UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K10-K/A
(Amendment No.1)
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| ☒ | Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the fiscal year ended December 31, 2019
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| ☐ | 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)
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| Delaware | | 75-2679109 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
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| 2000 McKinney Avenue |
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| Suite 700 | |
| | Dallas | TX | USA | | | 75201 |
| (Address of principal executive offices) | (Zip Code) |
214/932-6600
(Registrant’s telephone number, including area code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered under Section 12(b) of the Exchange Act:
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| 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
Indicate by check mark if the issuer is a well-known seasoned issuer pursuant to Section 13 or Section 15(d)as defined in Rule 405 of the Securities Act. Yes ☒ 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 ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): |
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| Large Accelerated Filer | x | | Accelerated Filer | | ☐ | | |
| Non-Accelerated Filer | ☐ | | Smaller Reporting Company | | ☐ | | |
| Emerging Growth 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 ☒
As of June 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 $3,070,019,000. There were 50,345,62750,397,277 shares of the registrant’s common stock outstanding on February 11,28, 2020.
TABLE OF CONTENTSEXPLANATORY NOTE
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PART I |
Item 1. | | |
Item 1A. | | |
Item 1B. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
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PART II |
Item 5. | | |
Item 6. | | |
Item 7. | | |
Item 7A. | | |
Item 8. | | |
Item 9. | | |
Item 9A. | | |
Item 9B. | | |
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PART III |
Item 10. | | |
Item 11. | | |
Item 12. | | |
Item 13. | | |
Item 14. | | |
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PART IV |
Item 15. | | |
Background
The disclosures set forth in this item are qualifiedThis Amendment No. 1 on Form 10-K/A (the "Form 10-K/A") is being filed by Item 1A. Risk Factors and the section captioned “Forward-Looking 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,” “TCBI”(the "Company" or "TCBI") in order to disclose information required by Items 10, 11, 12, 13 and 14 of Part III, which was previously omitted in reliance on Instruction G to Form 10-K from its Annual Report on Form 10-K (the "Form 10-K") for the “Company”), a Delaware corporation organized in 1996, isyear ended December 31, 2019, filed with the parent of Texas Capital Bank, National AssociationSecurities and Exchange Commission (the “Bank”"SEC"). on February 12, 2020. The Company is a registered bank holding company and a financial holding company.
The Bank is headquarterednot filing its definitive proxy statement for its 2020 annual stockholder meeting within 120 days of the end of its most recent fiscal year as required under Instruction G to Form 10-K in Dallas, with primary banking officesorder to incorporate information contained in Austin, Dallas, Fort Worth, Houston and San Antonio, the five largest metropolitan areas of Texas. Substantially all of our business activities are conducted throughdefinitive proxy statement into 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,Form 10-K. This Form 10-K/A discloses such information. In connection with the majorityfiling of this Form 10-K/A and pursuant to the rules of the SEC, we are including with this Form 10-K/A certain certifications with respect to this filing by our loans held for investment, excluding mortgage finance loansprincipal executive officer and principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002; accordingly, Item 15 of Part IV has also been amended to reflect the filing of these new certifications.
This Form 10-K/A is limited in scope to the items identified above and should be read in conjunction with the Form 10-K and our other national linesfilings with the SEC.
This Form 10-K/A does not reflect events occurring after the filing of business, beingthe Form 10-K or modify or update those disclosures affected by subsequent events. Consequently, all other information is unchanged and reflects the disclosures made to businesses headquartered or with operationsat the time of the filing of the Form 10-K.
As disclosed in Texas. Our national lines Part I, Item 1. Business of business provide specialized lending products to businesses throughout the United States. We have benefitted fromForm 10-K, in 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.
section captioned "Merger with Independent Bank Group, Inc.
On," on December 9, 2019, the Company entered into an Agreementagreement and Planplan 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 "Merger"). 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 mergerMerger 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 executive compensation disclosures under Item 11 in this Form 10-K/A are presented without regard to the terms of the merger agreement, at the effective timeMerger and related agreements which will effect changes in certain elements of the merger, each share of common stock, par value $0.01 per share, of TCBI outstanding immediately prior toCompany’s executive compensation when 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.transaction closes.
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
TABLE OF CONTENTS
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| PART III |
| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
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| PART IV |
| Item 15. | | |
| Item 16. | | |
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| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Information about our Executive Officer, will serveOfficers
Our named executive officers ("NEOs") for 2019, and the positions held by them as Special Advisor toof the Chairman, date of this Form 10-K/A, are:
C. Keith Cargill, President and Chief Executive Officer ("CEO") of the surviving entityCompany and surviving bank. The boardPresident and CEO of directorsTexas Capital Bank. Mr. Cargill, age 67, has served as President and CEO of IBTX following the merger will be comprised of 13 directors, of which seven will be former membersCompany and as a member of the board of directors since January 1, 2014. He has served as CEO of TCBIthe Bank since June 2013, after becoming President of the Bank in October 2008. He served as Chief Lending Officer of the Bank since its inception in December 1998 through July 2013. Mr. Cargill has more than 30 years of banking experience in the North Texas area.
Julie L. Anderson, Chief Financial Officer ("CFO") and six will beSecretary of the Company and CFO of Texas Capital Bank. Ms. Anderson, age 51, has served as the Company’s CFO since July 2017, and served as Chief Accounting Officer from December 2003 through August 2018. She assumed the role of CFO of Texas Capital Bank in July 2013 and the role of Corporate Secretary in May 2014. She served as the Company’s Controller from February 1999 to June 2017.
Vince A. Ackerson, Vice Chairman of Texas Capital Bank. Mr. Ackerson, age 63, has served as Vice Chairman of Texas Capital Bank since August 2019. Prior to holding this position, he served as Texas President and Chief Lending Officer of Texas Capital Bank from July 2013 to August 2019. He served as Dallas Regional President from October 2008 to July 2013 and as Executive Vice President of Dallas Corporate Banking since the Bank’s inception in December 1998 through July 2013.
John G. Turpen, Chief Risk Officer of the Company andChief Risk Officer of Texas Capital Bank. Mr. Turpen, age 51, assumed the role of Chief Risk Officer of Texas Capital Bank in September 2018 and assumed the role of Chief Risk Officer of the Company on January 1, 2019. From April 2016 to September 2018, Mr. Turpen served as chief risk officer for corporate and commercial banking at U.S. Bancorp. Mr. Turpen joined U.S. Bancorp in 2009 after holding increasingly senior positions in credit, risk and strategic planning at HSBC and Wells Fargo. Mr. Turpen’s banking career spans more than 20 years.
Board of Directors
The table below sets forth information about the members of the Company's board of directors including their ages.
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| Name | Age | Position |
| Larry L. Helm | 72 | Director; Chairman |
| C. Keith Cargill | 67 | Director; President and Chief Executive Officer |
| Jonathan E. Baliff | 56 | Director |
| James H. Browning | 70 | Director |
| David S. Huntley | 61 | Director |
| Charles S. Hyle | 69 | Director |
| Elysia Holt Ragusa | 68 | Director |
| Steven P. Rosenberg | 61 | Director |
| Robert W. Stallings | 70 | Director |
| Dale W. Tremblay | 61 | Director |
| Ian J. Turpin | 75 | Director |
| Patricia A. Watson | 54 | Director |
Larry L. Helm has served as a director since January 2006 and was elected chairman of the board in May 2012. He currently serves as a senior advisor for Accelerate Resources, LLC, a company engaged in the acquisition of non-operated oil and natural gas properties and mineral interests located in the Permian Basin and other areas, a position he has held since August 2017. Prior to joining Accelerate Resources, he served as Executive Vice President of Corporate Affairs at Halcón Resources from January 2013 to March 2016. Before Halcón Resources, he served as Executive Vice President, Finance and Administration, for Petrohawk Energy Corporation from June 2004 until its sale to BHP Billiton in July 2011. He served as Vice President-Transition with BHP Billiton prior to joining Halcón Resources in 2012. Prior to joining Petrohawk, Mr. Helm spent 14 years with Bank One, most notably as Chairman and CEO of Bank One Dallas and head of U.S. Middle Market Banking.
As a former membersbanking executive, Mr. Helm has extensive knowledge about our industry. His executive roles in energy companies and experience managing energy and commercial lending groups give him important insights into the Company’s lending activities and make him well qualified to serve as chairman of our board of directors and a member of the Risk Committee.
C. Keith Cargill has served as President and CEO of the Company and as a member of the board of directors of IBTX.
The merger agreement contains customary representations and warranties from both TCBI and IBTX, and each partysince January 1, 2014. He has agreed to customary covenants, including, among others, covenants relating to (1) the conduct of its business during the interim period between the executionserved as CEO of the merger agreement and the effective timeBank since June 2013, after becoming President 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 issuedBank 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 qualifyOctober 2008. He served 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 for the past five years:
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| | December 31, |
| (in thousands) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Loans held for sale | $ | 2,577,134 |
| | $ | 1,969,474 |
| | $ | 1,011,004 |
| | $ | 968,929 |
| | $ | 86,075 |
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| Loans held for investment, mortgage finance | 8,169,849 |
| | 5,877,524 |
| | 5,308,160 |
| | 4,497,338 |
| | 4,966,276 |
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| Loans held for investment, net | 16,476,413 |
| | 16,690,550 |
| | 15,366,252 |
| | 13,001,011 |
| | 11,745,674 |
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| Assets | 32,548,069 |
| | 28,257,767 |
| | 25,075,645 |
| | 21,697,134 |
| | 18,903,821 |
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| Demand deposits | 9,438,459 |
| | 7,317,161 |
| | 7,812,660 |
| | 7,994,201 |
| | 6,386,911 |
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| Total deposits | 26,478,593 |
| | 20,606,113 |
| | 19,123,180 |
| | 17,016,831 |
| | 15,084,619 |
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| Stockholders’ equity | 2,832,258 |
| | 2,500,394 |
| | 2,202,721 |
| | 2,009,557 |
| | 1,623,533 |
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The following table provides information aboutChief Lending Officer and as a director of the growthBank since its inception in December 1998 through July 2013. Mr. Cargill has more than 25 years of banking experience in the North Texas area.
Mr. Cargill has extensive knowledge of all aspects of our loans held for investment ("LHI") portfolio by typebusiness and particularly its lending operations. His many years of loan for the past five years:experience as a banker and his leadership in building our Company make him well qualified to serve as a director.
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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 |
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| Total real estate | 6,008,040 |
| | 6,050,083 |
| | 5,960,785 |
| | 5,560,909 |
| | 4,990,914 |
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| Construction | 2,563,339 |
| | 2,120,966 |
| | 2,166,208 |
| | 2,098,706 |
| | 1,851,717 |
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| Real estate term | 3,444,701 |
| | 3,929,117 |
| | 3,794,577 |
| | 3,462,203 |
| | 3,139,197 |
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| Mortgage finance | 8,169,849 |
| | 5,877,524 |
| | 5,308,160 |
| | 4,497,338 |
| | 4,966,276 |
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| Equipment leases | 256,462 |
| | 312,191 |
| | 264,903 |
| | 185,529 |
| | 113,996 |
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| Consumer | 71,463 |
| | 63,438 |
| | 48,684 |
| | 34,587 |
| | 25,323 |
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The Texas Market
The Texas market for banking services is highly competitive. Texas’ largest banking organizations are headquartered outside of Texas and are controlled by out-of-state organizations. We also compete with other providers of financial services, suchJonathan E. Baliff has served as non-bank lenders, commercial finance and leasing companies, consumer finance companies, financial technology, or fintech, companies, securities firms, insurance companies, full service brokerage firms and discount brokerage 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 actdirector since July 2017. Mr. Baliff served 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 centralan advisor 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, asset-based lending and escrow services, that offer specialized loan and deposit products to businesses 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. Most recently, we launched Bask Bank, an all-digital branch of our 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 has been to grow an independent bank that has focused primarily on middle market business customers and successful professionals and entrepreneurs in eachoffice of the five major metropolitan marketsBristow Group, Inc. Chairman, a position he held since his retirement from Bristow Group, Inc. in February 2019 until June 2019. Prior to his retirement he served as President and Chief Executive Officer and as a director of TexasBristow Group, Inc., from July 2014 until February 2019 and served as Bristow Group’s Senior Vice President and Chief Financial Officer from October 2010 to June 2014. Prior to joining Bristow, he served as Executive Vice President-Strategy at NRG Energy, where he led the development and implementation of NRG’s corporate strategy, as well as our national linesacquisitions and business alliances. Prior to joining NRG, he was in Credit Suisse’s Global Energy Group, where he advised energy companies on merger and acquisition assignments and project and corporate financings, most recently as Managing Director. Mr. Baliff started his career at Standard and Poor’s and then worked in JP Morgan’s natural resources group. He also served on active duty in the U.S. Air Force from 1985 until his retirement in 1993 with the rank of business. To achieve this, we have employed the following strategies:Captain.
offering a premierMr. Baliff has extensive financial and differentiatedleadership experience serving in executive roles with other public companies. His focus on corporate strategy, coupled with banking experience earlier in his career, makes him highly qualified to middle market businessesserve as a director and successful professionalsmember of the Risk Committee.
James H. Browninghas served as a director since October 2009. He retired in 2009 as a partner at KPMG LLP, an international accounting firm, in Houston where he served companies in the energy, construction, manufacturing, distribution and entrepreneurs who valuecommercial industries. He began his career at KPMG in 1971, becoming a broad relationshippartner in 1980. He most recently served as KPMG’s Southwest Area Professional Practice Partner, and also served as an SEC Reviewing Partner and as Partner in Charge of the New Orleans audit practice. He currently serves as chairman of the board and member of the Audit Committee of RigNet Inc., a global technology company providing customized communications services, applications, real-time machine learning and cybersecurity solutions to enhance customer decision-making and business performance. He also currently serves as a director of Herc Holdings, Inc., a New York Stock Exchange listed full-service equipment rental company, where he chairs the Audit Committee and is a member of the Finance Committee.
As a former partner with KPMG with more than 38 years in public accounting, Mr. Browning has demonstrated leadership capability. His public accounting experience with various industries gives him a wealth of knowledge in dealing with financial and accounting matters, as well as extensive knowledge of the responsibilities of public company boards. Mr. Browning is highly qualified to serve as a director and the chairman of our Bank;Audit Committee, where he has been designated a financial expert. He also serves as a member of the Governance and Nominating Committee.
growingDavid S. Huntley has served as a director since January 2018. Mr. Huntley currently serves as Senior Executive Vice President and Chief Compliance Officer of AT&T, Inc., a position he has held since December 2014. AT&T Inc. is a leading provider of communications and digital entertainment services in the United States and the world. He served as Senior Vice President and Assistant General Counsel for AT&T Services, Inc. from May 2012 to December 2014 and as Senior Vice President and Assistant General Counsel for AT&T Advertising Solutions and AT&T Interactive from September 2010 to May 2012. From June 2009 to September 2010, Mr. Huntley served as Senior Vice President of AT&T’s Mobility Customer Service Centers. He held positions of increasing responsibility in external affairs, wireless operations, mergers and acquisitions, data operations and other areas within AT&T since joining the company in 1994.
Mr. Huntley’s compliance and legal expertise, as well as his experience developing and implementing policies to safeguard the privacy of customer and employee information, make him highly qualified to serve as a director and member of the Audit Committee.
Charles S. Hyle has served as a director since October 2013. He served as Senior Executive Vice President and Chief Risk Officer of Key Corp. from June 2004 to his retirement in December 2012. He served as an executive with Barclays working in the U.S. and in London from 1980 to 2003, rising to serve as Managing Director and Global Head of Credit Portfolio Management - Barclays Capital - London. Mr. Hyle began his banking career in 1972 at JP Morgan.
Mr. Hyle has many years of experience in managing credit and operational risk for large banking and financial services organizations as a senior executive. This experience provides him with an understanding of the risks facing the Company and the Bank and the challenges we will face as we continue to grow and must comply with enhanced regulatory risk management requirements, which make him well qualified to serve as a director and the chairman of our loanRisk Committee. He also serves as a member of the Audit Committee and deposit basehas been designated as a financial expert.
Elysia Holt Ragusa has served as a director since January 2010. She currently serves as Principal of RCubetti, LLC, a business operations, investment and sales advisory firm, a position she has held since February of 2018. She served as an International Director of Jones Lang LaSalle from July 2008 until her retirement 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.December 2017. From 1989 until 2008, she served as
President and Chief Operating Officer of The merger with IBTX is intended to augment our strategy by delivering:Staubach Company, chaired Staubach’s Executive and Operating Committees and was a member of its board of directors. Jones Lang LaSalle and The Staubach Company merged in 2008. She previously served as a director of Fossil Group, Inc., a maker of watches and other apparel and accessories, where she served as a member of the Compensation Committee and chaired the Nominating and Corporate Governance Committee.
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 institutionAs an executive with extensive strategicexperience in all aspects of the commercial real estate business in Texas, Ms. Ragusa provides valuable insight for this important aspect of our business. This expertise, her demonstrated leadership capabilities and client coverage, including enhancingher public company board experience are valuable to the revenue mix by diversifying each company’s client base,Company and make her well qualified to serve as a director, as chairman of our Governance and Nominating Committee and as a member of the Human Resources Committee.
Steven P. Rosenberg has served as a director since September 2001. He is President of SPR Ventures, Inc., a private investment company, a position he has held since June 1997. He served as President of SPR Packaging LLC, a manufacturer of flexible packaging for the food industry, from May 2007 until his retirement in January 2018. He currently serves on the board of directors of Cinemark Holdings, a leader in the motion picture exhibition industry, where he serves as chair of the Nominating and Corporate Governance Committee and is an Audit Committee member.
Mr. Rosenberg offers valuable experience and insight to the board of directors deriving from his background as an entrepreneur, as well as a director of other public companies. Mr. Rosenberg is a member of the Human Resources Committee and serves as the chairman of the Bank’s Trust Committee.
Robert W. Stallings has served as a director since August 2001. He has served as Chairman of the board of directors and CEO of Stallings Capital Group, an investment company, since March 2001. He is currently Executive Chairman of the board of Gainsco, Inc., a property and casualty insurance company, a position he has held since August 2001. Prior to joining Gainsco, he served as Chairman and CEO of an asset management company as well as a savings bank.
Mr. Stallings’ experience in the banking and financial services industries provides extensive knowledge about our industry, which makes him highly qualified to serve as a director and member of the Risk Committee and the Bank’s Trust Committee.
Dale W. Tremblay has served as a director since May 2011. He is the President and CEO of C.H. Guenther and Son, LLC (dba Pioneer Flour Mills), one of the oldest privately held corporations in the U.S., and serves as a member of its board of directors. He joined Guenther in 1998 as Executive Vice President and Chief Operating Officer, and became President and CEO in April 2001. He currently serves as a director of Nature Sweet Ltd. He previously served as President for The Quaker Oats Company’s worldwide foodservice division and formerly was a member of the Michigan State University School of Finance Advisory Board and the Business and Community Advisory Council of the Federal Reserve Bank of Dallas. He also served as a director of Clear Channel Outdoor Holdings Inc., one of the world’s largest outdoor advertising companies, where he served as a member of the Audit and Special Committees and serves as chairman of the Compensation Committee.
Mr. Tremblay’s leadership experience in both private and public companies brings valuable knowledge and insight to our board of directors and his service as chairman of our Human Resources Committee.
Ian J. Turpin has served as a director since May 2001. Since 1992, he has served as President and director of LBJ Family Wealth Advisors, Ltd. (formerly LBJ Asset Management Partners, Ltd. and The LBJ Holding Company, LP) and has managed various companies affiliated with the family of the late President of the United States, Lyndon B. Johnson, which have included radio, real estate and private equity investments and diversified investment portfolios. From 1989 through 2015 he served as CEO of BusinesSuites, LP, a provider of serviced office space.
Mr. Turpin’s business linesexperience in international banking and loanwealth management 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;variety of industries offers valuable insights to the board of directors and the Governance and Nominating Committee.
presence in attractive, fast growing Texas markets that constitute fivePatricia A. Watson has served as a director since February 2016. She is Co-President of the topEnterprise Collaboration division of Intrado Corporation, an innovative, cloud-based, global technology partner. Prior to joining Intrado, she served as the Senior Executive Vice President and Chief Information Officer of Total System Services, Inc., ("TSYS"), a global payment solutions provider for financial and non-financial institutions from September 2016 until December 2019. Prior to joining TSYS she served as Vice President and Global Chief Information Officer for The Brinks Company. Prior to joining Brinks, she worked with Bank of America for more than 14 years in technology positions of increasing responsibility. She spent 10 fastest growing MSAsyears in the United States;
an experienced combined management team havingStates Air Force as executive staff officer, flight commander and director of operations. Ms. Watson currently serves as a strong track recorddirector 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 offerRockwell Automation, Inc., where she is 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;
treasury management services, including online banking and debit and credit card services;
escrow services; and
letters of credit.
Individual Customers. We also provide complete banking services for our individual customers, including:
personal wealth management and trust services;
certificates of deposit and IRAs;
interest-bearing and non-interest-bearing checking accounts;
traditional money market and savings accounts;
loans, both secured and unsecured;
online and mobile 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/Vice Chairman, our Bank's Chief Risk Officer and our Bank’s Chief Credit Officer, and is subject to oversight by the Risk Committeemember of the Company's board of directors. We believe we maintain an appropriately diversified loan portfolio. Credit policiesAudit Committee and underwriting guidelines are tailored to address the unique risks associated with each industry representedTechnology Committee.
Ms. Watson’s expertise in information technology and security in the portfolio.financial services and payments industries, as well as her strategic leadership skills, make her highly qualified to serve as a director and member of the Audit Committee.
Code of Business Conduct and Ethics
The Company has adopted a Code of Business Conduct and Ethics ("Code of Conduct") that applies to all its employees, including its CEO, CFO and Chief Accounting Officer. The Company has made the Code of Conduct available on its website at
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 customers 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, 2019, we had 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.
Regulation and Supervision
Generalwww.texascapitalbank.com. 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 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 Federal Reserve pursuant to the BHCA. We file quarterly reports and other information with the Federal Reserve. We file reports with the 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
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 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" 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 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 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
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 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 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, which were fully phased-in as of January 1, 2019 and for subsequent years. The leverage ratio requirement under the Basel III Capital Rules is 4.0%. In order to be well capitalized under the rules now in effect, our Bank must maintain CET1, Tier 1 and total capital ratios that are equal to or greater than 7.0%, 8.5% and 10.5%, respectively, and a leverage ratio equal to or greater than 5.0%. See “Selected Consolidated Financial Data - Capital and Liquidity Ratios.”
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 was implemented over a three year phase-in period that began on January 1, 2016 and concluded on January 1, 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, 2019 our Bank's CET1 ratio was 8.96% and its total risk-based capital ratio was 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
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 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.
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 8.2% at December 31, 2019 and, as a result, it is currently classified as “well capitalized” for purposes of the OCC’s prompt corrective action regulations.
The risk-based and leverage capital ratios established by federal banking regulators are minimum supervisory ratios generally applicable to banking organizations that meet specified criteria, assuming that they otherwise have received the highest regulatory ratings in their most recent examinations. Banking organizations not meeting these criteria are expected to operate with capital positions in excess of the minimum ratios. Regulators can, from time to time, change their policies or interpretations of banking practices to require changes in risk weights 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, and the proposed rules would increase substantially the $50 billion asset threshold, other relevant measures of liquidity are monitored by management and 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, 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 during the years 2016 to 2018. In response to this requirement we developed dedicated staffing, economic models, policies and procedures to implement stress testing on an annual basis, 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 incorporated the economic models and information developed through our stress testing program into our risk management and business, capital and liquidity planning activities, which are subject to continuing regulatory oversight.
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;
establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities 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 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 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.
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 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 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
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 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, 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.
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,
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. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information that 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 codeCode of ethicsConduct applicable to our executive officers will be posted on our website within four days of such amendment or waiver. We will
Corporate Governance
The board of directors is committed to providing sound governance for the Company. The board of directors has adopted Corporate Governance Guidelines (the "Guidelines") and charters for each committee of the board of directors to provide a printed copyflexible framework of anypolicies relating to the governance of the aforementionedCompany. These documents are available in the "Governance Documents" section of the Company’s website at: http://investors.texascapitalbank.com/govdocs.
Audit Committee
The Audit Committee oversees the Company’s and the Bank’s processes related to any requesting stockholder.
financial and regulatory reporting, internal control and regulatory and legal compliance. The Audit Committee also oversees the Company’s internal control over financial reporting, management’s preparation of the financial statements of the Company, the Company’s methodology for establishing the allowance for loan and lease losses and the sufficiency of quarterly provisions for loan and lease losses, and reviews and assesses the independence and qualifications of the Company’s independent registered public accounting firm. The Audit Committee appoints the firm selected to be the Company’s independent registered public accounting firm and monitors the performance of such firm, reviews and approves the scope of the annual audit and quarterly reviews and reviews with the independent registered public accounting firm the Company’s annual audit and annual consolidated financial statements. The Committee also oversees the Company’s internal audit staff, which includes reviewing with management the status of internal accounting controls, and evaluates areas having a potential financial or regulatory impact on the Company that may be brought to the Committee’s attention by management, the independent registered public accounting firm, the board of directors or by employees or other sources, including the Company’s confidential "hotline" maintained to allow employees to confidentially report matters requiring attention. The Audit Committee members are James H. Browning (chair), David S. Huntley, Charles S. Hyle and Patricia A. Watson. The board of directors has determined that Mr. Browning and Mr. Hyle qualify as "audit committee financial experts" as defined by the SEC, Nasdaq Stock Market Listing Rules and as further defined by applicable statutes and regulations, and also satisfy the Nasdaq Stock Market’s financial sophistication requirements and independence definition.
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ITEM 1A.11. | RISK FACTORSEXECUTIVE COMPENSATION |
Our business is subjectReport of the Human Resources Committee on the Compensation Discussion and Analysis
The Human Resources Committee ("HR Committee") has reviewed and discussed with management the Compensation Discussion and Analysis included in this Report. Based on such review and discussion, the HR Committee recommended 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 resultsboard 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 assurancedirectors that this discussion covers all potential risks thatCompensation Discussion and Analysis be included in this Annual Report on Form 10-K.
The Human Resources Committee
Dale W. Tremblay, Chair
Elysia Holt Ragusa
Steven P. Rosenberg
Compensation Discussion and Analysis
This Compensation Discussion and Analysis provides an overview of our compensation programs, explains our compensation philosophy, policies and practices, and describes the material compensation decisions we face. The occurrencehave made under such programs to our NEOs for 2019, which include Mr. Cargill, Ms. Anderson, Mr. Ackerson, and Mr. Turpen.
In view of the described risks could cause our resultsCompany’s competitive performance, historical earnings levels and growth in earnings, the HR Committee believes that the Company’s executive compensation philosophy and practices have been successful in attracting and retaining talented, dedicated executive officers and providing them with competitive compensation levels that are properly aligned with shareholder interests.
2019 Financial and Business Highlights
Net income of $322.9 million, increasing 7% from 2018 and 64% from 2017;
Net interest income of $979.7 million compared to differ materially from those described$914.9 million in our forward-looking statements included elsewhere2018 and $761.3 million in this report or2017;
Earnings per share of $6.21 compared to $5.79 in our other filings with the SEC2018 and could have a material adverse impact on our business, financial condition or results of operations.$3.73 in 2017;
Merger-Related Risks11% increase in total loans, primarily due to growth in total mortgage finance loans; and
28% increase in total deposits compared to prior year.
The consummationCompany performed well in 2019, reporting record net income of the merger is contingent upon the satisfaction of a number of conditions,$322.9 million. We benefited from continued growth in total mortgage finance loans, including shareholdermortgage correspondent aggregation loans, 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, imposingtotal deposits. Our net interest income
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 forreached 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
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
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, 2019, approximately 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, 2019, approximately 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 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.
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.
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 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 rate of growth in commercial loans is dependent on maintaining above-peer credit quality metrics. The failure to 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
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 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 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 loans held for investment, excluding mortgage finance loans and other national lines of business, are 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. While the Texas economy is more diversified than in the 1980’s, the energy sector continues to play an important role. At December 31, 2019 our outstanding energy loans represented 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, reserve depletion curves, material declines in the level of drilling and production activity in Texas and in other areas of the United States and material fluctuations in investor interest in oil and gas 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 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 traded on recognized domestic and international exchanges;
general economic consequences of international conditions, such as weakness in European and South American sovereign debt and currencies and the U.K.'s referendum to exit from the European Union, and the impact of those conditions on the US and global economies;
legislative and regulatory changes impacting our industry;
the financial health of our customers and economic conditions affecting them and the value of our collateral, including 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, including the extent and timing of intervention in credit markets by the Federal Reserve or withdrawal from that 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 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 competitors 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 ("FLHB"). Unexpected changes in requirements for capital resulting from regulatory actions 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
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 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, 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, 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 and in connection with the proposed Merger. See Merger-Related Risks for a discussion of risks related to the 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. In response to this risk we have increased our liquidity and developed more sophisticated techniques for monitoring and planning for changes in liquidity and capital over the past several years, but there is no assurance that we will maintain or have access to sufficient funding and capital to fully mitigate 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.
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
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. 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. 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 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 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.
Periods of unusually low or volatile interest rates have a material effect on our earnings. The Federal Reserve began raising rates in late 2015 and continued through 2018 contributing to improvement in our net interest 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 uncertainty regarding the extent to which interest rates may change in 2020 and future periods and what the future effects of any such changes will be on our interest income and expense. Increases in market interest rates can negatively impact our business, including reducing our customers' desire to borrow money from us and their ability to repay their outstanding loans 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 collateral, securities or other fixed rate earning assets, can decline significantly with relatively minor changes in interest rates.
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
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.
Rising interest rates in prior periods have increased our interest expense, with a commensurate adverse effect on our net interest income, and may be expected to do so in future periods. In a rising rate environment, competition for cost-effective deposits 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 by future 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. Material changes in regulation and requirements imposed on financial institutions, such as the Dodd-Frank Act, Basel III 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.
We are subject to a continuous program of examinations by our regulators 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 devote a significant amount of management time and expense to enhancing the infrastructure to support our compliance obligations, which can pose significant regulatory enforcement, financial and reputational risks if not appropriately addressed.
The Regulatory Relief Act passed on May 22, 2018 has provided a limited degree of regulatory relief for institutions of our size. Uncertainty regarding how our regulators will evaluate capital and liquidity planning going forward remains a risk. We continue to increase our capital and liquidity and expand our regulatory compliance staffing and systems in order to address continuing regulatory 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 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.
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 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 growing companies. In order to execute our 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 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;
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;
acquire and maintain sufficient qualified staffing and information technology and operational resources to support growth and compliance with regulatory requirements; and
consummate the proposed merger of equals with IBTX, which requires stockholder and regulatory 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 offering a premier and differentiated client banking experience to ensure future client acquisition and retention of existing clients and realize our 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 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 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.
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.
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. 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 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 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 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 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.
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 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. 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 complexity, and associated risk, of the analysis and processes relying on management 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 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 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 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 personnel. Any of these developments could limit our access to:
brokered deposits;
the Federal Reserve discount window;
advances from the FHLB;
capital markets transactions; and
development of new financial services.
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 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, 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
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.
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 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 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, 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 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.
The holders of our indebtedness and preferred stock have rights that are senior to those of our common stockholders. As of December 31, 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, 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 (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, 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; 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 - 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
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.
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.
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.
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ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
| |
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is traded on The Nasdaq Global Select Market under the symbol “TCBI”. On February 11, 2020, there were approximately 192 holders of record of our common stock.
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, 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, 2014. The performance graph represents past performance and should not be considered to be an indication of future performance.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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
| |
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, |
| (in thousands, except per share, average share and percentage data) | 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
| Consolidated Operating Data | | | | | | | | | |
| Interest income | $ | 1,365,312 |
| | $ | 1,164,193 |
| | $ | 879,299 |
| | $ | 703,408 |
| | $ | 602,958 |
|
| Interest expense | 385,592 |
| | 249,333 |
| | 117,971 |
| | 63,594 |
| | 46,428 |
|
| Net interest income | 979,720 |
| | 914,860 |
| | 761,328 |
| | 639,814 |
| | 556,530 |
|
| Provision for credit losses | 75,000 |
| | 87,000 |
| | 44,000 |
| | 77,000 |
| | 53,250 |
|
| Net interest income after provision for credit losses | 904,720 |
| | 827,860 |
| | 717,328 |
| | 562,814 |
| | 503,280 |
|
| Non-interest income | 92,440 |
| | 78,024 |
| | 74,256 |
| | 60,780 |
| | 47,738 |
|
| Non-interest expense | 589,999 |
| | 525,096 |
| | 465,876 |
| | 382,397 |
| | 326,523 |
|
| Income before income taxes | 407,161 |
| | 380,788 |
| | 325,708 |
| | 241,197 |
| | 224,495 |
|
| Income tax expense | 84,295 |
| | 79,964 |
| | 128,645 |
| | 86,078 |
| | 79,641 |
|
| Net income | 322,866 |
| | 300,824 |
| | 197,063 |
| | 155,119 |
| | 144,854 |
|
| Preferred stock dividends | 9,750 |
| | 9,750 |
| | 9,750 |
| | 9,750 |
| | 9,750 |
|
| Net income available to common stockholders | $ | 313,116 |
| | $ | 291,074 |
| | $ | 187,313 |
| | $ | 145,369 |
| | $ | 135,104 |
|
| Consolidated Balance Sheet Data | | | | | | | | | |
| Total assets | $ | 32,548,069 |
| | $ | 28,257,767 |
| | $ | 25,075,645 |
| | $ | 21,697,134 |
| | $ | 18,903,821 |
|
| 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 | 9,438,459 |
| | 7,317,161 |
| | 7,812,660 |
| | 7,994,201 |
| | 6,386,911 |
|
| Total deposits | 26,478,593 |
| | 20,606,113 |
| | 19,123,180 |
| | 17,016,831 |
| | 15,084,619 |
|
| Federal funds purchased and repurchase agreements | 141,766 |
| | 641,174 |
| | 365,040 |
| | 109,575 |
| | 143,051 |
|
| Other borrowings | 2,400,000 |
| | 3,900,000 |
| | 2,800,000 |
| | 2,000,000 |
| | 1,500,000 |
|
| Subordinated notes | 282,129 |
| | 281,767 |
| | 281,406 |
| | 281,044 |
| | 280,682 |
|
| Trust preferred subordinated debentures | 113,406 |
| | 113,406 |
| | 113,406 |
| | 113,406 |
| | 113,406 |
|
| Stockholders’ equity | 2,832,258 |
| | 2,500,394 |
| | 2,202,721 |
| | 2,009,557 |
| | 1,623,533 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | At or For the Year Ended December 31, |
| (in thousands, except per share, average share and percentage data) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Other Financial Data | | | | | | | | | |
| Income per share | | | | | | | | | |
| Basic | $ | 6.23 |
| | $ | 5.83 |
| | $ | 3.78 |
| | $ | 3.14 |
| | $ | 2.95 |
|
| Diluted | 6.21 |
| | 5.79 |
| | 3.73 |
| | 3.11 |
| | 2.91 |
|
| 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 | 50,286,300 |
| | 49,936,702 |
| | 49,587,169 |
| | 46,239,210 |
| | 45,808,440 |
|
| Diluted | 50,419,204 |
| | 50,272,872 |
| | 50,259,834 |
| | 46,765,902 |
| | 46,437,872 |
|
| Selected Financial Ratios | | | | | | | | | |
| Performance Ratios | | | | | | | | | |
| Net interest margin | 3.28 | % | | 3.78 | % | | 3.49 | % | | 3.14 | % | | 3.14 | % |
| Return on average assets | 1.04 | % | | 1.19 | % | | 0.87 | % | | 0.74 | % | | 0.79 | % |
| 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 | 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 | 0.31 | % | | 0.37 | % | | 0.16 | % | | 0.29 | % | | 0.07 | % |
| Allowance for loan losses to non-accrual loans | .9x |
| | 2.4x |
| | 1.8x |
| | 1.0x |
| | .8x |
|
| Non-accrual loans to LHI | 0.91 | % | | 0.36 | % | | 0.49 | % | | 0.96 | % | | 1.08 | % |
| Total NPAs to LHI plus OREO | 0.91 | % | | 0.36 | % | | 0.55 | % | | 1.07 | % | | 1.08 | % |
| Capital and Liquidity Ratios | | | | | | | | | |
| CET1 | 8.88 | % | | 8.58 | % | | 8.45 | % | | 8.97 | % | | 7.47 | % |
| Total capital ratio | 11.37 | % | | 11.31 | % | | 11.50 | % | | 12.48 | % | | 11.05 | % |
| Tier 1 capital ratio | 9.75 | % | | 9.53 | % | | 9.52 | % | | 10.23 | % | | 8.81 | % |
| Tier 1 leverage ratio | 8.42 | % | | 9.87 | % | | 9.15 | % | | 9.34 | % | | 8.92 | % |
| 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) | Liquidity assets include federal funds sold and interest-bearing deposits in other banks. |
| |
(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. |
| |
(3) | Non-interest expense divided by the sum of net interest income and non-interest income. |
| |
(4) | 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. See Supplemental Financial Data for a reconciliation of non-GAAP measures. |
| |
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 volatility in oil and gas prices, the financial impact of the Tax Act on our results of operations, expectations regarding rates of default and 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 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.
The possibility that the previously announced merger does not close when expected or at all because required regulatory, stockholder or other 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 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 stock price and 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.
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.
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, 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 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.
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.
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.
The failure to effectively manage our interest rate risk resulting from unexpectedly large or sudden changes in interest rates, maturity imbalances in our assets and liabilities, potential adverse effects to our borrowers including their
inability to repay loans with increased interest 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.
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.
On December 9, 2019, we and IBTX announced that both companies' boards of directors unanimously approved the merger agreement to combine the companies in an all-stock merger of equals. Upon closing of the 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 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.
Year ended December 31, 2019 compared to year ended December 31, 2018
We reported net income of $322.9 million and net income available to common stockholders of $313.1 million, or $6.21 per diluted common share, for the year ended December 31, 2019, compared to net income of $300.8 million and net income available to common stockholders of $291.1 million, or $5.79 per diluted common share, for 2018. Return on average common equity ("ROE") was 12.38% and return on average assets ("ROA") was 1.04% for the year ended December 31, 2019, compared to 13.14% and 1.19%, respectively, for 2018. The decreases in ROE and ROA were driven primarily by larger balances in total mortgage finance loans and liquidity assets.
Consolidated Daily Average Balances, Average Yields and 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. |
Volume/Rate Analysis
The following table presents the changes 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, |
| | 2019/2018 | | 2018/2017 |
| | Net Change | | Change Due To(1) | | Net Change | | Change Due To(1) |
| (in thousands) | Volume | | Yield/Rate(2) | | Volume | | Yield/Rate(2) |
| Interest income: | | | | | | | | | | | |
| Investment securities | $ | 7,165 |
| | $ | 5,787 |
| | $ | 1,378 |
| | $ | 2,294 |
| | $ | 722 |
| | $ | 1,572 |
|
| Loans held for sale | 41,286 |
| | 51,381 |
| | (10,095 | ) | | 32,081 |
| | 21,385 |
| | 10,696 |
|
| Loans held for investment, mortgage finance loans | 60,227 |
| | 78,979 |
| | (18,752 | ) | | 38,163 |
| | 25,541 |
| | 12,622 |
|
| Loans held for investment | 56,540 |
| | 38,729 |
| | 17,811 |
| | 207,423 |
| | 96,521 |
| | 110,902 |
|
| Federal funds sold and securities purchased under resale agreements | (2,263 | ) | | (2,329 | ) | | 66 |
| | 1,250 |
| | (435 | ) | | 1,685 |
|
| Interest-bearing deposits in other banks | 38,496 |
| | 36,304 |
| | 2,192 |
| | 3,198 |
| | (10,437 | ) | | 13,635 |
|
| Total | 201,451 |
| | 208,851 |
| | (7,400 | ) | | 284,409 |
| | 133,297 |
| | 151,112 |
|
| Interest expense: | | | | | | | | | | | |
| Transaction deposits | 21,170 |
| | 7,644 |
| | 13,526 |
| | 32,448 |
| | 6,197 |
| | 26,251 |
|
| Savings deposits | 54,601 |
| | 27,534 |
| | 27,067 |
| | 53,025 |
| | 3,382 |
| | 49,643 |
|
| Time deposits | 32,650 |
| | 15,517 |
| | 17,133 |
| | 19,757 |
| | 6,181 |
| | 13,576 |
|
| Other borrowings | 27,527 |
| | 18,344 |
| | 9,183 |
| | 25,009 |
| | 5,173 |
| | 19,836 |
|
| Long-term debt | 311 |
| | 20 |
| | 291 |
| | 1,123 |
| | 20 |
| | 1,103 |
|
| Total | 136,259 |
| | 69,059 |
| | 67,200 |
| | 131,362 |
| | 20,953 |
| | 110,409 |
|
| Net interest income | $ | 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 21% tax rate. |
Net Interest Income
Net interest income was $979.7 million, for the year ended December 31, 2019 compared to $914.9 million for 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,These results were accomplished organically without dilutive acquisitions 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 forare consistent with the year ended December 31, 2019 increased to $9.0 billion from $7.9 billion for 2018. Net interest margin forCompany’s high level of performance over the year ended December 31,past five years. At $6.21 per share, 2019 was 3.28% compared to 3.78% for 2018. The decrease was primarily duethe best earnings per share ("EPS") year in our history.
Executive Summary
Our compensation philosophy demands that executive compensation track appropriately to the effectCompany’s economic performance, as well as management’s performance. The HR Committee and the board of decreasesdirectors believe that the Company’s financial performance and our management’s overall performance in interest rates2019 were outstanding.
The HR Committee believes that executive pay and performance of the Company continue to be appropriately aligned. The key NEO pay decisions during 2019 on loan yields and higher funding costs compared to 2018.
The yield on total loans held for investment decreased to 4.98% for the year ended December 31, 2019 compared to 5.10% for 2018 and the yield on earning assets decreased to 4.56% for the year ended December 31, 2019 compared to 4.80% for 2018. The average cost of total deposits and borrowed funds increased to 1.31% for 2019 from 1.02% for 2018. The spread on total earning assets, net of the cost of deposits and borrowed funds, was 3.25% for 2019 compared to 3.78% for 2018. The decrease was primarily a result of an increase in the cost of interest-bearing liabilities coupled with declining loan yields. Total funding costs, including all deposits, long-term debt and stockholders' equity increased to 1.25% for 2019 compared to 0.99% for 2018.
Non-interest Income
|
| | | | | | | | | | | |
| | Year ended December 31, |
| (in thousands) | 2019 | | 2018 | | 2017 |
| Service charges on deposit accounts | $ | 11,320 |
| | $ | 12,787 |
| | $ | 12,432 |
|
| Wealth management and trust fee income | 8,810 |
| | 8,148 |
| | 6,153 |
|
| Brokered loan fees | 29,738 |
| | 22,532 |
| | 23,331 |
|
| Servicing income | 13,439 |
| | 18,307 |
| | 15,657 |
|
| Swap fees | 4,387 |
| | 5,625 |
| | 3,990 |
|
| Net gain/(loss) on sale of loans held for sale | (20,259 | ) | | (15,934 | ) | | (2,387 | ) |
| Other(1) | 45,005 |
| | 26,559 |
| | 15,080 |
|
| Total non-interest income | $ | 92,440 |
| | $ | 78,024 |
| | $ | 74,256 |
|
| |
(1)• | Other non-interest income includes such itemsNEOs received salary increases ranging from 3% to 6% in 2019. Salary increases were determined by the HR Committee, as letter of credit fees, bank owned life insurance ("BOLI") income, dividends on FHLB and FRB stock, income from legal settlements and other general operating income.described in more detail under "Base Salary." |
Non-interest income increased by $14.4 million during the year ended December 31, 2019 to $92.4 million, compared to $78.0 million for 2018. Other non-interest income increased $18.4 million, which included the settlement of $15.0 million in legal claims during 2019. Brokered loan fees increased $7.2 million due to an increase in total mortgage finance volumes during 2019 compared to 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 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.
Non-interest Expense
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (in thousands) | | 2019 | | 2018 | | 2017 |
| Salaries and employee benefits | | $ | 315,080 |
| | $ | 291,768 |
| | $ | 264,231 |
|
| Net occupancy expense | | 32,989 |
| | 30,342 |
| | 25,811 |
|
| Marketing | | 53,355 |
| | 39,335 |
| | 26,787 |
|
| Legal and professional | | 53,830 |
| | 42,990 |
| | 29,731 |
|
| Communications and technology | | 44,826 |
| | 30,056 |
| | 31,004 |
|
| FDIC insurance assessment | | 20,093 |
| | 24,307 |
| | 23,510 |
|
| Servicing-related expenses | | 22,573 |
| | 14,934 |
| | 15,506 |
|
| Allowance and other carrying costs for OREO | | 7 |
| | 474 |
| | 6,437 |
|
| Other(1) | | 47,246 |
| | 50,890 |
| | 42,859 |
|
| Total non-interest expense | | $ | 589,999 |
| | $ | 525,096 |
| | $ | 465,876 |
|
| |
(1)• | Other expense includes such itemsFor 2019, annual incentive payouts for NEOs were at 132.5% of target. As described in more detail under "Annual Incentive Plan"the annual incentive plan was based on achievement of performance goals related to net income and credit quality, as courier expenses, regulatory assessments other than FDIC insurance, insurance expenseswell as individual management strategic objectives ("MSOs"). |
| |
| • | Long-term incentive awards in the form of time-based restricted stock units ("RSUs") and other general operating expenses.performance-based RSUs were granted to NEOs in March 2019, as described in more detail under "Long-Term Incentive Compensation." |
Non-interestObjectives of Executive Compensation
We provide a compensation package for our NEOs that is primarily driven by the overall economic performance of the Company, together with a focus on the performance of each executive, which we believe impacts our overall long-term profitability. The objectives of our executive compensation programs are:
to attract and retain highly qualified executive officers by providing total compensation opportunities that are competitive with those provided in the industry and commensurate with the Company’s business strategy and performance objectives;
to provide incentive and motivation for our executive officers to enhance stockholder value by linking their compensation to the value of our common stock;
to provide an appropriate mix of fixed and variable pay components to establish a "pay-for-performance" oriented compensation program; and
to provide competitive compensation opportunities and financial incentives without imposing excessive risk to the Company, and to ensure that appropriate standards related to asset quality, capital management and expense management are maintained.
Oversight of Executive Compensation Program
The HR Committee of our board of directors oversees our executive compensation programs. Each member of the HR Committee is an "independent director" as defined by the Nasdaq Stock Market Listing Rules. With approval by the board, the HR Committee has developed and applied a compensation philosophy that focuses on a combination of competitive base salary and incentive compensation, including cash and equity-based programs, which are directly tied to performance and creation of stockholder value.
The HR Committee meets throughout the year, including formal meetings, informal conferences and discussions with management and consultants. The HR Committee works with executive management, primarily our CEO, to assess the compensation approach and compensation levels for our executive officers and key employees other than the CEO. The HR Committee makes recommendations to the board of directors with respect to the overall executive compensation and employment benefits, philosophy and objectives of the Company. The HR Committee establishes objectives for the year ended December 31, 2019 increased $64.9 million comparedCompany’s CEO and sets the CEO’s compensation based, in part, on the evaluation of market data provided by its independent consultant. The HR Committee also reviews and recommends to 2018. the board the Company's annual and long-term incentive plans for executive officers and key employees.
The increase isHR Committee regularly reviews the Company’s compensation programs to ensure that compensation levels and incentive opportunities are competitive and reflect performance. Factors considered in assessing the compensation of individual officers may include the Company’s overall performance, the officer’s experience, performance and contribution to the Company, the achievement of strategic goals, external equity and market value, internal equity, fairness and retention. There are no material differences in compensation policies and approach among the NEOs, as all relate primarily due to performance and contribution in achieving consolidated results. In the case of the NEOs other than the CEO, the CEO makes recommendations to the HR Committee regarding salary increases, in salariesannual incentive amounts and employee benefits, net occupancy expense and communication and technology expenses, all of which were due to general business growth and continued 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 marketing expense was primarily due to an increase in variable expenses tied to deposit balances. The increase in legal and professional expense 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 higher amortization expense resulting from higher mortgage prepayment rates, as well as an increase in impairment expense.
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 9%, 9% and 18% in 2019, 2018 and 2017, respectively, with the majority of the growth in 2019 relating to 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 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, 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. We also participate in syndicated loan relationships, both as a participant and as an agent. As of December 31, 2019, we had $2.3 billion in syndicated loans, $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, 2019, $26.0 million of our syndicated loans were on non-accrual.
Portfolio Geographic and Industry Concentrations
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, our Texas concentration remains significant. As of December 31, 2019, a majority of our loans held for investment, excluding 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 state. We also make loans to 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.
Compensation Risk Oversight
The table below summarizesHR Committee regularly reviews all compensation plans to identify whether any of the industry concentrationsCompany’s or the Bank’s compensatory policies or practices incent behavior that creates excessive or unnecessary risk to the Company. In 2018, the HR Committee conducted a risk assessment with the assistance of Pearl Meyer & Partners, LLC ("Pearl Meyer"), its independent compensation advisor. In 2019, the HR Committee reviewed the 2018 risk assessment in light of the current status of the Company and its compensation policies and practices. Based on the results of this review, the HR Committee determined that our compensation program does not create risks that are reasonably likely to have a material adverse effect on the Company.
Equity Incentive Philosophy
The HR Committee believes that the direct ownership of substantial amounts of common stock combined with stock-settled incentives combine to strongly align the interests of the Company’s senior executive officers with the interests of stockholders. The Company’s NEO compensation arrangements place a large amount of each individual’s future compensation “at risk” relative to the performance of the Company’s common stock. Our NEOs’ significant investments in our common stock, as required by our executive stock ownership guidelines, also make our executives sensitive to declines in our stock price.
The HR Committee generally considers the returns realized by stockholders through increases or decreases in the price of the Company’s common stock in the course of establishing NEO equity incentive compensation performance targets and in determining annual incentive compensation and vesting of long-term performance-based incentives, but has determined that it would be inappropriate to base specific incentive compensation award amounts or vesting determinations on stockholder return measures such as total stockholder return. This is primarily based upon concern that the Company’s NEO compensation measures not incent excessive risk-taking behavior in times when market perceptions of matters outside of our loans held for investment on a gross basis at December 31, 2019.
|
| | | | | | |
| (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 concentrationlong-term performance-based incentives are earned based on achievement of loans heldperformance measures such as EPS and return on equity ("ROE"). These performance measures are based on the Company’s financial performance and take into account the importance of balancing the risk appetite and risk management framework established by the board of directors, regulatory expectations for investment, excluding mortgage finance,safe and sound operation of a federally insured bank and the desire and ability of our executive leadership and employees to achieve long-term, sustainable growth in stockholder value.
Consideration of Most Recent Advisory Stockholder Vote on Executive Compensation
At our 2019 Annual Meeting of Stockholders, we received the affirmative support of 97% of votes cast in favor of our 2018 executive compensation, as disclosed in the 2019 Proxy Statement. The board and the HR Committee value the perspectives of our stockholders on executive compensation. In considering the results of this advisory vote, the HR Committee concluded that the compensation paid to our NEOs and the Company’s overall pay practices enjoy strong stockholder support.
The Company maintains active engagement with our stockholders, communicating directly with the holders of more than 50% of our outstanding common stock each year regarding the Company’s performance and responding to any single industry isquestions or issues they may raise. Future advisory votes on executive compensation will continue to serve as an additional tool to guide the board and the HR Committee in real estate and construction. Loans extended to borrowers withinevaluating 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 leasealignment of the propertiesCompany’s executive compensation program with the interests of the Company and its stockholders.
An advisory vote at the Company’s 2017 Annual Meeting of Stockholders confirmed that stockholders overwhelmingly favored an annual advisory vote on executive compensation. Consistent with this preference, the board implemented an annual advisory vote on executive compensation until the next required vote on the frequency of stockholder votes on executive compensation, which is scheduled to occur at the 2023 Annual Meeting of Stockholders.
Role of the Compensation Consultant
The HR Committee engaged Pearl Meyer as its independent executive compensation consulting firm for 2019 to provide:
expertise on compensation strategy and program design;
information relating to the selection of the Company’s peer group and compensation practices employed by the peer group and overall market;
advice regarding structuring and establishing executive compensation plans or through refinancing byarrangements that are aligned with the objectives of the Company and the interests of stockholders; and
recommendations to the HR Committee concerning the existing executive compensation programs and changes to such programs.
The HR Committee has determined that a formal executive compensation market/peer review will be performed every other institutional sources offering long-term fixed rate financing. Loan amounts are determinedyear and engaged Pearl Meyer to perform such review most recently in part from an analysis of pro forma cash flows. Loans are also underwritten2018, which we refer to comply with product-type specific advance rates against both cost and market value. Borrowers represented withinas 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.Pearl Meyer 2018
We believeReview. The Pearl Meyer 2018 Review provided the loans we originate are appropriately collateralizedHR Committee with a market competitive executive compensation analysis for the NEOs, including base salary, annual incentives, long-term incentives and nonqualified deferred compensation plans, including retirement benefits. To assist in determining 2019 base salaries and incentive compensation, the HR Committee used the Pearl Meyer 2018 Report Review and market data regarding performance of comparable financial services companies, and considered the Company’s financial performance and each NEO’s individual performance. The next executive compensation market/peer review will be performed in 2020.
Pearl Meyer provided its executive compensation consulting services under our credit standards. Approximately 97% of our loans held for investment are secured by collateral. Over 61%the direction of the real estate collateral is locatedHR Committee and did not provide any additional services to the Company. Our management provides input to the compensation consultant but does not direct or oversee its activities with respect to our executive compensation programs. In order not to impair the independence of the compensation consultant, or create the appearance of an impairment, the Committee follows a policy that the compensation consulting firm may not provide other services to the Company. The HR Committee has evaluated Pearl Meyer’s independence, including the factors relating to independence specified in Texas. Nasdaq Stock Market Listing Rules, and determined Pearl Meyer to be independent.
Peer Company Compensation Data
The table below sets forth information regardingHR Committee works with the distributionindependent consultant to collect and review competitive market compensation practices. As one point of our loans heldreference, the HR Committee reviews compensation practices for investment on a gross basis among various typespeer group of collateral at December 31, 2019:publicly traded bank holding companies of comparable size. The peer group used in evaluating and setting 2019 NEO compensation included the following:
|
| | | | | | |
| (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 | % |
|
| |
| Associated Banc-Corp | PacWest Bancorp |
| BankUnited, Inc. | Pinnacle Financial Partners, Inc. |
| BOK Financial Corporation | Prosperity Bancshares Inc. |
| Cullen/Frost Bankers, Inc. | Signature Bank |
| First Midwest Bancorp, Inc. | SVB Financial Group |
| F.N.B. Corporation | Western Alliance Bancorporation |
| IberiaBank Corporation | Wintrust Financial Corporation |
As notedThe HR Committee targets total compensation paid to the Company’s executive officers to be aligned with the 50th percentile of the Company’s peer group and market. Some executive officers may be below the 50th percentile, while some may be above, depending on the facts and circumstances of each executive including experience, time in the table above, approximately 24.3%position and performance.
Elements of our loans heldCompensation Program
Our compensation program for investmentexecutive officers consists of the following elements:
base salary;
annual incentive compensation;
long-term incentive compensation; and
other retirement and health benefits.
Base Salary
Base salaries are designed to compensate executive officers for their roles and responsibilities and to provide competitive levels of fixed compensation that reflects their experience, duties and scope of responsibilities. We pay competitive base salaries in order to recruit and retain executives of the quality necessary to ensure the success of our Company. Base salaries for the NEOs are subject to annual review, but are not always adjusted on an annual basis. The HR Committee determines the appropriate level and timing of changes in base compensation for the NEOs (other than the CEO) based on the recommendation of the CEO. In making determinations of salary levels for the NEOs, the HR Committee considers the entire compensation package for each NEO, including annual incentive compensation and equity-based compensation provided under our long-term compensation plan.
The HR Committee determines the level of periodic salary increases after reviewing:
the qualifications, experience and performance of each executive officer;
the compensation paid to persons having similar duties and responsibilities in our peer group companies; and
the nature of the Bank’s business, the complexity of its activities and the importance of the executive’s experience to the success of the business.
After considering these factors, reviewing results of the Pearl Meyer 2018 Review and discussing proposed salaries for the other NEOs with the CEO, the HR Committee recommended and the board approved annual salaries, with the indicated percentage increases, effective March 1, 2019, as of December 31, 2019 are secured by real property. The table below summarizes our total real estate loan portfolio, which includes real estate loansfollows: Mr. Cargill $1,000,000 (4%), Ms. Anderson $500,000 (4%), Mr. Ackerson $540,500 (6%), 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, 2019:
|
| | | | | | |
| (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) | 731,220 |
| | 12.2 | % |
| Commercial buildings | 704,318 |
| | 11.7 | % |
| Hotel/motel buildings | 377,412 |
| | 6.3 | % |
| Hospital/medical buildings | 367,156 |
| | 6.1 | % |
| Residential lots | 348,282 |
| | 5.8 | % |
| Shopping center/mall buildings | 327,431 |
| | 5.4 | % |
| Industrial buildings | 294,315 |
| | 4.9 | % |
| Commercial lots | 94,214 |
| | 1.6 | % |
| Unimproved land | 54,657 |
| | 0.9 | % |
| Other | 476,194 |
| | 7.9 | % |
| Other than market risk |
| |
|
| 1-4 Family dwellings (other than condominium) | 384,094 |
| | 6.4 | % |
| Commercial buildings | 311,948 |
| | 5.2 | % |
| Industrial buildings | 300,184 |
| | 5.0 | % |
| Other | 225,063 |
| | 3.8 | % |
| Total real estate loans | $ | 6,008,040 |
| | 100.0 | % |
The table below summarizes our market risk real estate portfolio at December 31,Annual Incentive Compensation
We provide annual cash incentive opportunities to motivate and reward the NEOs for achievement of financial results as well as strategic and business objectives. A target bonus opportunity is set for each NEO as a percentage of base salary, with the percentage varying depending on their position. For 2019, the annual incentive target amounts for the NEOs were as segregated by the geographic region in which the property is located:follows:
|
| | | | | | |
| (in thousands except percentage data) | Amount | | Percent of Total |
| Geographic region: | | | |
| Dallas/Fort Worth | $ | 1,095,967 |
| | 22.9 | % |
| Houston | 908,119 |
| | 19.0 | % |
| San Antonio | 411,146 |
| | 8.6 | % |
| Austin | 403,945 |
| | 8.4 | % |
| Other Texas cities | 108,281 |
| | 2.3 | % |
| Other states | 1,859,293 |
| | 38.8 | % |
| Total market risk real estate loans | $ | 4,786,751 |
| | 100 | % |
|
| | |
| Executive Officer | Target Incentive (% of Base Salary) | Target Incentive ($) |
| C. Keith Cargill | 115% | $1,150,000 |
| Julie L. Anderson | 80% | $400,000 |
| Vince A. Ackerson | 85% | $459,425 |
| John G. Turpen | 75% | $341,250 |
Actual incentive amounts that could be earned by the NEOs for 2019 were based on the level of achievement of performance goals relating to the following key metrics: net income (65%), credit quality (25%) and MSOs (10%).
For the net income metric, NEOs could earn between 25% (for performance at threshold levels) and 150% (for performance above target levels) of their respective weighted target bonus amounts. With respect to the net income metric, the target performance goal was $327.0 million, which would result in a payout of 100% of the weighted target incentive; the threshold performance goal was $280.0 million, resulting in a payout of 25% of the weighted target incentive; and the maximum threshold performance goal was $360.0 million, resulting in a payout of 150% of the weighted target incentive.
For the credit quality metric, NEOs could earn between 0% and 100% of the weighted target amount based on performance measured against board-approved guidelines and tolerances reviewed by the Risk Committee throughout the year.
For the MSO metric, NEOs could earn between 0% and 100% of the weighted target amount based on the HR Committee’s qualitative assessment of the NEO’s successful completion of specific business and financial objectives and strategic initiatives related to the NEO’s areas of responsibility in the business as approved by the HR Committee at the beginning of the year.
In addition, in determining the amount of annual incentives earned, the HR Committee considers the performance of the Company relative to its peer group, and also considers the entire compensation package of each of the NEOs and the performance of that individual.
The determination of collateral value is critically important when financing real estate. As a result, obtaining currentHR Committee met in February 2020 to consider the Company’s performance against incentive goals 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.
Appraisals are, in substantially all cases, reviewed by a third party to determine the reasonablenessannual incentives to be paid to the NEOs. For 2019, the following results were achieved and considered in determining NEO incentive compensation:
Adjusted net income of $373.2 million, which exceeded 150% of target for this metric, resulting in a maximum payout of 97.5% of each NEO’s aggregate target amount. Net income for the period was adjusted upward for the net impact of unanticipated declines in interest rates experienced in 2019 and was adjusted downward for gains related to the settlement of certain legal claims in 2019, both of which were determined by the HR Committee not to be attributable to management’s performance.
Credit quality results were measured against board-approved guidelines and tolerances reviewed by the Risk Committee throughout the year and were determined to equal 100% of target for this metric, resulting in a payout of 25.0% of each NEO’s aggregate target amount.
Achievement of individual MSOs were reviewed and determined by the HR Committee to equal 100% of target for this metric for each NEO, resulting in a payout of 10.0% of each NEO’s aggregate target amount.
Based on the achievement of the appraised value. The third party reviewer will challenge whether or notfinancial, business and individual performance goals described above, the data used is appropriate and relevant, form an opinion asHR Committee awarded the following annual incentives 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 $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 authorizationNEOs 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:fiscal year 2019:
|
| | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| | | | Period End Balances | | | | Period End Balances |
| (in thousands, except relationship data) | Number of Relationships | | Committed | | Outstanding | | Number of Relationships | | Committed | | Outstanding |
| $30.0 million and greater | 177 |
| | $ | 8,254,124 |
| | $ | 4,251,321 |
| | 152 |
| | $ | 6,995,259 |
| | $ | 3,678,155 |
|
| $20.0 million to $29.9 million | 196 |
| | 4,708,982 |
| | 3,103,200 |
| | 224 |
| | 5,272,529 |
| | 3,362,732 |
|
|
| | | |
| Executive Officer | Target Incentive ($) | Incentive Earned (% of Target) | Incentive Earned ($) |
| C. Keith Cargill | $1,150,000 | 132.5% | $1,523,750 |
| Julie L. Anderson | $400,000 | 132.5% | $530,000 |
| Vince A. Ackerson | $459,425 | 132.5% | $608,738 |
| John G. Turpen | $341,250 | 132.5% | $452,156 |
Long-Term Incentive Compensation
Long-term incentive awards for our NEOs include equity-based awards that are designed to directly align the interests of the NEOs with those of our stockholders and to motivate the NEOs to increase the value of the Company to stockholders over the long term.
Growth2019 Grant of Equity Awards
In February 2019, the Company made an annual grant of equity awards to the NEOs. The 2019 equity awards consisted of RSUs, 50% of which were time-based awards and 50% of which were performance-based awards. The time-based RSUs vest on the third anniversary of the grant date, subject to the executive’s continued employment with the Company. The performance-based RSUs may be earned in period-end outstanding balances relatedamounts ranging from 0% to large credit relationships primarily resulted from150% of the target award, based on the Company’s level of achievement of performance goals relating to (i) average EPS growth (25% weighting), (ii) average EPS growth relative to a peer group (25% weighting), (iii) average ROE relative to the Company’s three-year plan (25% weighting), and (iv) average ROE relative to a peer group (25% weighting) for the three-year period ending December 31, 2021.
When considering the 2019 awards, the HR Committee started with an increaseintended target value for each NEO, which was based on a percentage of his or her base salary. For 2019, the target values for equity awards to the NEOs, as a percentage of their respective base salaries, were as follow: Mr. Cargill, 230%; Ms. Anderson, 115%; Mr. Ackerson, 120%; and Mr. Turpen, 100%. The amounts of the grants were based on a variety of factors deemed relevant by the HR Committee, including the Company’s performance, the NEO’s level of responsibility, an assessment of individual performance made by the Committee, including discussion of the performance of the other NEOs with the CEO, and competitive market data. The number of time-based RSUs and the target number of performance-based RSUs (including the threshold and maximum number of performance-based RSUs that could be earned) granted to each NEO are set forth below in the number2019 Grants of commitments. Plan-Based Awards Table.
The RSUs will be forfeited upon an NEO’s termination of employment, except as otherwise provided below. The RSUs provide for accelerated vesting if an NEO is terminated without cause or terminates his or her employment for good reason (each as defined in the NEO’s employment agreement) following a change in control of the Company, regardless of whether the performance criteria have been achieved. If an NEO violates the provisions of any agreement with the Company that contains confidentiality, non-solicitation or other protective or restrictive covenant provisions, any unvested awards will cease to vest, any undelivered shares will be forfeited and any net shares delivered to the NEO with respect to the awards must be immediately returned to the Company.
2017 Grants of Performance-Based RSUs - Performance Results and Payouts
The Company made an annual grant of RSUs in March 2017. The grants were structured in a manner consistent with the 2019 grants described above, with awards consisting of 50% time-based RSUs and 50% performance-based RSUs. The 2017 performance-based RSUs could be earned in amounts ranging from 0% to 150% of the target award, based on the Company’s level of achievement of performance goals relating to EPS compound annual growth rate ("CAGR") and average ROE over a three-year performance period.
The following table summarizessets forth the average committedrange of specific targets, relative weights and outstanding loan balances per relationship related to our large heldresulting payouts for investment credit relationships, excluding mortgage finance, at year-end:
|
| | | | | | | | | | | | | | | |
| | 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
|
| | | | | | | | | | | | | | | |
| | December 31, 2019 |
| (in thousands) | Total | | Within 1 Year | | 1-5 Years | | After 5 Years |
| Loan maturity: | | | | | | | |
| Commercial | $ | 10,230,828 |
| | $ | 3,563,035 |
| | $ | 5,807,416 |
| | $ | 860,377 |
|
| Mortgage finance | 8,169,849 |
| | 8,169,849 |
| | — |
| | — |
|
| Construction | 2,563,339 |
| | 731,908 |
| | 1,766,100 |
| | 65,331 |
|
| Real estate | 3,444,701 |
| | 664,770 |
| | 1,851,049 |
| | 928,882 |
|
| Consumer | 71,463 |
| | 56,182 |
| | 7,740 |
| | 7,541 |
|
| Equipment leases | 256,462 |
| | 29,512 |
| | 107,965 |
| | 118,985 |
|
| Total loans held for investment | $ | 24,736,642 |
| | $ | 13,215,256 |
| | $ | 9,540,270 |
| | $ | 1,981,116 |
|
| Interest rate sensitivity for selected loans with: | | |
| |
| |
|
| Predetermined interest rates | $ | 3,074,975 |
| | $ | 1,556,329 |
| | $ | 530,507 |
| | $ | 988,139 |
|
| Floating or adjustable interest rates | 21,661,667 |
| | 11,658,927 |
| | 9,009,763 |
| | 992,977 |
|
| Total loans held for investment | $ | 24,736,642 |
| | $ | 13,215,256 |
| | $ | 9,540,270 |
| | $ | 1,981,116 |
|
Interest Reserve Loans
As ofthe 2017 performance-based RSUs for the three-year period ending December 31, 2019, and December 31, 2018, we had $743.8 million and $718.5 million, respectively, in loans held for investment that included interest reserve arrangements, representing approximately 29% and 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 andas established at the time the credit is approved. We have ongoing controlsawards were granted:
|
| | | | | | | | | | |
Target EPS CAGR (25% weight) | Payout (as a % of weighted Target Award) | | Target EPS CAGR Peer Rank (25% weight) | Payout (as a % of weighted Target Award) | | Target Average ROE (25% weight) | Payout (as a % of weighted Target Award) | | Target Average ROE Peer Rank (25% weight) | Payout (as a % of weighted Target Award) |
| 5% | 50% | | Bottom quartile | 0% | | 9.6% | 50% | | Bottom quartile | 0% |
| 10% | 75% | | 25th to 39.9th% | 50% | | 9.8% | 75% | | 25th to 39.9th% | 50% |
| 15% | 100% | | 40th to 59.9th% | 100% | | 10.0% | 100% | | 40th to 59.9th% | 100% |
| 18% | 125% | | 60th to74.9th% | 125% | | 10.2% | 125% | | 60th to74.9th% | 125% |
| 20% | 150% | | Top Quartile | 150% | | 10.4% | 150% | | Top Quartile | 150% |
Payouts for monitoring complianceresults falling between the specified values reflected above are determined based on straight-line interpolation.
The three-year performance period with loan covenants, advancing fundsrespect to the 2017 performance-based RSUs concluded on December 31, 2019. The following table sets forth the Company’s actual achievement of performance goals for the 2017 performance-based RSUs 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 analysisresulting payout percentages. Actual EPS was adjusted downward for the impact 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 investedreduction in the
project before any draws are allowed under the Bank's credit commitment. We require current financial statementsCompany’s income tax rate as a result of the
borrowing entityTax Cuts and
guarantors, as well as conduct periodic inspections ofJobs Act enacted in December 2017 that 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 doHR Committee determined did 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, 2019 and December 31, 2018, none of our loans with interest reserves were on non-accrual.result from management’s performance.
|
| | | | | | | | | | |
Adjusted EPS CAGR (25% weight) | Payout (as a % of weighted Target Award) | | Adjusted EPS CAGR Peer Rank (25% weight) | Payout (as a % of weighted Target Award) | | Actual Average ROE (25% weight) | Payout (as a % of weighted Target Award) | | Actual Average ROE Peer Rank (25% weight) | Payout (as a % of weighted Target Award) |
| 17.8% | 123% | | 60th% | 125% | | 11.68% | 150% | | 60th% | 125% |
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:
|
| | | | | | | | | | | |
| | As of December 31, |
| (in thousands) | 2019 | | 2018 | | 2017 |
| Non-accrual loans(1) | | | | | |
| Commercial | | | | | |
| Oil and gas properties | $ | 125,049 |
| | $ | 37,532 |
| | $ | 64,192 |
|
| Assets of the borrowers | 54,538 |
| | 16,538 |
| | 7,571 |
|
| Accounts receivable and inventory | 29,789 |
| | 21,300 |
| | 24,399 |
|
| Other | 4,084 |
| | 2,493 |
| | 3,569 |
|
| Total commercial | 213,460 |
| | 77,863 |
| | 99,731 |
|
| Real estate |
|
| |
|
| |
|
|
| Commercial property | 1,751 |
| | 988 |
| | 1,096 |
|
| Single family residences | 1,449 |
| | 1,469 |
| | 118 |
|
| Hotel/motel | 8,500 |
| | — |
| | — |
|
| Other | — |
| | — |
| | 499 |
|
| Total real estate | 11,700 |
| | 2,457 |
| | 1,713 |
|
| Consumer | 34 |
| | 55 |
| | — |
|
| Equipment leases | 190 |
| | — |
| | — |
|
| Total non-accrual loans | 225,384 |
| | 80,375 |
| | 101,444 |
|
| OREO(2) | — |
| | 79 |
| | 11,742 |
|
| Total non-performing assets | $ | 225,384 |
| | $ | 80,454 |
| | $ | 113,186 |
|
| Restructured loans - accruing | $ | — |
| | $ | — |
| | $ | — |
|
| 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) | As of December 31, 2019, 2018 and 2017, non-accrual loans included $35.1 million, $20.0 million and $18.8 million, respectively, in loans that met the criteria for restructured. |
| |
(2) | At December 31, 2019, 2018 and 2017, there was no valuation allowance recorded against the OREO balance. |
| |
(3) | At December 31, 2019, 2018 and 2017, loans past due 90 days and still accruing includes premium finance loans of $8.5 million, $9.2 million and $5.5 million, respectively. |
| |
(4) | Includes loans guaranteed by U.S. government agencies that were repurchased out of Ginnie Mae securities. Loans are recorded as loans held for sale and carried 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 includes 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 loans held for sale on our balance sheet regardless of whether the repurchase option has been exercised. |
Total non-performing assets at December 31, 2019 increased $144.9 million from December 31, 2018. The increase during 2019 primarily related to increases in our energy and leveraged loan portfolios. Energy non-performing assets totaled $125.0 million at December 31, 2019 compared to $37.5 million at December 31, 2018, and leveraged lending non-performing assets totaled $73.2 million and $28.8 million for the 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, 2019, we had $46.6 million in loans of this type, compared to $81.7 million at December 31, 2018.
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 inherent losses in the loan portfolio 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. The decrease in provision recorded during 2019 compared to 2018 was primarily related to decreases in charge-offs and loans held for investment, excluding mortgage finance, balances.
The table below presents a summary of our loan 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. The combined allowance as a percentage of loans held for investment decreased to 0.83% at December 31, 2019 from 0.90% and 0.94% at December 31, 2018 and 2017, respectively. The downward trend in the combined allowance as a percentage of loans held for investment that began in 2017 continued during 2018 and 2019 due primarily to growth in mortgage finance loans held for investment.
The following table presents a summary of our allowance for loan losses 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 experience.
At December 31, 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 4 - 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.
Loans Held for Sale
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 1 - 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 banking centers, courier services and online and mobile banking. BankDirect and Bask Bank, our online banking 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, 2019 increased $4.4 billion compared to 2018. Average demand deposits for the year ended December 31, 2019 increased $1.1 billion compared to 2018, and average interest-bearing deposits increased $3.3 billion. The average cost of deposits increased to 1.19% in 2019 from 0.92% in 2018 due to increased
competition for deposits, as well as higher interest rates during the first half of 2019 prior to the interest rate reductions that began in August 2019.
The following table discloses our average deposits:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (in thousands) | 2019 | | 2018 | | 2017 |
| Non-interest-bearing | $ | 8,989,104 |
| | $ | 7,890,304 |
| | $ | 8,320,650 |
|
| Interest-bearing transaction | 3,535,282 |
| | 3,044,300 |
| | 2,159,375 |
|
| Savings | 9,780,532 |
| | 7,986,135 |
| | 7,495,318 |
|
| Time deposits | 2,351,698 |
| | 1,292,864 |
| | 478,513 |
|
| Total average deposits | $ | 24,656,616 |
| | $ | 20,213,603 |
| | $ | 18,453,856 |
|
Uninsured deposits at December 31, 2019 were 53% of total deposits, compared to 57% of total deposits at December 31, 2018 and 59% of total deposits at December 31, 2017. The insured deposit data for 2019, 2018 and 2017 reflect the deposit insurance impact of "combined ownership segregation" of escrow and other accounts at an aggregate level but 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, |
| (in thousands) | 2019 | | 2018 | | 2017 |
| Months to maturity: | | | | | |
| 3 or less | $ | 215,991 |
| | $ | 193,982 |
| | $ | 161,523 |
|
| Over 3 through 6 | 75,632 |
| | 89,529 |
| | 146,027 |
|
| Over 6 through 12 | 165,973 |
| | 100,177 |
| | 128,817 |
|
| Over 12 | 50,619 |
| | 15,834 |
| | 28,965 |
|
| Total | $ | 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 objectives in managing our liquidity are to maintain our ability to meet loan commitments, repurchase investment securities and 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 Asset and Liability Management Committee (“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, 2019 and 2018, our principal source of funding has been our customer deposits, supplemented by our short-term and long-term borrowings, primarily from federal funds purchased and 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 mortgage finance assets.
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 $4.3 billion at December 31, 2019 and $2.9 billion at December 31, 2018. The following table summarizes the growth in and composition of liquidity assets:
|
| | | | | | | | | | | | |
| | | December 31, |
| (in thousands except percentage data) | | 2019 | | 2018 | | 2017 |
| Federal funds sold and securities purchased under resale agreements | | $ | 30,000 |
| | $ | 50,190 |
| | $ | 30,000 |
|
| Interest-bearing deposits | | 4,233,766 |
| | 2,815,684 |
| | 2,697,581 |
|
| Total liquidity assets | | $ | 4,263,766 |
| | $ | 2,865,874 |
| | $ | 2,727,581 |
|
| | | | | | | |
| Total liquidity assets as a percent of: | | | | | | |
| Total loans held for investment | | 17.3 | % | | 12.7 | % | | 13.2 | % |
| Total earning assets | | 13.5 | % | | 10.5 | % | | 11.2 | % |
| Total deposits | | 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, 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 core customer deposits, relationship brokered deposits and traditional brokered deposits:
|
| | | | | | | |
| | December 31, |
| (in thousands) | 2019 | | 2018 |
| Deposits from core customers | $ | 22,549,568 |
| | $ | 17,015,541 |
|
| Deposits from core customers as a percent of total deposits | 85.2 | % | | 82.6 | % |
| Relationship brokered deposits | $ | 1,617,247 |
| | $ | 2,027,850 |
|
| Relationship brokered deposits as a percent of average total deposits | 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 | $ | 20,747,292 |
| | $ | 17,504,922 |
|
| Average deposits from core customers as a percent of average total deposits | 84.1 | % | | 86.6 | % |
| Average relationship brokered deposits | $ | 2,096,287 |
| | $ | 1,890,824 |
|
| Average relationship brokered deposits as a percent of average total deposits | 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 $5.3 billion. Based on our internal guidelines, we have chosen to limit our use of these sources to a lesser amount. We have increased our use of traditional brokered deposits in 2018 and 2019 in response to favorable rates available in that market relative to other available funding sources.
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 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 short-term and other borrowings:
|
| | | | | | | | | | |
| | | 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 |
|
For additional information on our short-term and other borrowings, see Note 11 - Short-Term and Other Borrowings in the accompanying notes to the consolidated financial statements included elsewhere in this 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. 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 $2.7 billion for the year ended December 31, 2019 as compared to $2.4 billion in 2018 and $2.1 billion in 2017. We have not paid any cash dividends on our common stock since we commenced operations. While we have no plans to pay dividends on our common stock in the foreseeable future, 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. See the discussion at Risk Factors – Risks Relating to Our Securities.
For additional information on our capital, see Note 14 - Regulatory Restrictions 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, 2019, significant fixed and determinable contractual obligations to third parties by payment date. Amounts in the table do not include accrued or accruing interest. See Note 7 - Leases in the 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 report.
|
| | | | | | | | | | | | | | | | | | | | | | |
| (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 | 10 |
| | $ | 23,607,562 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 23,607,562 |
|
| Time deposits | 10 |
| | 2,810,219 |
| | 55,923 |
| | 2,034 |
| | 2,855 |
| | 2,871,031 |
|
| Federal funds purchased and customer repurchase agreements | 11 |
| | 141,766 |
| | — |
| | — |
| | — |
| | 141,766 |
|
| FHLB borrowings | 11 |
| | 2,400,000 |
| | — |
| | — |
| | — |
| | 2,400,000 |
|
| Subordinated notes | 12 |
| | — |
| | — |
| | — |
| | 282,129 |
| | 282,129 |
|
| Trust preferred subordinated debentures | 12 |
| | — |
| | — |
| | — |
| | 113,406 |
| | 113,406 |
|
| Total contractual obligations | | | $ | 28,959,547 |
| | $ | 55,923 |
| | $ | 2,034 |
| | $ | 398,390 |
| | $ | 29,415,894 |
|
Off-Balance Sheet Arrangements
We had the following off-balance sheet contractual obligations as of December 31, 2019:
|
| | | | | | | | | | | | | | | | | | | |
| (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 | $ | 2,672,791 |
| | $ | 3,112,661 |
| | $ | 2,066,169 |
| | $ | 215,034 |
| | $ | 8,066,655 |
|
| Standby and commercial letters of credit | 186,377 |
| | 58,301 |
| | 16,727 |
| | — |
| | 261,405 |
|
| Total financial instruments with off-balance sheet risk | $ | 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 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.
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 at the balance sheet date. The allowance for loan losses is comprised of general reserves and specific reserves assigned to certain 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 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 4 – 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
ASU 2018-15 "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40 - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract)" ("ASU 2018-15") aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to 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.
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 in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and 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. |
|
| | | | | | | | | | | | | | | | | | | |
| | 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. Declines and 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 in future periods. Foreign exchange rates, commodity prices (other than energy) and equity prices are not expected to pose significant market risk to us.
The responsibility for managing market risk rests with the ALCO, which operates under policy guidelines established by our board of directors. The acceptable negative variation in net interest revenue due to a 100 basis point increase or decrease in interest rates is generally limited by these guidelines to plus or minus 10-12%. These guidelines establish maximum levels for
short-term borrowings, short-term assets and public and brokered deposits and minimum levels for liquidity, among other things. Oversight of our compliance with these guidelines is the ongoing responsibility of the 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, 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 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, 2019
|
| | | | | | | | | | | | | | | | | | | |
| (in thousands) | 0-3 mo Balance | | 4-12 mo Balance | | 1-3 yr Balance | | 3+ yr Balance | | Total Balance |
| Assets: | | | | | | | | | |
| 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 | 23,716,946 |
| | 173,143 |
| | 32,628 |
| | 316,084 |
| | 24,238,801 |
|
| Total fixed loans | 259,483 |
| | 1,296,845 |
| | 300,767 |
| | 1,217,880 |
| | 3,074,975 |
|
| Total loans(2) | 23,976,429 |
| | 1,469,988 |
| | 333,395 |
| | 1,533,964 |
| | 27,313,776 |
|
| Total interest sensitive assets | $ | 28,267,216 |
| | $ | 1,472,668 |
| | $ | 333,747 |
| | $ | 1,743,782 |
| | $ | 31,817,413 |
|
| Liabilities: | | | | | | | | | |
| Interest-bearing customer deposits | $ | 14,169,103 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 14,169,103 |
|
| CDs & IRAs | 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 | 14,798,930 |
| | 2,180,392 |
| | 55,923 |
| | 4,889 |
| | 17,040,134 |
|
| Repurchase agreements, federal funds purchased, FHLB borrowings | 2,541,766 |
| | — |
| | — |
| | — |
| | 2,541,766 |
|
| Subordinated notes | — |
| | — |
| | — |
| | 282,129 |
| | 282,129 |
|
| Trust preferred subordinated debentures | — |
| | — |
| | — |
| | 113,406 |
| | 113,406 |
|
| Total borrowings | 2,541,766 |
| | — |
| | — |
| | 395,535 |
| | 2,937,301 |
|
| Total interest sensitive liabilities | $ | 17,340,696 |
| | $ | 2,180,392 |
| | $ | 55,923 |
| | $ | 400,424 |
| | $ | 19,977,435 |
|
| GAP | $ | 10,926,520 |
| | $ | (707,724 | ) | | $ | 277,824 |
| | $ | 1,343,358 |
| | $ | — |
|
| Cumulative GAP | $ | 10,926,520 |
| | $ | 10,218,796 |
| | $ | 10,496,620 |
| | $ | 11,839,978 |
| | $ | 11,839,978 |
|
| | | | | | | | | | |
| Demand deposits | | | | | | | | | 9,438,459 |
|
| Stockholders’ equity | | | | | | | | | 2,832,258 |
|
| Total | | | | | | | | | $ | 12,270,717 |
|
| |
(1) | Investment securities based on fair market value. |
| |
(2) | Total loans includes loans held for investments, stated at gross, and loans held for sale. |
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 over the next twelve months based on three interest rate scenarios. These are a static rate scenario and two “shock test” scenarios.
These scenarios are based on interest rates as of the last day of a reporting period published by independent sources and incorporate relevant spreads of instruments that are actively traded in the open market. The Federal Reserve’s federal funds target affects short-term borrowing; the prime lending rate and 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 although we may do so in the future if that appears advisable.
For modeling purposes, the “shock test” scenarios assume immediate, sustained 100 and 200 basis point increases in interest rates and a 100 basis point decrease in interest rates.
Our interest rate risk exposure model incorporates assumptions regarding the level of interest rate on indeterminable maturity deposits (demand deposits, interest-bearing transaction accounts and savings accounts) for a given level of market rate change. In the current environment of 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 these changes is factored into the simulation model. This modeling indicated interest rate sensitivity as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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.
| |
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Index to Consolidated Financial Statements
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, 2019 and 2018, the related consolidated statements of income and other comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as “the consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 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 internal control over financial reporting as of December 31, 2019, based on 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 12, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the 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 regulationsactual achievement 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.
|
| |
| 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, TX
February 12, 2020
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | |
| | December 31, |
| (in thousands except per share data) | 2019 | | 2018 |
| Assets | | | |
| Cash and due from banks | $ | 161,817 |
| | $ | 214,191 |
|
| Interest-bearing deposits in other banks | 4,233,766 |
| | 2,815,684 |
|
| Federal funds sold and securities purchased under resale agreements | 30,000 |
| | 50,190 |
|
| 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 | 8,169,849 |
| | 5,877,524 |
|
| Loans held for investment (net of unearned income) | 16,476,413 |
| | 16,690,550 |
|
| Less: Allowance for loan losses | 195,047 |
| | 191,522 |
|
| Loans held for investment, net | 24,451,215 |
| | 22,376,552 |
|
| Mortgage servicing rights, net | 64,904 |
| | 42,474 |
|
| Premises and equipment, net | 31,212 |
| | 23,802 |
|
| Accrued interest receivable and other assets | 740,051 |
| | 626,614 |
|
| Goodwill and intangible assets, net | 18,099 |
| | 18,570 |
|
| Total assets | $ | 32,548,069 |
| | $ | 28,257,767 |
|
| Liabilities and Stockholders’ Equity | | | |
| Liabilities: | | | |
| Deposits: | | | |
| Non-interest-bearing | $ | 9,438,459 |
| | $ | 7,317,161 |
|
| Interest-bearing | 17,040,134 |
| | 13,288,952 |
|
| Total deposits | 26,478,593 |
| | 20,606,113 |
|
| Accrued interest payable | 12,760 |
| | 20,675 |
|
| Other liabilities | 287,157 |
| | 194,238 |
|
| Federal funds purchased and repurchase agreements | 141,766 |
| | 641,174 |
|
| Other borrowings | 2,400,000 |
| | 3,900,000 |
|
| Subordinated notes, net | 282,129 |
| | 281,767 |
|
| Trust preferred subordinated debentures | 113,406 |
| | 113,406 |
|
| Total liabilities | 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, 2019 and 2018 | 150,000 |
| | 150,000 |
|
| Common stock, $.01 par value: | | | |
| Authorized shares—100,000,000 | | | |
| Issued shares—50,338,158 and 50,201,127 at December 31, 2019 and 2018, respectively | 503 |
| | 502 |
|
| Additional paid-in capital | 978,205 |
| | 967,890 |
|
| Retained earnings | 1,694,608 |
| | 1,381,492 |
|
| Treasury stock (shares at cost: 417 at December 31, 2019 and 2018) | (8 | ) | | (8 | ) |
| Accumulated other comprehensive income, net of taxes | 8,950 |
| | 518 |
|
| Total stockholders’ equity | 2,832,258 |
| | 2,500,394 |
|
| Total liabilities and stockholders’ equity | $ | 32,548,069 |
| | $ | 28,257,767 |
|
See accompanying notes to consolidated financial statements.
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND OTHER
COMPREHENSIVE INCOME |
| | | | | | | | | | | |
| | Year ended December 31, |
| (in thousands except per share data) | 2019 | | 2018 | | 2017 |
| Interest income | | | | | |
| Interest and fees on loans | $ | 1,284,036 |
| | $ | 1,124,970 |
| | $ | 846,292 |
|
| Investment securities | 8,654 |
| | 2,834 |
| | 1,066 |
|
| Federal funds sold and securities purchased under resale agreements | 1,529 |
| | 3,792 |
| | 2,542 |
|
| Interest-bearing deposits in other banks | 71,093 |
| | 32,597 |
| | 29,399 |
|
| Total interest income | 1,365,312 |
| | 1,164,193 |
| | 879,299 |
|
| Interest expense | | | | | |
| Deposits | 293,537 |
| | 185,116 |
| | 79,886 |
|
| Federal funds purchased | 11,872 |
| | 6,531 |
| | 2,592 |
|
| Other borrowings | 58,393 |
| | 36,207 |
| | 15,137 |
|
| Subordinated notes | 16,764 |
| | 16,764 |
| | 16,764 |
|
| Trust preferred subordinated debentures | 5,026 |
| | 4,715 |
| | 3,592 |
|
| Total interest expense | 385,592 |
| | 249,333 |
| | 117,971 |
|
| Net interest income | 979,720 |
| | 914,860 |
| | 761,328 |
|
| Provision for credit losses | 75,000 |
| | 87,000 |
| | 44,000 |
|
| Net interest income after provision for credit losses | 904,720 |
| | 827,860 |
| | 717,328 |
|
| Non-interest income | | | | | |
| Service charges on deposit accounts | 11,320 |
| | 12,787 |
| | 12,432 |
|
| Wealth management and trust fee income | 8,810 |
| | 8,148 |
| | 6,153 |
|
| Brokered loan fees | 29,738 |
| | 22,532 |
| | 23,331 |
|
| Servicing income | 13,439 |
| | 18,307 |
| | 15,657 |
|
| Swap fees | 4,387 |
| | 5,625 |
| | 3,990 |
|
| Net gain/(loss) on sale of loans held for sale | (20,259 | ) | | (15,934 | ) | | (2,387 | ) |
| Other | 45,005 |
| | 26,559 |
| | 15,080 |
|
| Total non-interest income | 92,440 |
| | 78,024 |
| | 74,256 |
|
| Non-interest expense | | | | | |
| Salaries and employee benefits | 315,080 |
| | 291,768 |
| | 264,231 |
|
| Net occupancy expense | 32,989 |
| | 30,342 |
| | 25,811 |
|
| Marketing | 53,355 |
| | 39,335 |
| | 26,787 |
|
| Legal and professional | 53,830 |
| | 42,990 |
| | 29,731 |
|
| Communications and technology | 44,826 |
| | 30,056 |
| | 31,004 |
|
| FDIC insurance assessment | 20,093 |
| | 24,307 |
| | 23,510 |
|
| Servicing related expenses | 22,573 |
| | 14,934 |
| | 15,506 |
|
| Allowance and other carrying costs for other real estate owned | 7 |
| | 474 |
| | 6,437 |
|
| Other | 47,246 |
| | 50,890 |
| | 42,859 |
|
| Total non-interest expense | 589,999 |
| | 525,096 |
| | 465,876 |
|
| Income before income taxes | 407,161 |
| | 380,788 |
| | 325,708 |
|
| Income tax expense | 84,295 |
| | 79,964 |
| | 128,645 |
|
| 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 |
|
| 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 | $ | 331,298 |
| | $ | 300,830 |
| | $ | 197,076 |
|
| Basic earnings per common share | $ | 6.23 |
| | $ | 5.83 |
| | $ | 3.78 |
|
| Diluted earnings per common share | $ | 6.21 |
| | $ | 5.79 |
| | $ | 3.73 |
|
See accompanying notes to consolidated financial statements.
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, 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.
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| | Year ended December 31, |
| (in thousands) | 2019 | | 2018 | | 2017 |
| Operating activities | | | | | |
| Net income | $ | 322,866 |
| | $ | 300,824 |
| | $ | 197,063 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Provision for credit losses | 75,000 |
| | 87,000 |
| | 44,000 |
|
| Deferred tax expense (benefit) | 10,796 |
| | (6,400 | ) | | 31,276 |
|
| Depreciation and amortization | 37,267 |
| | 32,022 |
| | 27,871 |
|
| 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 | 17,604 |
| | 16,938 |
| | 22,019 |
|
| Purchases and originations of loans held for sale | (10,183,057 | ) | | (6,753,709 | ) | | (5,556,964 | ) |
| Proceeds from sales and repayments of loans held for sale | 9,508,927 |
| | 5,759,067 |
| | 5,457,117 |
|
| Changes in operating assets and liabilities: | | | | | |
| Accrued interest receivable and other assets | (143,617 | ) | | (123,542 | ) | | (105,720 | ) |
| Accrued interest payable and other liabilities | 87,884 |
| | (5,026 | ) | | 10,289 |
|
| Net cash (used in)/provided by operating activities | (240,268 | ) | | (679,715 | ) | | 132,161 |
|
| Investing activities | | | | | |
| Purchases of investment securities | (113,233 | ) | | (101,558 | ) | | (97,776 | ) |
| Maturities and calls of available-for-sale securities | — |
| | — |
| | 94,775 |
|
| Principal payments received on investment securities | 6,185 |
| | 3,426 |
| | 4,383 |
|
| Originations of mortgage finance loans | (138,759,289 | ) | | (99,151,237 | ) | | (86,931,566 | ) |
| Proceeds from pay-offs of mortgage finance loans | 136,466,964 |
| | 98,581,873 |
| | 86,120,744 |
|
| 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 | (16,651 | ) | | (7,651 | ) | | (12,265 | ) |
| 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 | (2,276,077 | ) | | (1,992,746 | ) | | (3,215,745 | ) |
| Financing activities | | | | | |
| Net increase in deposits | 5,872,480 |
| | 1,482,933 |
| | 2,106,349 |
|
| Costs from issuance of stock related to stock-based awards and warrants | (1,459 | ) | | (2,382 | ) | | (2,241 | ) |
| Preferred dividends paid | (9,750 | ) | | (9,750 | ) | | (9,750 | ) |
| 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 | 3,861,863 |
| | 2,846,935 |
| | 3,149,823 |
|
| Net increase in cash and cash equivalents | 1,345,518 |
| | 174,474 |
| | 66,239 |
|
| Cash and cash equivalents at beginning of period | 3,080,065 |
| | 2,905,591 |
| | 2,839,352 |
|
| Cash and cash equivalents at end of period | $ | 4,425,583 |
| | $ | 3,080,065 |
| | $ | 2,905,591 |
|
| Supplemental disclosures of cash flow information: | | | | | |
| Cash paid during the period for interest | $ | 393,507 |
| | $ | 236,338 |
| | $ | 115,789 |
|
| Cash paid during the period for income taxes | 89,967 |
| | 75,405 |
| | 103,871 |
|
See accompanying notes to consolidated financial statements.
(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 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 the 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. 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.
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 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 shareperformance goals 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."
Cash and Cash Equivalents
Cash equivalents include amounts due from banks, interest-bearing deposits in other banks, federal funds sold and 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
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.
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 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 as a separate component of 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 are 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, 2019 and 2018.
Equity Securities
Beginning January 1, 2018, upon adoption of 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 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 government sponsored entities such as Fannie Mae or Freddie 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. 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. 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 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
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 extinguished and the loans continue to be reported as held for sale. As a Ginnie Mae approved lender, we may 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 (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 commitmentthree-year 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 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 further allocations of the allowance for loan losses or be subject to charge off in the event the loans become impaired.
Allowance for Loan Losses
The allowance for loan losses is comprised of general reserves and specific reserves for impaired loans, all based on our estimate of losses inherent in the portfolio at the balance sheet date. In order to determine the allowance for loan losses, all loans are assigned a credit grade. Loan commitments graded substandard or worse and greater than $500,000 are specifically reviewed for loss potential. Loans deemed to be impaired, as well as restructured loans and loans formerly reported as restructured, are assigned a specific 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 portfolio segments, and then further segregated by credit grades. 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 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 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 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 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, 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 loss experience as a baseline before consideration of current environmental issues both internal and external to the Bank that might reasonably cause the measure of incurred loss to differ from historical experience. 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.
The single Q Factor adjustment and application of any management overlay to model calculated segment weights reflects management’s determination that the allowance model is calculating an appropriate level of the allowance in the context of all known loan portfolio quality and concentration issues as well as other environmental factors that are reasonably believed to cause the measure of incurred loss, inclusive of unidentified losses inherent in the current portfolio, to differ from historical 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. 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. 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. 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 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, and are recorded in allowance and other carrying costs for OREO in the consolidated statements of income and other comprehensive income. Gains or losses on sale of OREO are recorded in other non-interest income in the consolidated statements of income and other comprehensive income.
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 the related servicing rights at the date of sale using values derived from a valuation model. 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. 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 income when earned and are reported in non-interest income on the consolidated statements of income and other comprehensive income. MSR valuation allowance expense and servicing related expenses are recorded in servicing related expenses in the consolidated 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 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 at least annually or whenever 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.
Premises and Equipment, Net
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. 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 disposals of premises and equipment are included in other non-interest income in the consolidated statements of income and other comprehensive income.
Software
Costs incurred in connection with development or purchase of internal use software and cloud computing arrangements, including in-substance software licenses, are capitalized. Amortization is computed on a straight-line basis over the estimated useful life of the asset, which generally ranges from one to five years. Capitalized software is included in other assets in the consolidated balance sheets.
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.
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 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.
In conjunction with the sale and securitization of loans held for sale and their related servicing rights, we may be exposed to liability resulting from recourse and repurchase agreements. If it is determined subsequent to our sale of a loan or its related servicing rights that a breach of the representations or warranties made in the 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, 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.
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 activity.
Leases
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 became 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 either the earliest period presented or as of the 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 have not restated comparative periods. Of the optional practical expedients available under ASU 2016-02, we adopted all expedients except for the hindsight practical expedient. As a result of implementing ASU 2016-02, we recognized an operating lease right-of-use ("ROU") asset of $64 million and 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 lease commencement based on the present value of the remaining lease payments using a 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 amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in net occupancy expense in the consolidated statements of income and other comprehensive income. See Note 7 – Leases for additional information.
Revenue Recognition
ASC 606, Revenue from Contracts with Customers ("ASC 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the 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 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 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 similar fiduciary activities. Revenue is recognized when our performance obligation is completed each month, which is generally the 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 the third party. These fees are paid to us by the 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 payoff) or upon receipt of the facility renewal or application. Revenue related to our MCA business is recognized at the time a loan is purchased.
Other non-interest income primarily includes items such as letter of credit fees, bank owned life insurance income, dividends on FHLB and FRB stock and other general operating income, none of which are subject to 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 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 Company and its subsidiary file a consolidated federal income tax return. We utilize the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based upon the difference between the values of the assets and liabilities as reflected in the financial statements and their related tax basis using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. As changes in tax law or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation 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 (“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.
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 with a single counterparty that 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. Because we act as an intermediary for our customer, changes in the fair value of 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. |
(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.
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 | ) |
Atending December 31, 2019, the CRT securities wereNEOs who received 2017 performance-based RSUs earned 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.
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. |
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:payouts:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (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 |
|
|
| | | |
| Executive Officer | Target Award of 2017 Performance-Based RSUs | Aggregate Payout Factor (% of Target Award) | Shares Earned and Paid Out |
| C. Keith Cargill | 10,008 | 130.8% | 13,086 |
| Julie L. Anderson | 2,032 | 130.8% | 2,657 |
| Vince A. Ackerson | 2,519 | 130.8% | 3,294 |
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 conditionsOther Benefits
Retirement Savings Opportunity. All employees may participate in our market areas and other factors.
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 basisup to 85% 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 |
|
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 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 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | |
| (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.
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
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.
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.
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 |
|
(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.
(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.
(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. |
(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.
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,eligible compensation, subject to applicable limitations.
(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.
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.
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.
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 2019, 2018 or 2017.
The required reserve balances at the Federal Reserve at December 31, 2019 and 2018 were approximately $283.4 million and $157.7 million, respectively.
(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 thecurrent 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.Service limits. 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 inprovide the 401(k) Plan when they meet certain requirements concerning minimum age and periodto help our employees save some amount of credited service. Alltheir cash compensation for retirement in a tax efficient manner. Since 2006, we have matched contributions made by our employees to the 401(k) Plan based upon a formula that considers the amount contributed by the respective employee, with a vesting scheduled based upon the employee’s tenure with the Company. The matching contributions for each NEO are investedset forth in accordance with participant elections among certain investment options.the 2019 All Other Compensation Table. We do not provide an option for our employees to invest in our common stock through the 401(k) Plan. We have not historically provided any retirement plans, such as defined benefit, defined contribution, supplemental executive retirement benefits, retiree medical or deferred compensation plans requiring mandatory Company contributions, to our employees or the NEOs, other than the 401(k) Plan and the Nonqualified Deferred Compensation Plan described below.
We also offerNonqualified Deferred Compensation Plan. The Company offers a non-qualifiednonqualified 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 investmentsspecified investment funds or market indexes approved by the HR Committee and selected by the participants. These investment alternatives are similar to the choices under the 401(k) Plan. The gains and losses credited to each participant’s deferral account are subject to the same investment risk as an actual investment in the specified investment funds or market indexes. The Company restores any lost company match in the 401(k) Plan due to legal limits on qualified plans. In 2019, we matched contributions made by participants into the nonqualified deferred compensation plan allows us to make discretionary contributions on behalf ofbased upon 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.formula that considers the amount contributed by the respective employee with a vesting scheduled based upon the employee’s tenure with the Company. All participant contributions to the plan and any related earnings are immediately vested and may be withdrawn upon the participant'sparticipant’s separation from service, death or disability or upon a date specified by the participant. Salary deferrals
Health and Welfare Benefits.All full-time employees, including our NEOs, may participate in our health and welfare benefit programs, including medical, dental and vision care coverage, disability insurance and life insurance. We provide these benefits to meet the health and welfare needs of employees and their families.
Employment Agreements
The Company maintains employment agreements with each of its NEOs, the material terms of each NEO’s employment agreement are recordeddescribed below.
Employment Agreement for Mr. Cargill
Mr. Cargill’s amended and restated employment agreement, which we refer to as salariesthe "Cargill Agreement," had an initial term of one year and employee benefits expenseautomatically renews for successive one-year terms unless notice of non-renewal is given by either party. The Cargill Agreement will terminate upon Mr. Cargill’s death or disability, upon his voluntary termination of employment or upon his termination for cause. "Cause" as defined in the consolidated statementsagreement includes: (1) fraud, misappropriation or embezzlement; (2) the material breach of incomethe executive's responsibilities, restrictive covenants or fiduciary duties; (3) conviction of a felony or crime of moral turpitude; (4) illegal use of drugs interfering with an offsetting payablethe performance of his duties; or (5) acceptance of other employment without permission. Upon any such termination Mr. Cargill would be entitled to participants in other liabilities onreceive his base salary, pro-rated through the consolidated balance sheets.termination date, any unpaid but accrued vacation benefits and any unreimbursed business expenses.
We have an Employee Stock Purchase Plan (“ESPP”). Employees are eligibleIf terminated by the Company without cause or by non-renewal, or by Mr. Cargill for “good reason,” Mr. Cargill would receive a cash payment equal to twelve months’ base salary, a cash payment equal to his average annual incentive payment for the ESPP when they meet certain requirements concerning periodtwo prior years and continued medical insurance benefits for twelve months following termination. "Good reason" is defined as (1) an assignment of credited service and minimum hours worked. Eligible employees may contribute a between 1% and 10% of eligible compensation upduties that are functionally inferior to the Section 423duties set forth in the Cargill Agreement; (2) a change of employment location which is more than 50 miles from the Internal Revenue Code limitCompany’s current executive offices; or (3) a reduction in salary, other than as part of $25,000. In 2006, stockholders approveda proportionate reduction affecting all other senior officers.
If, in connection with a "change in control", as defined in 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 madeCargill Agreement, Mr. Cargill’s employment is terminated either (1) by the board of directors,Company or its designated committee. Grants are subjectthe successor entity without cause, or (2) by Mr. Cargill for good reason, Mr. Cargill would receive a lump sum payment equal to vesting requirements. Under2.5 times his average base salary and the plans, we may grant, among other things, non-qualified stock options,average annual incentive stock options, restricted stock, restricted stock units (“RSUs”), stock appreciation rights (“SARs”), cash-settled performance units or any combination thereofpayment to employees and non-employee directors. A total of 2,550,000 shares are authorizedhim 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 |
| |
|
|
A summaryyears preceding the change in control. This change in control payment is in lieu of our RSU activityany other amounts to which he would be entitled under the Cargill Agreement.
As a means of providing protection to the Company’s stockholders, under certain adverse conditions such as dissolution, bankruptcy or a distressed sale of the Company’s assets or stock for the purpose of avoiding a bankruptcy proceeding or at the recommendation of regulatory authorities, the above described payments would not occur, except for the cash payments described above that would be owing upon Mr. Cargill’s voluntary termination of employment.
The Cargill Agreement contains other terms and related informationconditions, including non-competition and non-solicitation provisions, confidentiality obligations and restrictions on Mr. Cargill’s ability to be involved with a competing bank or company with a place of business in Texas.
Amended and Restated Executive Employment Agreement between Ms. Anderson and the Company
The Company entered into an Amended and Restated Executive Employment Agreement with Ms. Anderson effective July 1, 2017, which we refer to as the "Anderson Agreement". The Anderson Agreement had an 18-month initial term and automatically renews for successive one-year terms unless earlier terminated.
The Anderson Agreement terminates upon Ms. Anderson’s death or disability, upon her voluntary termination of employment or upon her termination for cause. Upon any such termination, Ms. Anderson would be entitled to receive her base salary, pro-rated through the termination date, any unpaid but accrued vacation benefits and any unreimbursed business expenses.
Termination for "cause" means the Company’s termination of Ms. Anderson’s employment for any of the following reasons: (1) fraud, misappropriation or embezzlement; (2) the material breach of Ms. Anderson’s executive responsibilities or of the protective covenants in the Anderson Agreement; (3) conviction of a felony or crime of moral turpitude; (4) intentional breach of any non-disclosure or non-competition/non-solicitation agreement with the Company or the Bank; (5) intentional failure to perform her duties and responsibilities; (6) illegal use of drugs interfering with Ms. Anderson’s performance of her duties; (7) acceptance of other employment without permission; or (8) her material breach of fiduciary duties owed to the Company.
If Ms. Anderson's employment is terminated by the Company without cause or upon notice, or Ms. Anderson terminates her employment for good reason, Ms. Anderson would be entitled to a cash payment equal to twelve months' base salary, a cash payment equal to her average annual incentive payment for the two preceding bonus plan years and continued medical insurance benefits for twelve months following termination. If Ms. Anderson's employment is terminated without cause or for good reason within the period beginning 90 days before and ending 18 months following a "change in control" of the Company as follows. Grants of RSUs include time-based vesting conditionsdefined in the Anderson Agreement, Ms. Anderson would be entitled to a cash payment equal to 2.5 times her average base salary and cash bonus in effect for the two preceding bonus plan years and continued health and welfare benefits that generally vest ratably overare no less favorable than the benefits to which Ms. Anderson was entitled prior to the change-in-control for a period of 18 months following termination. "Good reason" is defined as: (1) an assignment of duties that are functionally inferior to her duties set forth in the Anderson Agreement; (2) a change of employment location which is more than 50 miles from the Company’s current executive offices; (3) a reduction in salary, other than as part of a proportionate reduction affecting all other senior officers; or (4) the delivery by the Company of a notice of non-renewal of the Anderson Agreement in connection with certain change in control events.
As a means of providing protection to the Company’s stockholders, under certain adverse conditions such as dissolution, bankruptcy or a distressed sale of the Company’s assets or stock for the purpose of avoiding a bankruptcy proceeding or at the recommendation of regulatory authorities, the above described payments would not occur except for the cash payments that would be owing upon Ms. Anderson’s termination of employment due to death or disability, voluntary termination of employment or termination for cause. If the described adverse conditions occur and Ms. Anderson’s termination of employment is without cause or for good reason, she would also be entitled to a cash payment equal to six months base salary.
The Anderson Agreement contains other terms and conditions, including non-competition and non-solicitation provisions, confidentiality obligations and restrictions on Ms. Anderson’s ability to be involved with a competing state or national bank or company providing similar services with a place of business in Texas during her employment and for the one-year period following her termination or resignation.
Retirement Transition Agreement between Mr. Ackerson and the Company and Employment Agreement for Mr. Ackerson
On July 29, 2019, the Company announced Mr. Ackerson’s planned retirement from the Company, which is expected to become effective August 31, 2021 (the "Separation Date"). In connection with his retirement, Mr. Ackerson entered into a Retirement Transition Agreement (the "Retirement Agreement") with the Company and the Bank that provides for Mr. Ackerson to receive the following compensation in connection with his retirement following the Separation Date:
| |
| (1) | A cash payment equal to eighteen months of Mr. Ackerson’s base salary as in effect on the Separation Date, plus a cash payment equal to the average of the annual cash bonuses paid by the Company for the two full bonus plan years prior to the Separation Date, each of such amounts to be payable in equal semi-monthly installments, over a period of eighteen months in accordance with the Company's regular payroll practices (the "Cash Severance Payments"). |
| |
| (2) | Continued vesting of the performance portion of outstanding RSUs and any other performance-based awards granted to Mr. Ackerson pursuant to the Amended and Restated 2015 Long-Term Incentive Plan (the "2015 Plan"), in accordance with their terms and subject to the achievement of the applicable performance conditions that remain outstanding as of the Separation Date. |
| |
| (3) | Continued vesting of the time-based portion of outstanding RSUs that did not otherwise vest on or before the Separation Date, in accordance with their terms. |
| |
| (4) | A one-time lump sum payment of $20,000 as reimbursement for Mr. Ackerson’s out-of-pocket legal expenses and reasonable expenses incurred in connection with the Retirement Agreement and other office and administrative expenses. |
Mr. Ackerson will also receive certain health benefits for a period of 18 months following his retirement.
If Mr. Ackerson’s employment is terminated without cause or due to disability prior to the Separation Date, or upon death prior to the date that all Cash Severance Payments have been paid, Mr. Ackerson or his estate would be entitled to receive the Cash Severance Payments. If a "change in control" (as defined in the 2015 Plan) should occur prior to the Separation Date, in lieu of the amounts described above, Mr. Ackerson will be entitled to receive a cash payment equal to 2.5 times his average annual base salary and bonus in effect for the two years immediately preceding the change in control.
Subject to the arrangements set forth in the Retirement Agreement as described above, Mr. Ackerson’s employment continues to be subject to his Amended and Restated Executive Employment Agreement that became effective on December 18, 2014 (the "Ackerson Agreement"). Prior to the Separation Date, Mr Ackerson will continue to receive his base salary and other benefits in accordance with the terms of the Ackerson Agreement.
The Ackerson Agreement had an initial term of one year and automatically renews for successive one-year terms unless notice of non-renewal is given by either party or unless earlier terminated in accordance with the terms of the agreement, and provides for compensation including base salary and participation in the annual incentive plan for key executives.
The Ackerson Agreement terminates upon the executive’s death or disability, voluntary termination of employment or upon the executive’s termination for cause. Upon any such termination the executive would be entitled to his base salary, pro-rated through the termination date, any unpaid but accrued vacation benefits and any unreimbursed business expenses. “Cause” is defined substantially identically to the Cargill Agreement.
The Ackerson Agreement provides for severance payments to the executive upon termination of the executive’s employment without cause or by the executive for good reason, at which time the executive would be entitled to receive: (1) a cash payment equal to 12 months’ base salary as then in effect; (2) a cash payment equal to the average annual incentive paid to the executive for the two years preceding his termination; and (3) continued medical insurance benefits, at the Company’s expense, for a period of twelve months following termination. “Good reason” is defined substantially identically to the Cargill Agreement.
The Ackerson Agreement includes protective provisions triggered under adverse conditions that limit the payments due to Mr. Ackerson that are identical to the Cargill Agreement. The Ackerson Agreement includes non-competition and non-solicitation provisions, confidentiality obligations and restrictions on the executive’s ability to be involved with a competing state or national bank that will continue in effect following any termination of Mr. Ackerson's employment for a period of one year.
Employment Agreement for Mr. Turpen
The Company entered into an Executive Employment Agreement with Mr. Turpen effective September 4, 2018 (the "Turpen Agreement"). The Turpen Agreement has an initial term of three years and thereafter automatically renews for successive one-year terms, unless notice of non-renewal is given by either party or earlier terminated in accordance with the agreement, and provides for compensation including base salary and participation in the annual incentive plan for key executives.
The Turpen Agreement terminates upon the executive’s death or disability, upon the executive’s voluntary termination of employment or upon the executive’s termination for cause. Upon any such termination the executive would be entitled to five years. Additionally,his base salary, pro-rated through the termination date, any unpaid but accrued vacation benefits and any unreimbursed business expenses. "Cause" is defined substantially identically to the Cargill Agreement.
The Turpen Agreement provides for severance payments to the executive upon termination of the executive’s employment by us without cause or by the executive for good reason, at which time the executive is entitled to receive: (1) a cash payment equal to 12 months’ base salary as then in effect; (2) a cash payment equal to the average annual incentive paid to the executive for the two years preceding his termination; and (3) continued medical insurance benefits, at the Company’s expense, for a period of twelve months following termination. "Good reason" is defined substantially identically to the Cargill Agreement.
The Turpen Agreement includes provisions relating to payments upon a change in control that are substantially identical to the terms of the Cargill Agreement, as well as protective provisions triggered under adverse conditions that limit the payments due to Mr. Turpen and non-competition and non-solicitation provisions, confidentiality obligations and restrictions on the executive’s ability to be involved with a competing state or national bank.
Tax Implications of Executive Compensation
Although deductibility of compensation is preferred, tax deductibility is not a primary objective of our compensation programs. We believe that achieving our compensation objectives set forth above is more important than the benefit of tax deductibility and we reserve the right to maintain flexibility in how we compensate our executive officers, even if it may result in limiting the deductibility of amounts of compensation from time to time, grantstime.
2019 Summary Compensation Table*
|
| | | | | | | | | | | | | | | | | | | |
| | | | | Non-Equity Incentive Plan Compensation | | |
| Name and Principal Position | Year | Salary | Stock Awards (A) | Annual Incentive Plan Compensation (B) | Long-Term Incentive Plan Compensation (C) | All Other Compensation (D) | Total |
| | | | | | | | |
| C. Keith Cargill | 2019 | $ | 994,167 |
| $ | 2,299,990 |
| $ | 1,523,750 |
| $ | — |
| $ | 90,907 |
| $ | 4,908,814 |
|
| President and CEO of the Company; | 2018 | 956,167 |
| 2,020,454 |
| 1,059,256 |
| — |
| 108,342 |
| 4,144,219 |
|
| President and CEO of Texas Capital Bank | 2017 | 910,000 |
| 1,589,270 |
| 1,083,912 |
| — |
| 29,462 |
| 3,612,644 |
|
| | | | | | | | |
| Julie L. Anderson | 2019 | 496,667 |
| 575,058 |
| 530,000 |
| 72,801 |
| 24,685 |
| 1,699,211 |
|
| CFO and Secretary of the Company; | 2018 | 472,500 |
| 440,932 |
| 366,528 |
| 159,491 |
| 25,385 |
| 1,464,836 |
|
| CFO of Texas Capital Bank | 2017 | 412,333 |
| 572,672 |
| 361,898 |
| 173,047 |
| 24,192 |
| 1,544,142 |
|
| | | | | | | | |
| Vince A. Ackerson | 2019 | 535,417 |
| 660,008 |
| 608,738 |
| — |
| 73,791 |
| 1,877,954 |
|
| Vice Chairman of Texas Capital Bank | 2018 | 506,000 |
| 505,202 |
| 389,436 |
| — |
| 71,067 |
| 1,471,705 |
|
| | 2017 | 485,000 |
| 400,017 |
| 433,208 |
| — |
| 42,913 |
| 1,361,138 |
|
| | | | | | | | |
| John G. Turpen | 2019 | 452,500 |
| 454,980 |
| 452,156 |
| — |
| 53,075 |
| 1,412,711 |
|
| Chief Risk Officer of the Company; | 2018 | 144,833 |
| 949,850 |
| 350,000 |
| — |
| 152,772 |
| 1,597,455 |
|
| Chief Risk Officer of Texas Capital Bank | 2017 | — |
| — |
| — |
| — |
| — |
| — |
|
For a description of the employment agreements applicable to the NEOs, refer to the "Employment Agreements" section of the "Compensation Discussion and Analysis."
*Columns for which no amounts are reported have been deleted.
| |
| (A) | Amounts represent the aggregate grant date fair value of RSUs, determined in accordance with Accounting Standard Codification (ASC) Topic 718. With respect to the 2019 awards granted on February 12, 2019, 50% of the award is time-based with cliff vesting occurring at the end of three years, on February 12, 2022, and 50% of the award is performance-based with vesting occurring on the first administratively practicable day following determination by the HR Committee that certain performance targets were achieved and subject to the NEO’s continued employment over a three-year period ending December 31, 2021. The amounts presented for the 50% performance-based portion of the 2019 awards reflect the value of the award at target based on the probable outcome of the performance targets determined as of the grant date. The value of the 50% performance-based portion of the 2019 awards for each NEO at the grant date assuming that the highest levels of performance targets are achieved is as follows: Mr. Cargill $1,724,993, Ms. Anderson $431,323, Mr. Ackerson $495,006 and Mr. Turpen $341,235. |
| |
| (B) | Amounts represent payouts under our annual incentive program. For further details of the targets and performance related to the payout of these amounts, refer to the "Annual Incentive Compensation" section of the "Compensation Discussion and Analysis." |
| |
| (C) | Amounts represent payouts related to cash-settled units. In 2014, 2015 and 2016, Ms. Anderson was awarded an annual grant of cash-settled units that provide for annual vesting in equal amounts over a four-year period. |
| |
| (D) | See additional description in 2019 All Other Compensation Table. In 2018, amounts paid to Mr. Turpen included a one-time signing bonus of $150,000, car allowance of $2,400, and insurance premium of $372. |
2019 All Other Compensation Table
|
| | | | | | | | | | | | | | | | |
| Name | Year | Perquisites and Other Personal Benefits (A) | Insurance Premiums | Company Contributions to 401(k) Plans | Company Contributions to Nonqualified Deferred Compensation Plans | Total |
| | | | | | | |
| C. Keith Cargill | 2019 | $ | 11,249 |
| $ | 2,033 |
| $ | 17,975 |
| $ | 59,650 |
| $ | 90,907 |
|
| Julie L. Anderson | 2019 | 7,200 |
| 1,603 |
| 15,882 |
| — |
| 24,685 |
|
| Vince A. Ackerson | 2019 | 21,186 |
| 2,371 |
| 18,109 |
| 32,125 |
| 73,791 |
|
| John G. Turpen | 2019 | 8,613 |
| 2,231 |
| 15,081 |
| 27,150 |
| 53,075 |
|
| |
| (A) | Perquisites include a car allowance of $7,200 for each of the NEOs as well as the following club dues: Mr. Cargill $4,049, Mr. Ackerson $13,986 and Mr. Turpen $1,413. |
2019 Grants of Plan Based Awards Table*
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Estimated Future Payouts Under Non-Equity Incentive Plan Awards (A) | | Estimated Future Payouts Under Equity Incentive Plan Awards (B) | | |
| Name | Grant Date | Threshold | Target | Maximum | | Threshold | Target | Maximum | All Other Stock Awards: Number of Shares of Stock or Units (C) | Grant Date Fair Value of Stock and Option Awards |
| | | | | | | | | | |
| C. Keith Cargill | 2/12/2019 (A) | $ | — |
| $ | — |
| $ | — |
| | 9,625 |
| 19,250 |
| 28,875 |
| — |
| $ | 1,149,995 |
|
| | 2/12/2019 (B) | — |
| — |
| — |
| | — |
| — |
| — |
| 19,250 |
| 1,149,995 |
|
| | N/A | 287,500 |
| 1,150,000 |
| 1,523,750 |
| | — |
| — |
| — |
| — |
| — |
|
| Julie L. Anderson | 2/12/2019 (A) | — |
| — |
| — |
| | 2,407 |
| 4,813 |
| 7,220 |
| — |
| 287,529 |
|
| | 2/12/2019 (B) | — |
| — |
| — |
| | — |
| — |
| — |
| 4,813 |
| 287,529 |
|
| | N/A | 100,000 |
| 400,000 |
| 530,000 |
| | — |
| — |
| — |
| — |
| — |
|
| Vince A. Ackerson | 2/12/2019 (A) | — |
| — |
| — |
| | 2,762 |
| 5,524 |
| 8,286 |
| — |
| 330,004 |
|
| | 2/12/2019 (B) | — |
| — |
| — |
| | — |
| | — |
| 5,524 |
| 330,004 |
|
| | N/A | 114,856 |
| 459,425 |
| 608,738 |
| | — |
| | — |
| — |
| — |
|
| John G. Turpen | 2/12/2019 (A) | — |
| — |
| — |
| | 1,904 |
| 3,808 |
| 5,712 |
| — |
| 227,490 |
|
| | 2/12/2019 (B) | — |
| — |
| — |
| | — |
| | — |
| 3,808 |
| 227,490 |
|
| | N/A | 85,313 |
| 341,250 |
| 452,156 |
| | — |
| | — |
| — |
| — |
|
*Columns for which no amounts are reported have been deleted.
| |
| (A) | Amounts represent potential payments under our annual incentive program. The actual amount earned in 2019 was paid in February 2020 and is shown in the “Non-Equity Incentive Plan Compensation” column of the 2019 Summary Compensation Table. See "Compensation Discussion and Analysis - Annual Incentive Compensation," for more information regarding our 2019 annual incentive program. |
| |
| (B) | Amounts represent awards of RSUs made under the 2015 Plan that will vest based upon the Company’s achievement of certain performance measures, subject to the NEO’s continued employment by the Company over a three-year period ending December 31, 2021. Based on the defined objectives of the awards the NEO has the opportunity to vest between 0% and 150% of the RSUs. The grant date fair value of the award is based on the closing price of our common stock on the date of grant, $59.74, and reflects the value of the award at target based on the probable outcome of the performance measures determined as of the grant date in accordance with ASC 718 and pursuant to the 2015 Plan. See "Compensation Discussion and Analysis - Long-Term Incentive Compensation" for more information on the RSU grants. |
| |
| (C) | Amounts represent awards of RSUs made under the 2015 Plan that will cliff vest at the end of three years on February 12, 2022. The grant date fair value is based on the closing price of our common stock on the date of grant, or $59.74. |
2019 Outstanding Equity Awards at Fiscal Year-end Table*
|
| | | | | | | | | | | |
| | | Stock Awards |
| Name | Grant Date | Number of Shares or Units of Stock That Have Not Vested (A) | Market Value of Shares or Units of Stock That Have Not Vested (A)(B) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (C) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested (B)(C) |
| | | | | | |
| C. Keith Cargill | 2/12/2019 | 19,250 |
| $ | 1,092,823 |
| 19,250 |
| $ | 1,092,823 |
|
| | 3/27/2018 | 11,506 |
| 653,196 |
| 11,506 |
| 653,196 |
|
| | 3/22/2017 | 10,008 |
| 568,154 |
| — |
| — |
|
| Julie L. Anderson | 2/12/2019 | 4,813 |
| 273,234 |
| 4,813 |
| 273,234 |
|
| | 3/27/2018 | 2,511 |
| 142,549 |
| 2,511 |
| 142,549 |
|
| | 7/18/2017 | 1,923 |
| 109,169 |
| — |
| — |
|
| | 3/22/2017 | 2,032 |
| 115,357 |
| — |
| — |
|
| Vince A. Ackerson | 2/12/2019 | 5,524 |
| 313,597 |
| 5,524 |
| 313,597 |
|
| | 3/27/2018 | 2,877 |
| 163,327 |
| 2,877 |
| 163,327 |
|
| | 3/22/2017 | 2,519 |
| 143,004 |
| — |
| — |
|
| John G. Turpen | 2/12/2019 | 3,808 |
| 216,180 |
| 3,808 |
| 216,180 |
|
| | 9/17/2018 | 8,800 |
| 499,576 |
| — |
| — |
|
*Columns for which no amounts are reported have been deleted.
| |
| (A) | Awards granted 2/12/2019 cliff vest at the end of three years on 2/12/2022. Awards granted 3/27/2018 cliff vest at the end of three years on 3/27/2021. Awards granted 3/22/2017 cliff vest at the end of three years on 3/22/2020. Award granted 7/18/2017 to Ms. Anderson cliff vests 20% on each of the first five anniversaries of the grant date. Award granted 9/17/2018 to Mr. Turpen cliff vests 20% on each of the first five anniversaries of the grant date. |
| |
| (B) | Based on the December 31, 2019 closing market price of our common stock of $56.77. |
| |
| (C) | Awards granted 2/12/2019 and 3/27/2018 will vest based upon the Company’s achievement of certain performance targets and the executive’s continued employment by the Company over the three-year periods ending December 31, 2021 and December 31, 2020, respectively. Awards are shown at target. |
2019 Option Exercises and Stock Vested Table*
|
| | |
| | Stock Awards |
| Name | Number of Shares Acquired on Vesting (A) | Value Realized on Vesting (B) |
| | | |
| C. Keith Cargill | 23,981 | $1,360,261 |
| Julie L. Anderson | 6,451 | 366,453 |
| Vince A. Ackerson | 8,292 | 471,650 |
| John G. Turpen | 2,200 | 123,574 |
*Columns for which no amounts are reported have been deleted.
| |
| (A) | The shares included in the table represent gross shares vested. Actual shares issued, net of taxes, were 16,073 to Mr. Cargill, 4,062 to Ms. Anderson, 5,317 to Mr. Ackerson, and 1,664 to Mr. Turpen. |
| |
| (B) | The value realized by the NEO upon the vesting of RSUs is calculated by multiplying the number of shares of stock vested by the market value of the underlying shares on the vesting date, which is the amount that is taxable to the executive. |
2019 Pension Benefits Table
The table disclosing the actuarial present value of each executive’s accumulated benefit under defined benefit plans, the number of years of credited service under each plan and the amount of pension benefits paid to each NEO during the year is omitted because the Company does not have a defined benefit plan for NEOs.
2019 Nonqualified Deferred Compensation Table*
|
| | | | | | | | | | | | |
| Name | NEO Contributions in Last Fiscal Year (A) | Company Contributions in Last Fiscal Year (B) | Aggregate Earnings/(Loss) in Last Fiscal Year (C) | Aggregate Balance at Last Fiscal Year End (D) |
| | | | | |
| C. Keith Cargill | $ | 619,282 |
| $ | 59,650 |
| $ | 332,001 |
| $ | 2,144,073 |
|
| Julie L. Anderson | — |
| — |
| 847 |
| 41,581 |
|
| Vince A. Ackerson | 301,801 |
| 32,125 |
| 255,405 |
| 1,673,385 |
|
| John G. Turpen | 27,150 |
| 27,150 |
| 2,457 |
| 56,757 |
|
See "Compensation Discussion and Analysis - Other Benefits - Nonqualified Deferred Compensation Plan" for a description of the nonqualified deferred compensation plan.
*Columns for which no amounts are reported have been deleted.
| |
| (A) | Participants in the plan may elect to defer up to 75% of their annual salary and/or short-term incentive payout. 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. Amounts are included in the Salary or Annual Incentive Plan Compensation columns of the 2019 Summary Compensation Table. |
| |
| (B) | Company contributions are detailed in the 2019 All Other Compensation Table and included in the 2019 Summary Compensation Table. The discretionary company contributions vest based upon the employee’s tenure with the Company. As of December 31, 2019, all NEOs had met the requirements for immediate vesting. |
| |
| (C) | Aggregate earnings do not reflect "above market or preferential earnings" and are not included in the 2019 Summary Compensation Table. |
| |
| (D) | Amounts represent the total compensation deferred by each NEO and discretionary contributions made to each NEO by the Company, together with any related earnings or losses attributed to either in accordance with each NEOs deferral account investment selections. All participant and Company contributions included in these amounts have been reported as compensation in the 2019 Summary Compensation Table or in Summary Compensation Tables for previous years. |
2019 Potential Payments Upon Termination or Change in Control Table
The following table summarizes the estimated payments that would be payable to each NEO upon a termination of service for each of the reasons stated below. For the purposes of the quantitative disclosure in the following table, and in accordance with SEC regulations, we have assumed that the termination took place on December 31, 2019 and that the price per share of our common stock was the closing market price as of that date, $56.77.
|
| | | | | | | | | | | | | | | |
| Name | Termination Without Cause or For Good Reason | Change in Control: Termination Without Cause or For Good Reason | Death | Disability | Retirement |
| | | | | | |
| C. Keith Cargill | | | | | |
| Severance (A) | $ | 2,291,503 |
| $ | 5,666,675 |
| $ | — |
| $ | — |
| $ | — |
|
| Death/disability (B) | — |
| — |
| — |
| — |
| — |
|
| Accelerated vesting of long-term incentives (C) | — |
| 4,060,190 |
| 4,060,190 |
| 4,060,190 |
| 4,060,190 |
|
| Other benefits (D) | 35,755 |
| 71,510 |
| — |
| — |
| — |
|
| | | | | | |
| Julie L. Anderson | | | | | |
| Severance (A) | 948,264 |
| 2,332,120 |
| — |
| — |
| — |
|
| Death/disability (B) | — |
| — |
| — |
| — |
| — |
|
| Accelerated vesting of long-term incentives (C) | — |
| 1,088,394 |
| 1,088,394 |
| 1,088,394 |
| — |
|
| Other benefits (D) | 25,365 |
| 38,048 |
| — |
| — |
| — |
|
| | | | | | |
| Vince A. Ackerson | | | | | |
| Severance (E) | 1,329,837 |
| 2,549,490 |
| — |
| — |
| 1,329,837 |
|
| Death/disability (E) | — |
| — |
| 1,329,837 |
| 1,329,837 |
| — |
|
| Accelerated vesting of long-term incentives (C) | — |
| 1,096,853 |
| 1,096,853 |
| 1,096,853 |
| 1,096,853 |
|
| Other benefits (D) | 52,883 |
| 52,883 |
| — |
| 52,883 |
| 52,883 |
|
| | | | | | |
| John G. Turpen | | | | | |
| Severance (A) | 856,078 |
| 2,118,320 |
| — |
| — |
| — |
|
| Death/disability (B) | — |
| — |
| — |
| — |
| — |
|
| Accelerated vesting of long-term incentives (C) | — |
| 931,936 |
| 931,936 |
| 931,936 |
| — |
|
| Other benefits (D) | 39,162 |
| 58,743 |
| — |
| — |
| — |
|
| |
| (A) | Pursuant to their employment agreement, if an NEO is terminated without cause or for good reason, severance is equal to twelve months of base salary plus the average incentive compensation paid during the prior two-year period and will be paid over a period of twelve months. If the NEO’s termination occurs in connection with a change in control, severance is equal to 2.5 times average salary plus average incentive compensation paid during the prior two-year period and will be paid in a lump sum within 30 days of the NEO’s termination. |
| |
| (B) | Employment agreements provide for no payment upon an NEO’s death or disability. |
| |
| (C) | Includes immediate vesting at target of any performance-based awards for which performance conditions have not yet been satisfied, based on the December 31, 2019 closing price of our common stock of $56.77. As of December 31, 2019, Mr. Cargill had met the age and service conditions to be eligible for accelerated vesting of long-term incentives upon retirement and Mr. Ackerson's Retirement Agreement provides for accelerated vesting of long-term incentives upon retirement. Ms. Anderson and Mr. Turpen had not met the age and service conditions as of December 31, 2019 to be eligible for the accelerated vesting of long-term incentives upon retirement. |
| |
| (D) | Other benefits include the following insurance: medical, dental, vision, life, accidental death and disability, short-term disability, long-term disability and supplemental long-term disability. Messrs. Cargill and Turpen and Ms. Anderson would receive one year of benefits in the event of termination without cause. In the event of a change in control, Mr. Cargill would receive 24 months of benefits, and Ms. Anderson and Mr. Turpen would each receive 18 months of benefits. Pursuant to his Retirement Agreement, Mr. Ackerson would receive 18 months of benefits in the event of termination without cause or due to disability, as well as in the event of his retirement. Cost includes both employer and employee coverage. |
| |
| (E) | Mr. Ackerson’s Retirement Agreement provides for a severance payment equal to eighteen months base salary in effect as of his Separation Date and a cash payment equal to the average of the annual cash bonuses paid by the Company for the two full bonus plan years prior to the Separation Date, plus a lump sum payment of $20,000 as compensation for legal fees incurred by Mr. Ackerson in connection with the preparation and negotiation of the Retirement Agreement (the “Cash Severance Payments”). In the event of his termination without cause or disability occurring prior to the Separation Date, Mr. Ackerson will receive the Cash Severance Payments. In the event of his death, any unpaid Cash Severance Payments will be paid to Mr. Ackerson’s estate. If a change in control occurs prior to the Separation Date, severance is equal to 2.5 times his average salary plus average incentive compensation paid during the prior two-year period. If a change in control occurs subsequent to his Separation date, he will receive any unpaid Cash Severance Payments. See Employment Agreements - Retirement Transition Agreement between Mr. Ackerson and the Company and Employment Agreement for Mr. Ackerson for more information regarding the terms of Mr. Ackerson’s retirement. |
2019 Director Compensation Table*
For service on our board of directors in 2019, our non-employee directors were paid an annual retainer of $55,000 and a fee of $1,750 per meeting. Our chairman received an additional $80,000 per year for serving in that role. In addition, each member of a committee was paid a fee of $1,750 per committee meeting attended. Directors serving as chairman of the Audit Committee and Risk Committee received an additional $30,000 per year for serving in those roles and the directors chairing the HR Committee and Governance and Nominating Committee received an additional $20,000 per year for serving in those roles. Members attending special meetings of the board and committees were paid $1,750 per meeting, or $1,250 for telephonic meetings. In addition to cash retainer fees, each non-employee director receives an annual grant of RSUs with
both time-based and performance-based vesting conditions are made that generally vestan aggregate grant date fair value of approximately $65,000 at the
endApril board meeting, which vest in full on the first anniversary 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-employeeThe following table contains information pertaining to the compensation of the Company’s board of 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 ended2019 fiscal year. Amounts below also include fees paid for service on subsidiary board committees.
|
| | | | | | | | | |
| Name | Fees Earned or Paid In Cash (A) | Stock Awards (B) | Total |
| | | | |
| Jonathan E. Baliff (D) | $ | 66,250 |
| $ | 64,992 |
| $ | 131,242 |
|
| James H. Browning (C) | 127,250 |
| 64,992 |
| 192,242 |
|
| Larry L. Helm (C) | 154,250 |
| 64,992 |
| 219,242 |
|
| David S Huntley (E) | 66,750 |
| 64,992 |
| 131,742 |
|
| Charles S. Hyle (C) | 111,500 |
| 64,992 |
| 176,492 |
|
| Elysia Holt Ragusa (C) | 102,250 |
| 64,992 |
| 167,242 |
|
| Steven P. Rosenberg (C) | 91,500 |
| 64,992 |
| 156,492 |
|
| Robert W. Stallings (C) | 74,250 |
| 64,992 |
| 139,242 |
|
| Dale W. Tremblay (C) | 90,000 |
| 64,992 |
| 154,992 |
|
| Ian J. Turpin (C) | 80,000 |
| 64,992 |
| 144,992 |
|
| Patricia A. Watson (C) | 75,000 |
| 64,992 |
| 139,992 |
|
*Columns for which no amounts are reported have been deleted.
| |
| (A) | Amounts represent meeting fees paid upon attendance of board and committee meetings, annual retainer fees and fees for service as chairman of the board or a committee. |
| |
| (B) | Amounts represent the aggregate grant date fair value determined in accordance with ASC 718 of all stock awards granted pursuant to the 2015 Plan. On April 16, 2019, all currently serving directors received 1,107 RSUs with a grant date fair value of $58.71 per share which will vest in full on the first anniversary of the grant date. |
| |
| (C) | As of December 31, 2019, Messrs. Browning, Helm, Hyle, Rosenberg, Stallings, Tremblay and Turpin and Mses. Ragusa and Watson held 1,340 unvested RSUs, and the following directors held vested SARS: Mr. Browning, 3,000; Mr. Helm, 3,000; Mr. Turpin, 1,800. |
| |
| (D) | As of December 31, 2019, Mr. Baliff held 1,304 unvested RSUs and 214 shares of restricted stock subject to continuing restrictions. |
| |
| (E) | As of December 31, 2019, Mr. Huntley held 1,199 unvested RSUs and 167 shares of restricted stock subject to continuing restrictions. |
HUMAN RESOURCES COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the HR Committee of the board of directors of the Company was an officer or employee of the Company during 2019 or any other time. In addition, none of the executive officers of the Company served on the board of directors or on the compensation committee of any other entity, for which any executive officers of such other entity served either on our board of directors or on our HR Committee.
CEO PAY RATIO
Item 402(u) of Regulation S-K, implementing a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act, requires that we disclose a ratio that compares the annual total compensation of our median employee to that of our CEO.
In order to determine the median employee, we prepared a list of all employees as of December 31, 2019, 2018 and 2017, respectively.
Total compensation costalong with their gross income as reported on IRS form W-2 for all share-based arrangements2019. Gross income as reported on IRS form W-2 for 2019 was $11.8 million, $9.0 million and $8.1 millionannualized for those employees that were not employed for the years ended December 31, full year.
After identifying the median employee, we calculated that employee’s annual total compensation using the same methodology we use for our NEOs as set forth in the 2019 2018 and 2017, respectively.Summary Compensation Table.
Cash-settled units totaling 163,856 were outstanding at December 31,The annual total compensation for 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 unitsCEO was $5.8 million, $8.0 million$4,908,814 and $13.9 million for the years ended December 31,median employee was $93,586. The resulting ratio of our CEO’s pay to that of our median employee for 2019 2018 and 2017, respectively.was 52.5 to 1.
(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.
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 | 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. |
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. |
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.
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.
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 are presented in the following 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 |
|
The weighted-average received and paid interest rates for interest rate swaps outstanding 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 | % |
The weighted-average strike rate for outstanding interest rate caps was 3.29% at December 31, 2019 and 3.20% at December 31, 2018.
Our credit exposure on derivative instruments is limited to the net favorable value and interest payments by each counterparty. In some cases collateral may be required from the counterparties involved if the net value of the derivative instruments exceeds a nominal amount. Our credit exposure associated with these instruments, net of any collateral pledged, was approximately
$48.7 million at December 31, 2019 and approximately $18.7 million at December 31, 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 sale commitments. At December 31, 2019, we had $56.6 million in cash collateral pledged for these derivatives, of which $54.3 million was included in interest-bearing deposits in other banks and $2.3 million was included in accrued interest receivable and other assets. At December 31, 2018, we had $25.3 million in cash collateral pledged for these derivatives, of which $11.2 million was included in interest-bearing 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 are party to 12 risk participation agreements where we are a participant bank with a notional amount of $146.7 million at December 31, 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 $3.6 million at December 31, 2019 and $1.5 million at December 31, 2018. The fair value of these exposures was insignificant to the consolidated financial statements at both December 31, 2019 and December 31, 2018. Risk participation agreements entered into by us as the lead bank provide credit protection to us should the borrower fail to perform on its interest rate derivative contract with us. We are party to 12 risk participation agreements where we are the lead bank having a notional amount of $145.9 million at December 31, 2019, compared to 9 agreements having a notional amount of $114.8 million at December 31, 2018.
(19) Related Party Transactions
During 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 31, 2019 and $13.5 million at December 31, 2018.
(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 |
|
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 |
|
(21) Quarterly Financial Data (unaudited)
The tables below summarize our quarterly financial information:
|
| | | | | | | | | | | | | | | |
| | 2019 Selected Quarterly Financial Data |
| (in thousands, except per share data) | Fourth | | Third | | Second | | First |
| Interest income | $ | 337,757 |
| | $ | 355,101 |
| | $ | 346,893 |
| | $ | 325,561 |
|
| Interest expense | 89,372 |
| | 102,933 |
| | 103,340 |
| | 89,947 |
|
| Net interest income | 248,385 |
| | 252,168 |
| | 243,553 |
| | 235,614 |
|
| Provision for credit losses | 17,000 |
| | 11,000 |
| | 27,000 |
| | 20,000 |
|
| Net interest income after provision for credit losses | 231,385 |
| | 241,168 |
| | 216,553 |
| | 215,614 |
|
| Non-interest income | 17,761 |
| | 20,301 |
| | 24,364 |
| | 30,014 |
|
| Non-interest expense | 158,690 |
| | 149,370 |
| | 141,561 |
| | 140,378 |
|
| Income before income taxes | 90,456 |
| | 112,099 |
| | 99,356 |
| | 105,250 |
|
| Income tax expense | 16,539 |
| | 23,958 |
| | 21,387 |
| | 22,411 |
|
| Net income | 73,917 |
| | 88,141 |
| | 77,969 |
| | 82,839 |
|
| Preferred stock dividends | 2,437 |
| | 2,438 |
| | 2,437 |
| | 2,438 |
|
| Net income available to common stockholders | $ | 71,480 |
| | $ | 85,703 |
| | $ | 75,532 |
| | $ | 80,401 |
|
| Basic earnings per share: | $ | 1.42 |
| | $ | 1.70 |
| | $ | 1.50 |
| | $ | 1.60 |
|
| Diluted earnings per share: | $ | 1.42 |
| | $ | 1.70 |
| | $ | 1.50 |
| | $ | 1.60 |
|
|
| | | | | | | | | | | | | | | |
| | 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 |
|
| |
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL 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
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, 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, 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, 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, 2019. The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, is included in this Item under the heading “Report of Independent Registered Public Accounting Firm.”
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, 2019, based on 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, 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 the Company as of December 31, 2019 and 2018, the related consolidated statements of income and other comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and our report dated February 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 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, TX
February 12, 2020
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ITEM 9B. | OTHER INFORMATION |
None.
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ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this item relating to Texas Capital Bancshares, Inc.’s directors, executive officers, code of 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 within 120 days after the end of our 2019 fiscal year.
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ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this item relating to compensation of our directors and executive officers will be included in an amendment to this Annual Report on Form 10-K/A filed within 120 days after the end of our 2019 fiscal year.
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| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Ownership of Company Common Stock
The following tables set forth information required by this item relating to securityas of February 28, 2020 concerning the beneficial ownership of certain beneficial ownersthe Company’s common stock by: (a) each person the Company knows to beneficially own more than 5% of the issued and managementoutstanding shares of a class of common stock, (b) each director, director nominee and securities authorized for issuanceNEO, and (c) all of the Company’s executive officers and directors as a group. The persons named in the table have sole voting and investment power with respect to all shares they owned, unless otherwise noted.In computing the number of shares beneficially owned by a person and the percentage of ownership held by that person, shares of common stock subject to options, restricted stock units ("RSUs") or stock appreciation rights ("SARs") held by that person that are currently exercisable or will become exercisable or vest within 60 days of February 28, 2020 are deemed exercised and outstanding.
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Persons Known to Company Who Own More Than 5% of Outstanding Shares of Company Common Stock | Number of Shares of Common Stock Beneficially Owned | | Percent of Shares of Common Stock Outstanding* |
| The Vanguard Group and certain affiliates | 4,658,023 | (1) | 9.24% |
| BlackRock, Inc. and certain affiliates | 4,492,101 | (2) | 8.91% |
| Frontier Capital Management Co., LLC | 2,658,017 | (3) | 5.27% |
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| * | Percentage is calculated on the basis of 50,397,277 shares, the total number of shares of common stock outstanding on February 28, 2020. |
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| (1) | As reported by The Vanguard Group on a Schedule 13G/A filed with the SEC on February 12, 2020, as of December 31, 2019, reporting sole voting power with respect to 26,237 shares, shared voting power with respect to 9,093 shares, sole dispositive power with respect to 4,629,679 shares and shared dispositive power with respect to 28,344 shares. Its address is 100 Vanguard Blvd., Malvern, PA 19355. |
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| (2) | As reported by BlackRock, Inc. on a Schedule 13G/A filed with the SEC on February 6, 2020, as of December 31, 2019, reporting sole voting power with respect to 4,294,371 shares and sole dispositive power with respect to 4,492,101 shares. Its address is 55 East 52nd St., New York, NY 10055. |
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| (3) | As reported by Frontier Capital Management Co., LLC. on a Schedule 13G filed with the SEC on February 14, 2020, as of December 31, 2019, reporting sole voting power with respect to 1,261,539 shares and sole dispositive power with respect to 2,658,017 shares. Its address is 99 Summer Street, Boston, MA 02110. |
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| Name (1) | Number of Shares of Common Stock Beneficially Owned | | Percent of Shares of Common Stock Outstanding |
| Vince A. Ackerson | 31,886 | (2) | * |
| Julie L. Anderson | 32,951 | (3) | * |
| Jonathan E. Baliff | 2,779 | (4) | * |
| James H. Browning | 12,709 | (5) | * |
| C. Keith Cargill | 98,098 | (6) | * |
| Larry L. Helm | 21,834 | (7) | * |
| David S. Huntley | 2,332 | (8) | * |
| Charles S. Hyle | 5,255 | (9) | * |
| Elysia Holt Ragusa | 7,530 | (10) | * |
| Steven P. Rosenberg | 33,115 | (11) | * |
| Robert W. Stallings | 9,730 | (12) | * |
| Dale W. Tremblay | 8,730 | (13) | * |
| John G. Turpen | 1,664 | (14) | * |
| Ian J. Turpin | 22,985 | (15) | * |
| Patricia A. Watson | 5,282 | (16) | * |
| All executive officers and directors as a group | 296,880 | | 0.59%** |
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| * | Less than 1% of the issued and outstanding shares of the class. |
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| ** | Percentage is calculated on the basis of 50,397,277 shares, the total number of shares of common stock outstanding on February 28, 2020. |
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| (1) | Unless otherwise stated, the address for each person in this table is 2000 McKinney Avenue, 7th Floor, Dallas, Texas 75201. |
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| (2) | Includes 27,678 shares held by Mr. Ackerson, as well as 2,519 RSUs that will vest within 60 days. Also includes 1,689 shares held by JAKS Partners, LTD. Mr. Ackerson is the general partner of JAKS Partners. |
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| (3) | Includes 30,919 shares held by Ms. Anderson, as well as 2,032 RSUs that will vest within 60 days. |
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| (4) | Includes 1,458 shares held by Mr. Baliff, as well as 1,107 RSUs that will vest within 60 days and 214 shares of restricted common stock as to which restrictions lapse on July 18, 2020, but for which he has voting power. |
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| (5) | Includes 11,369 shares held by Mr. Browning, as well as 1,340 RSUs that will vest within 60 days. |
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| (6) | Includes 88,090 shares held by Mr. Cargill, as well as 10,008 RSUs that will vest within 60 days. |
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| (7) | Includes 20,494 shares held by Mr. Helm, as well as 1,340 RSUs that will vest within 60 days. |
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| (8) | Includes 1,058 shares held by Mr. Huntley, as well as 1,107 RSUs that will vest within 60 days and 167 shares of restricted common stock as to which restrictions lapse on January 23, 2021, but for which he has voting power. |
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| (9) | Includes 3,915 shares held by Mr. Hyle, as well as 1,340 RSUs that will vest within 60 days. |
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| (10) | Includes 6,190 shares held by Ms. Ragusa, as well as 1,340 RSUs that will vest within 60 days. |
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| (11) | Includes 31,775 shares held by Mr. Rosenberg, as well as 1,340 RSUs that will vest within 60 days. |
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| (12) | Includes 8,390 shares held by Mr. Stallings, as well as 1,340 RSUs that will vest within 60 days. |
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| (13) | Includes 7,390 shares held by Mr. Tremblay, as well as 1,340 RSUs that will vest within 60 days. |
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| (14) | Includes 1,664 shares held by Mr. Turpen. |
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| (15) | Includes 4,469 shares held by Mr. Turpin, as well as 1,340 RSUs that will vest within 60 days. Also includes 5,951 shares held by Johnson Management Trust, 9,321 shares held by The Nini Gift Trust and 1,904 shares held in the Rebekah Johnson Nugent 1976 Trust, each of which Mr. Turpin’s spouse serves as the trustee. |
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| (15) | Includes 3,942 shares held by Ms. Watson, as well as 1,340 RSUs that will vest within 60 days. |
Equity Compensation Plan Information
The following table provides information as of December 31, 2019 regarding common stock that may be issued under the Company’s existing equity compensation plans will be included in an amendment to this Annual Report on Form 10-K/A filed within 120 days after the end of our 2019 fiscal year.plans.
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| Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans |
| Equity compensation plans approved by security holders | 579,512 (A) | $33.95 | 1,772,070 (B) |
| Equity compensation plans not approved by security holders | — | — | — |
| Total | 579,512 | $33.95 | 1,772,070 |
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| (A) | Includes 21,200 shares issuable pursuant to outstanding SARs with a weighted average exercise price of $33.95 and 558,312 shares issuable pursuant to outstanding RSUs. Since RSUs have no exercise price, they are not included in the weighted average exercise price calculation. |
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| (B) | All of these shares are available for issuance pursuant to grants of full-value awards. |
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| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Certain Relationships and Related Transactions
In the ordinary course of business, the Bank has made loans, and may continue to make loans in the future, to the Bank's and the Company's officers, directors and employees. However, it is the Bank’s policy to not extend loans to executive officers of the Bank and the Company. The Bank makes loans to directors and their affiliates in the ordinary course of business on substantially the same terms as those with other customers. All loans to directors are reviewed and approved by our board of directors prior to making any such loans. The Bank also provides wealth management services for managed accounts to directors at discounted fees.
In February 2018, the Bank signed an agreement with TSYS, under which TSYS provides transaction processing services to the Bank in exchange for a fee, estimated to be $400,000 to $600,000 per year. Patricia A. Watson, a member of the Company’s board of directors, served as the Senior Executive Vice President and Chief Information Officer of TSYS until December 2019. The board determined that the transaction did not affect Ms. Watson’s independence.
The Company has policies and procedures for reviewing related party transactions involving the Company’s and the Bank’s directors, executive officers and their affiliates. Each director and NEO of the Company and the Bank is required to complete a questionnaire annually, and each director who serves on the Audit Committee must complete a certification of independence annually. Both of these documents are designed to disclose all related party transactions, including loans, and this information requiredis reviewed by this item relatingmanagement, the Audit Committee and the board of directors, as appropriate. Such transactions are subject to security ownershipthe standards set forth in the Company’s Code of certain relationshipsConduct and related transactionsin applicable laws and regulations and the Nasdaq Stock Market Listing Rules for determining the independence of directors. The questionnaires, certifications and Code of Conduct are all in writing.
Director Independence
The board of directors has determined that each director independence will be includedother than Mr. Cargill qualifies as an “independent director” as defined in an amendment to this Annual Report on Form 10-K/A filed within 120 days after the end of our 2019 fiscal year.Nasdaq Stock Market Listing Rules and as further defined by applicable statutes and regulations.
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| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
Auditor Fees and Services
The information requiredAudit Committee has appointed Ernst & Young LLP to continue as our independent registered public accounting firm for the 2020 fiscal year.
Fees for professional services provided by this item relating to principal accountantthe Company’s independent registered public accounting firm in each of the last two fiscal years, in each of the following categories, were:
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| (in thousands) | 2019 | 2018 |
| Audit fees | $ | 1,877 |
| $ | 1,644 |
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| Audit-related fees | — |
| — |
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| Tax fees | 499 |
| 480 |
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| Total | $ | 2,376 |
| $ | 2,124 |
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Fees for audit services include fees and services will beassociated with the audit of the Company’s annual consolidated financial statements, the review of the consolidated financial statements included in an amendmentthe Company’s Form 10-Qs, accounting consultations and management’s assertions regarding effective internal controls in compliance with the requirements of Section 404 of the Sarbanes Oxley Act and Federal Deposit Insurance Corporation Improvement Act. Tax fees included various federal, state and local tax services, as well as tax consultations.
Pre-approval Policies and Procedures
The Audit Committee has adopted a policy that requires advance approval of all audit, audit-related and tax services performed by the independent registered public accounting firm. The policy provides for pre-approval by the Audit Committee of specifically defined audit and non-audit services. Unless the specific service has been previously pre-approved with respect to this Annual Report on Form 10-K/A filed within 120 days afterthat year, the endAudit Committee must approve the permitted service before the independent registered public accounting firm is engaged to perform it. The Audit Committee has delegated to the chairman of our 2019 fiscal year.the Audit Committee authority to approve permitted services provided that the chairman reports any decisions to the Audit Committee at its next scheduled meeting.
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| 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
(3) Exhibits
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| 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* |
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**ITEM 16. | Furnished herewithFORM 10-K SUMMARY |
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+ | Management contract or compensatory plan arrangement |
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this reportAmendment No. 1 to be signed on its behalf by the undersigned thereunto duly authorized.
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| Date: | February 12,March 2, 2020 | | TEXAS CAPITAL BANCSHARES, INC. |
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| | | | 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.
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Date: | February 12, 2020 | | /S/ LARRY L. HELM |
| | | Larry L. Helm
Chairman of the Board and Director
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Date: | February 12, 2020 | | /S/ JULIE ANDERSON |
| | | Julie Anderson
Chief Financial Officer
(principal financial officer)
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Date: | February 12, 2020 | | /S/ ELLEN DETRICH |
| | | Ellen Detrich
Controller
(principal accounting officer)
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Date: | February 12, 2020 | | /S/ JONATHAN E. BALIFF |
| | | Jonathan E. Baliff
Director |
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Date: | February 12, 2020 | | /S/ JAMES H. BROWNING |
| | | James H. Browning
Director
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Date: | February 12, 2020 | | /S/ DAVID S. HUNTLEY |
| | | David S. Huntley
Director |
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Date: | February 12, 2020 | | /S/ CHARLES S. HYLE |
| | | Charles S. Hyle
Director
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Date: | February 12, 2020 | | /S/ ELYSIA H. RAGUSA |
| | | Elysia H. Ragusa
Director |
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Date: | February 12, 2020 | | /S/ STEVEN P. ROSENBERG |
| | | Steven P. Rosenberg
Director |
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Date: | February 12, 2020 | | /S/ ROBERT W. STALLINGS |
| | | Robert W. Stallings
Director |
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Date: | February 12, 2020 | | /S/ DALE W. TREMBLAY |
| | | Dale W. Tremblay
Director
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Date: | February 12, 2020 | | /S/ IAN J. TURPIN |
| | | Ian J. Turpin
Director
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Date: | February 12, 2020 | | /S/ PATRICIA A. WATSON |
| | | Patricia A. Watson
Director |
