May 17, 2016, which is incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q dated July 21, 2016+
~~10.14~~	Form of Performance Award Agreement for Executive Officers under the Texas Capital Bancshares, Inc. 2015 Long-Term Incentive Plan, which is incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q dated October 20, 2016+
10.15	~~Texas Capital Bancshares, Inc. Nonqualified Deferred Compensation Plan, which is incorporated by reference to Exhibit 10.19 to our Annual Report on Form 10-K dated February 17, 2017+~~
~~10.16~~	Form of 2017 Performance Award Agreement for Executive Officers, pursuant to the Texas Capital Bancshares, Inc. 2015 Long-Term Incentive Plan, which is incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q dated April 20, 2017+
10.16	Form of 2018 Performance Award Agreement for Executive Officers pursuant to the Texas Capital Bancshares, Inc. 2015 Long-Term Incentive Plan, which is incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q dated April 19, 2018+
10.17	~~Retirement Transition and~~Form of 2018 Restricted Stock Unit Award Agreement ~~dated May 30, 2017, between~~for Non-Employee Directors pursuant to the Texas Capital Bancshares, Inc. Amended and ~~Peter Bartholow,~~Restated 2015 Long-Term Incentive Plan, which is incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q dated April 19, 2018+
10.18	Form of 2019 Performance Award Agreement for Executive Officers pursuant to the Texas Capital Bancshares, Inc. 2015 Long-Term Incentive Plan, which is incorporated by reference to Exhibit 10.1 to our ~~Current~~Quarterly Report on Form ~~8-K~~10-Q dated ~~June 1, 2017+~~
~~10.18~~	Amended and Restated Executive Employment Agreement dated May 30, 2017, between Texas Capital Bancshares, Inc. and Julie Anderson, which is incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K dated June 1, 2017+April 18, 2019+



21	Subsidiaries of the Registrant*
23.1	Consent of Ernst & Young LLPLLP, Independent Registered Public Accounting Firm
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**
101.INS	XBRL Instance Document*
101.SCH	XBRL Taxonomy Extension Schema Document*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB	XBRL Taxonomy Extension Label Linkbase Document*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document*


*	Filed herewith


**	Furnished herewith


+	Management contract or compensatory plan arrangement

~~102~~105

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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.



Date:	February ~~14, 2018~~12, 2020	TEXAS CAPITAL BANCSHARES, INC.

		By:	/S/ C. KEITH CARGILL
			C. Keith Cargill President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



Date:	February ~~14, 2018~~12, 2020	/S/ LARRY L. HELM
		Larry L. Helm Chairman of the Board and Director

Date:	February ~~14, 2018~~12, 2020	/S/ JULIE ANDERSON
		Julie Anderson Chief Financial Officer (principal financial ~~and~~officer)

Date:	February 12, 2020	/S/ ELLEN DETRICH
		Ellen Detrich Controller (principal accounting officer)

Date:	February ~~14, 2018~~12, 2020	/S/ JONATHAN E. BALIFF
		Jonathan E. Baliff Director

Date:	February ~~14, 2018~~12, 2020	/S/ JAMES H. BROWNING
		James H. Browning Director

Date:	February ~~14, 2018~~	~~/S/ PRESTON M. GEREN III~~
		~~Preston M. Geren III~~ ~~Director~~

~~Date:~~	~~February 14, 2018~~12, 2020	/S/ DAVID S. HUNTLEY
		David S. Huntley Director

Date:	February ~~14, 2018~~12, 2020	/S/ CHARLES S. HYLE
		Charles S. Hyle Director



Date:	February ~~14, 2018~~12, 2020	/S/ ELYSIA H. RAGUSA
		Elysia H. Ragusa Director

Date:	February ~~14, 2018~~12, 2020	/S/ STEVEN P. ROSENBERG
		Steven P. Rosenberg Director

Date:	February ~~14, 2018~~12, 2020	/S/ ROBERT W. STALLINGS
		Robert W. Stallings Director

Date:	February ~~14, 2018~~12, 2020	/S/ DALE W. TREMBLAY
		Dale W. Tremblay Director

Date:	February ~~14, 2018~~12, 2020	/S/ IAN J. TURPIN
		Ian J. Turpin Director

Date:	February ~~14, 2018~~12, 2020	/S/ PATRICIA A. WATSON
		Patricia A. Watson Director

~~103~~106



	Price Per Share
Quarter Ended	High	Low
March 31, 2016	49.88	29.78
June 30, 2016	51.84	34.54
September 30, 2016	55.25	42.36
December 31, 2016	81.25	54.20

March 31, 2017	93.35	75.80
June 30, 2017	84.35	70.65
September 30, 2017	87.50	69.65
December 31, 2017	95.20	77.65



	12/31/2012		12/31/2013		12/31/2014		12/31/2015		12/31/2016		12/31/2017
Texas Capital
Bancshares, Inc.	$	100.00	$	138.78	$	121.22	$	110.26	$	174.92	$	198.35
Russell 2000
Index (RTY)	100.00		136.65		141.62		133.77		159.59		180.42
Nasdaq Bank
Index (CBNK)	100.00		137.95		142.12		151.67		204.03		211.49



	Amount		Percent of Total Loans
Collateral type:
Business assets	$	6,360,634	30.6	%
Real property	5,960,785		28.7	%
Mortgage finance loans	5,308,160		25.6	%
Energy	920,346		4.4	%
Municipal tax- and revenue-secured	715,589		3.4	%
Unsecured	649,472		3.1	%
Highly liquid assets	492,527		2.4	%
Other assets	302,041		1.5	%
Rolling stock	51,712		0.2	%
U. S. Government guaranty	11,077		0.1	%
Total loans held for investment	$	20,772,343	100.0	%



	2017 Average Balance				2016 Average Balance
	Committed		Outstanding		Committed		Outstanding
$30.0 million and greater	$	44,195	$	23,953	$	42,820	$	22,370
$20.0 million to $29.9 million	23,312		14,355		23,472		14,921



	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days(1)		Total Past Due		Non-accrual		Current		Total
Commercial
Business loans	$	12,346	$	13,029	$	6,984	$	32,359	$	34,535	$	7,992,918	$	8,059,812
Energy	1,100		—		—		1,100		65,196		1,063,703		1,129,999
Mortgage finance loans	—		—		—		—		—		5,308,160		5,308,160
Construction
Market risk	239		—		—		239		—		2,098,446		2,098,685
Commercial	—		—		—		—		—		35,786		35,786
Secured by 1-4 family	1,635		—		—		1,635		—		30,102		31,737
Real estate
Market risk	1,724		295		—		2,019		—		2,681,527		2,683,546
Commercial	—		—		—		—		1,595		839,787		841,382
Secured by 1-4 family	174		139		1,392		1,705		118		267,826		269,649
Consumer	100		74		—		174		—		48,510		48,684
Equipment leases	636		16		53		705		—		264,198		264,903
Total loans held for investment	$	17,954	$	13,553	$	8,429	$	39,936	$	101,444	$	20,630,963	$	20,772,343



December 31, 2017
	Number of Contracts	Pre-Restructuring Outstanding Recorded Investment		Post-Restructuring Outstanding Recorded Investment
Commercial business loans	3	$	7,527	$	7,640
Energy loans	1	$	1,070	$	—
Total new restructured loans in 2017	4	$	8,597	$	7,640



	Within One Year		After One But Within Three Years		After Three But Within Five Years		After Five Years		Total
Federal funds purchased and customer repurchase agreements	$	365,040	$	—	$	—	$	—	$	365,040
FHLB borrowings	2,800,000		—		—		—		2,800,000
Subordinated notes	—		—		—		281,406		281,406
Trust preferred subordinated debentures	—		—		—		113,406		113,406
Total borrowings	$	3,165,040	$	—	$	—	$	394,812	$	3,559,852



	December 31, 2017					December 31, 2016					December 31, 2015
	SARs			Weighted Average Exercise Price		SARs			Weighted Average Exercise Price		SARs			Weighted Average Exercise Price
SARs outstanding at beginning of year	125,863			$	31.68	360,544			$	25.73	445,009			$	24.83
SARs granted	—			—		—			—		—			—
SARs exercised	(51,500		)	33.94		(234,681		)	22.54		(84,465		)	20.97
SARs forfeited	—			—		—			—		—			—
SARs outstanding at year-end	74,363			$	30.12	125,863			$	31.68	360,544			$	25.73
SARs vested and exercisable at year-end	60,463			$	26.02	94,463			$	26.73	307,144			$	22.49
Weighted average remaining contractual life of SARs vested				2.82					3.62					2.36
Compensation expense	$	265,000				$	307,000				$	367,000
Unrecognized compensation expense	$	127,000				$	392,000				$	699,000
Weighted average period over which unrecognized compensation expense is expected to be recognized (in years)				0.75					1.52					2.40
Fair value of shares vested during the year	$	294,000				$	337,000				$	436,000
Weighted average remaining contractual life of SARs currently outstanding (in years)				3.35					4.32					3.08
Intrinsic value of SARs exercised	$	3,802,000				$	4,881,000				$	8,291,000



	December 31, 2017					December 31, 2016
	Number of Shares			Weighted Average Grant Date Fair Value		Number of Shares		Weighted Average Grant Date Fair Value
RSAs with restrictions outstanding at beginning of year	1,472			$	33.97	—		$	—
RSAs granted	641			78.00		1,472		33.97
RSAs lapsed restrictions	(491		)	33.97		—		—
RSAs with restrictions outstanding at year-end	1,622			$	51.37	1,472		$	33.97
Compensation expense	$	24,000				$	15,000
Unrecognized compensation expense	$	61,000				$	35,000
Weighted average period over which unrecognized compensation expense is expected to recognized (in years)				2.10				2.10
Weighted average remaining contractual life of RSUs currently outstanding				8.69				9.13




Year ending December 31,	Minimum Payments
2018	$	16,446
2019	16,137
2020	15,286
2021	12,805
2022	12,138
2023 and thereafter	17,299
	$	90,111



	December 31, 2017 Weighted-Average Interest Rate				December 31, 2016 Weighted-Average Interest Rate
	Received		Paid		Received		Paid
Non-hedging interest rate swaps	3.59	%	4.34	%	3.17	%	4.58	%



	2016 Selected Quarterly Financial Data
	Fourth		Third		Second		First
Interest income	$	188,671	$	182,492	$	172,442	$	159,803
Interest expense	17,448		15,753		15,373		15,020
Net interest income	171,223		166,739		157,069		144,783
Provision for credit losses	9,000		22,000		16,000		30,000
Net interest income after provision for credit losses	162,223		144,739		141,069		114,783
Non-interest income	18,835		16,716		13,932		11,297
Non-interest expense	106,523		94,799		94,255		86,820
Income before income taxes	74,535		66,656		60,746		39,260
Income tax expense	26,149		23,931		21,866		14,132
Net income	48,386		42,725		38,880		25,128
Preferred stock dividends	2,437		2,438		2,437		2,438
Net income available to common stockholders	$	45,949	$	40,287	$	36,443	$	22,690
Basic earnings per share:	$	0.97	$	0.88	$	0.79	$	0.49
Diluted earnings per share:	$	0.96	$	0.87	$	0.78	$	0.49
Average shares
Basic	47,156,000		45,981,000		45,924,000		45,889,000
Diluted	47,760,000		46,510,000		46,438,000		46,354,000