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.
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.
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.
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.
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.
30
ITEM 1B. UNRESOLVED STAFF COMMENTS | |
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
ITEM 2. PROPERTIES
Our corporate headquarters is located in downtown Dallas, Texas. These facilities, which we lease, house our executive and primary administrative offices, as well as the principal banking headquarters of Texas Capital Bank. We also lease other facilities in our primary market regions of Dallas, Fort Worth, Houston, Austin and San Antonio, as well as in California, Illinois, Louisiana, Missouri and New York, some of which operate as full-service banking centers. We also lease an operations center in Richardson, Texas that houses our loan and deposit operations and our customer call center.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various claims and legal actions that may arise in the course of conducting its business. Management does not expect the disposition of any of these matters to have a material adverse impact on the Company’s financial statements or results of operations.
| |
ITEM 4. | MINE SAFETY DISCLOSURES |
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
31
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES | |
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, 2020,8, 2021, there were approximately 192175 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, 2019,2020, 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, 2014.2015. The performance graph represents past performance and should not be considered to be an indication of future performance.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 12/31/2015 | | 12/31/2016 | | 12/31/2017 | | 12/31/2018 | | 12/31/2019 | | 12/31/2020 |
Texas Capital Bancshares, Inc. | $ | 100.00 | | | $ | 158.64 | | | $ | 179.89 | | | $ | 103.38 | | | $ | 114.87 | | | $ | 120.40 | |
Russell 2000 Index (RTY) | 100.00 | | | 119.30 | | | 134.87 | | | 118.81 | | | 146.70 | | | 173.09 | |
Nasdaq Bank Index (CBNK) | 100.00 | | | 134.52 | | | 139.44 | | | 115.35 | | | 139.62 | | | 125.29 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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
| |
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) | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
Consolidated Operating Data | | | | | | | | | |
Interest income | $ | 1,056,912 | | | $ | 1,365,312 | | | $ | 1,164,193 | | | $ | 879,299 | | | $ | 703,408 | |
Interest expense | 188,086 | | | 385,592 | | | 249,333 | | | 117,971 | | | 63,594 | |
Net interest income | 868,826 | | | 979,720 | | | 914,860 | | | 761,328 | | | 639,814 | |
Provision for credit losses | 258,000 | | | 75,000 | | | 87,000 | | | 44,000 | | | 77,000 | |
Net interest income after provision for credit losses | 610,826 | | | 904,720 | | | 827,860 | | | 717,328 | | | 562,814 | |
Non-interest income | 185,516 | | | 92,440 | | | 78,024 | | | 74,256 | | | 60,780 | |
Non-interest expense | 704,396 | | | 600,850 | | | 532,533 | | | 466,858 | | | 384,097 | |
Income before income taxes | 91,946 | | | 396,310 | | | 373,351 | | | 324,726 | | | 239,497 | |
Income tax expense | 25,657 | | | 84,295 | | | 79,964 | | | 128,645 | | | 86,078 | |
Net income | 66,289 | | | 312,015 | | | 293,387 | | | 196,081 | | | 153,419 | |
Preferred stock dividends | 9,750 | | | 9,750 | | | 9,750 | | | 9,750 | | | 9,750 | |
Net income available to common stockholders | $ | 56,539 | | | $ | 302,265 | | | $ | 283,637 | | | $ | 186,331 | | | $ | 143,669 | |
Consolidated Balance Sheet Data | | | | | | | | | |
Total assets | $ | 37,726,096 | | | $ | 32,548,069 | | | $ | 28,257,767 | | | $ | 25,075,645 | | | $ | 21,697,134 | |
Loans held for sale | 283,165 | | | 2,577,134 | | | 1,969,474 | | | 1,011,004 | | | 968,929 | |
Loans held for investment (LHI) | 15,351,451 | | | 16,476,413 | | | 16,690,550 | | | 15,366,252 | | | 13,001,011 | |
Loans held for investment, mortgage finance | 9,079,409 | | | 8,169,849 | | | 5,877,524 | | | 5,308,160 | | | 4,497,338 | |
Liquidity assets(1) | 9,032,807 | | | 4,263,766 | | | 2,865,874 | | | 2,727,581 | | | 2,725,645 | |
Investment securities | 3,196,970 | | | 239,871 | | | 120,216 | | | 23,511 | | | 24,874 | |
Demand deposits | 12,740,947 | | | 9,438,459 | | | 7,317,161 | | | 7,812,660 | | | 7,994,201 | |
Total deposits | 30,996,589 | | | 26,478,593 | | | 20,606,113 | | | 19,123,180 | | | 17,016,831 | |
Federal funds purchased and repurchase agreements | 111,751 | | | 141,766 | | | 641,174 | | | 365,040 | | | 109,575 | |
Other borrowings | 3,000,000 | | | 2,400,000 | | | 3,900,000 | | | 2,800,000 | | | 2,000,000 | |
Subordinated notes | 282,490 | | | 282,129 | | | 281,767 | | | 281,406 | | | 281,044 | |
Trust preferred subordinated debentures | 113,406 | | | 113,406 | | | 113,406 | | | 113,406 | | | 113,406 | |
Stockholders’ equity | 2,871,224 | | | 2,801,321 | | | 2,480,308 | | | 2,190,072 | | | 1,997,890 | |
|
| | | | | | | | | | | | | | | | | | | |
| 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 |
|
(1)Liquidity assets include federal funds sold and interest-bearing deposits in other banks.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At or For the Year Ended December 31, |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
Other Financial Data | | | | | | | | | |
Income per share | | | | | | | | | |
Basic | $ | 1.12 | | | $ | 6.01 | | | $ | 5.68 | | | $ | 3.76 | | | $ | 3.10 | |
Diluted | 1.12 | | | 5.99 | | | 5.64 | | | 3.71 | | | 3.07 | |
Book value per common share | 53.92 | | | 52.67 | | | 46.42 | | | 41.09 | | | 37.33 | |
Tangible book value per common share(1) | 53.57 | | | 52.31 | | | 46.05 | | | 40.71 | | | 36.93 | |
Weighted average shares | | | | | | | | | |
Basic | 50,430,326 | | | 50,286,300 | | | 49,936,702 | | | 49,587,169 | | | 46,239,210 | |
Diluted | 50,582,979 | | | 50,419,204 | | | 50,272,872 | | | 50,259,834 | | | 46,765,902 | |
Selected Financial Ratios | | | | | | | | | |
Performance Ratios | | | | | | | | | |
Net interest margin | 2.39 | % | | 3.28 | % | | 3.78 | % | | 3.49 | % | | 3.14 | % |
Return on average assets | 0.18 | % | | 1.01 | % | | 1.16 | % | | 0.86 | % | | 0.73 | % |
Return on average common equity | 2.10 | % | | 11.95 | % | | 12.80 | % | | 9.46 | % | | 9.16 | % |
Efficiency ratio(2) | 66.81 | % | | 56.04 | % | | 53.63 | % | | 55.87 | % | | 54.82 | % |
| | | | | | | | | |
Non-interest expense to average earning assets | 1.93 | % | | 2.00 | % | | 2.19 | % | | 2.12 | % | | 1.88 | % |
Asset Quality Ratios | | | | | | | | | |
Allowance for credit losses on loans to LHI | 1.04 | % | | 0.79 | % | | 0.85 | % | | 0.89 | % | | 0.96 | % |
Net charge-offs (recoveries) to average LHI | 0.80 | % | | 0.31 | % | | 0.37 | % | | 0.16 | % | | 0.29 | % |
Allowance for credit losses on loans to non-accrual loans | 2.1x | | .9x | | 2.4x | | 1.8x | | 1.0x |
Non-accrual loans to LHI | 0.50 | % | | 0.91 | % | | 0.36 | % | | 0.49 | % | | 0.96 | % |
Total NPAs to LHI plus OREO | 0.50 | % | | 0.91 | % | | 0.36 | % | | 0.55 | % | | 1.07 | % |
Capital and Liquidity Ratios | | | | | | | | | |
CET1 | 9.35 | % | | 8.88 | % | | 8.58 | % | | 8.45 | % | | 8.97 | % |
Total capital ratio | 12.09 | % | | 11.37 | % | | 11.31 | % | | 11.50 | % | | 12.48 | % |
Tier 1 capital ratio | 10.25 | % | | 9.75 | % | | 9.53 | % | | 9.52 | % | | 10.23 | % |
Tier 1 leverage ratio | 7.52 | % | | 8.42 | % | | 9.87 | % | | 9.15 | % | | 9.34 | % |
Total common equity to total assets | 7.21 | % | | 8.15 | % | | 8.25 | % | | 8.14 | % | | 8.52 | % |
Tangible common equity to total tangible assets(3) | 7.13 | % | | 8.07 | % | | 8.18 | % | | 8.06 | % | | 8.43 | % |
Average LHI, net to average total deposits | 80.07 | % | | 95.73 | % | | 102.74 | % | | 97.56 | % | | 95.82 | % |
(1)Stockholders' equity excluding preferred stock, less goodwill and intangibles, divided by shares outstanding at period end.
(2)Non-interest expense divided by the sum of net interest income and non-interest income.
(3)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.
|
| | | | | | | | | | | | | | | | | | | |
| 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
| |
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, 20192020 and 20182019 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 20182019 Annual Report on Form 10K filed with the SEC on February 14, 2019,12, 2020, for discussion of our results of operations for the years ended December 31, 20182019 and 2017.2018.
Forward-Looking Statements
Certain statements and financial analysis contained in this report that are not historical facts are forward-looking statements made pursuant tomay constitute "forward-looking statements" within the safe harbor provisionsmeaning of federal securities laws.the Private Securities Litigation Reform Act of 1995. 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.fact and constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. 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 ofmaterial risks and uncertainties for the Tax Act onU.S. and world economies, and for our results of operations,business, resulting from the COVID-19 pandemic, 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 loancredit losses and provision for loancredit 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 thatCOVID-19 pandemic is adversely affecting us and our customers, employees and third-party service providers; 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 thatadverse impacts of 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 impactpandemic on our stock pricebusiness, financial position, operations and our future business and financial results if the proposed mergerprospects have been material. It is not consummated.
The inability of our stockholderspossible to be certainaccurately predicts the extent, severity or duration of the precise value of the merger consideration they may receive in the merger due to the fluctuation in the market price of IBTXpandemic or when normal economic and TCBI common stock, including as a result of the financial performance of TCBI prior to closing.operational conditions will return.
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 TCBIwe are highly dependent.
•Changes in interest rates, which may affect TCBI's or IBTX'sour net income and other future cash flows, or the market value of TCBI's or IBTX'sour assets, including the market value of investment securities.
•Changes in theour ability of TCBI or IBTX to access the capital markets, including changes in their respectiveour 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 loancredit 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 loancredit 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.prices and the effects of the COVID-19 pandemic.
•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 Cuts and Jobs Act of 2017 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-attackscyber-incidents against us, our customers or our third party vendors, or to manage risks from failures, disruptions or security breaches affecting us, our customers or our third party vendors.vendors, which risks have been materially enhanced by our increased reliance on technology to support associates working outside our offices.
•The costs and effects of cyber-incidents or other failures, disruptions or security breaches of our systems or those our third-party providers.
•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.
•The failure of our enterprise risk management framework, our compliance program, or our corporate governance and supervisory oversight functions to timely identify and address emerging risks adequately, which may result in unexpected losses.
•Uncertainty regarding the future of the London Interbank Offered Rate ("LIBOR"),LIBOR, and the potentialexpected transition away from LIBOR toward new interest rate benchmarks.
•Legislative and regulatory changes imposing further restrictions and costs on our business, a failure to remainmaintain 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 effect of changes in laws, regulations, policies and guidelines (including, among others, laws, regulations, policies and guidelines concerning taxes, banking, securities and monetary and fiscal policies) with which we and our subsidiaries must comply under the new Biden Administration and the effects of any such changes on our business and results of operations;
•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 identify, 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.
•Volatility in the market price of our common stock.
•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, investigations, inquiries and related matters with respect to the financial services industry, including those directly involving us or our Bank.Bank and arising from our participation in government stimulus programs responding to the economic impact of the COVID-19 pandemic.
•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 approvedentered into the merger agreementMerger Agreement to combine the companies in an all-stock merger of equals. Upon closing ofOn May 22, 2020, we and IBTX mutually agreed to terminate the merger,Merger Agreement. The termination was approved by 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. Thecompany's board of directors after careful consideration of the surviving entitysignificant impact of the COVID-19 pandemic on global markets and on the companies' ability to fully realize the benefits expected to be achieved through the merger. Neither party paid a termination fee in connection with the termination of the Merger Agreement.
In response to the pressures of the current economic environment and a refinement of our strategy, we took actions during the second and third quarters of 2020 which are expected to decrease our non-interest expenses, including a workforce reduction and write-offs of certain software assets. While these expenses, as well as merger-related expenses incurred in the first half of 2020, had a significant impact on our year-to-date operating results, we believe that we are better positioned to improve our core profitability going forward as the non-interest expense items are not expected to recur in future periods. During the fourth quarter of 2020, we did experience improvements in non-interest expense as a result of these actions, specifically in salaries and employee benefits due to the workforce reduction and in communications and technology expense related to lower software amortization expense as compared to the third quarter of 2020. We continue to focus on balance sheet strength and while we intend to operate with above-average liquidity in response to the uncertain economic environment, we believe opportunities exist to improve core earnings by reducing or replacing higher cost funding sources and improving the earning asset mix.
Our organic growth model and the surviving bank will be compriseddepth of 13 directors,talent on our team have built a resilient business with lasting client relationships and a record of which seven will be former membersvalue creation through dynamic markets and business cycles.
Impact of COVID-19 Pandemic
Impact on Our Financial Statements and Results of Operations
Financial institutions are dependent upon the ability of their loan customers to meet their loan obligations and the availability of their workforce and vendors. As a result of the Boardshelter-at-home mandate that was in force early in the second quarter of Directors2020, commercial activity throughout the state of TCBITexas, as well as nationally, decreased significantly. As of December 31, 2020, most regions in Texas have allowed businesses to re-open at limited capacities and six will be former memberswith caution as to social-distancing and other restrictions. Commercial activity has improved, but has not returned to the levels existing prior to the outbreak of the boardpandemic. This continued depression in commercial activity may result in our customers' inability to meet their loan obligations to us. In addition, the economic pressures and uncertainties related to the COVID-19 pandemic have resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer. Our business and consumer customers are experiencing varying degrees of directors of IBTX. The mergerfinancial distress, which is expected to closecontinue into the first quarter of 2021, especially if COVID-19 infections increase and new economic restrictions are mandated. Our borrowing base includes customers in mid-2020,industries such as energy, hotel/lodging, restaurants, entertainment, retail and commercial real estate, all of which have been and are likely to continue to be significantly impacted by the COVID-19 pandemic. We recognize that these industries may take longer to recover as consumers may be hesitant to return to full social interaction or may change their spending habits on a more permanent basis as a result of the pandemic. We continue to monitor these customers closely.
Future economic conditions are subject to satisfactionsignificant uncertainty. We have taken deliberate actions to ensure that we have the balance sheet strength to serve our clients and communities, including increases in liquidity and managing our assets and liabilities in order to maintain a strong capital position. Current economic pressures and their effects on our customers, coupled with the implementation of customary closing conditions,the CECL expected loss methodology for determining our allowance for credit losses, have contributed to a substantially increased provision for credit losses in 2020. We continue to monitor closely the impact of the COVID-19 pandemic on our customers, as well as the effects of the CARES Act and the new Act. Uncertainties associated with the pandemic include the duration of the outbreak, the impact to our customers, employees and vendors and the impact to the economy as a whole. COVID-19 has had, and is expected to continue to have, a significant adverse impact on our business, financial position and operating results. The extent to which the COVID-19 pandemic will impact our operations and financial results in 2021 cannot be reasonably or reliably estimated at this time.
Impact on our Business Operations
In order to protect the health of our customers and employees, and to comply with applicable government directives, we have modified our business practices, including receiptrestricting employee travel, directing employees to work from home insofar as is possible and implementing our business continuity plans and protocols to the extent necessary. Since early March 2020, a majority of customary regulatory approvalsour workforce has been working virtually with limited impact on the execution of our business and approval byclient experience. We expect to be able to continue with this strategy for the stockholdersforeseeable future, but will begin transitioning employees back into the office in a phased approach when it is safe to do so. When the time comes to transition employees back into the office locations, our Business Continuity team has a plan in place to phase employees back into the office locations over an extended period of each company. Refertime. Our branch locations are currently open and operating during normal business hours, although customers are admitted into the branches only between the hours of 10:00 a.m. and 2:00 p.m. We are taking additional precautions within our branch locations, including enhanced cleaning procedures, to Mergerensure the safety of our customers and our employees.
Energy Portfolio
Outstanding energy loans totaled $766.2 million, or 3% of total loans held for investment, at December 31, 2020, compared to $1.4 billion, or 6% of total loans, at December 31, 2019. The decline in outstanding energy loans is due to our strategic de-risking of the energy portfolio as well as a heightened level of charge-offs in 2020 as we reached final resolution on a number of loans previously disclosed as problem loans. At December 31, 2020, energy non-accruals decreased to $51.7 million, compared to $125.0 million at December 31, 2019, further evidencing final resolution of previously disclosed problem loans.
Our energy loan portfolio is primarily comprised of loans to exploration and production (“E&P”) companies that are generally collateralized with Independent Bank Group, Inc.proven reserves based on appropriate valuation standards that take into account the risk of oil and gas price volatility. At December 31, 2020, loans to E&P companies represented approximately 70% of total energy loans outstanding. The majority of this portfolio consists of first lien, senior secured, reserve-based loans, which we believe is the lowest-risk form of energy lending. At December 31, 2020 approximately 40% of our exposure was located in Item 1 for additional disclosures.lower cost production areas such as the Permian Basin and Eagle Ford.
Year ended December 31, 20192020 compared to year ended December 31, 20182019
We reported net income of $322.9$66.3 million and net income available to common stockholders of $313.1$56.5 million, or $6.21$1.12 per diluted common share, for the year ended December 31, 2019,2020, compared to net income of $300.8$312.0 million and net income
available to common stockholders of $291.1$302.3 million, or $5.79$5.99 per diluted common share, for 2018.2019. Return on average common equity ("ROE") was 12.38%2.10% and return on average assets ("ROA") was 1.04%0.18% for the year ended December 31, 2019,2020, compared to 13.14%11.95% and 1.19%1.01%, respectively, for 2018.2019. The decreasesdecline in net income, ROE and ROA werefor the year ended December 31, 2020 resulted primarily from a $183.0 million increase in the provision for credit losses, as well as a $103.5 million increase in non-interest expense, driven primarily by larger balances in total mortgage finance loans and liquidity assets.the significant year-to-date 2020 expenses described below.
Consolidated Daily Average Balances, Average Yields and Rates
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2020 | 2019 | 2018 |
(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 | $ | 689,590 | | $ | 10,112 | | 1.47 | % | $ | 37,574 | | $ | 1,611 | | 4.29 | % | $ | 24,142 | | $ | 849 | | 3.52 | % |
Investment Securities—non-taxable(2) | 195,741 | | 9,320 | | 4.76 | % | 176,328 | | 8,915 | | 5.06 | % | 46,553 | | 2,512 | | 5.40 | % |
Federal funds sold and securities purchased under resale agreements | 114,141 | | 693 | | 0.61 | % | 73,946 | | 1,529 | | 2.07 | % | 201,236 | | 3,792 | | 1.88 | % |
Interest-bearing Deposits in other banks | 9,653,129 | | 27,569 | | 0.29 | % | 3,483,254 | | 71,093 | | 2.04 | % | 1,769,074 | | 32,597 | | 1.84 | % |
Loans held for sale | 1,114,311 | | 36,369 | | 3.26 | % | 2,688,677 | | 112,526 | | 4.19 | % | 1,561,530 | | 71,240 | | 4.56 | % |
Loans held for investment, mortgage finance | 8,589,762 | | 285,212 | | 3.32 | % | 6,999,585 | | 241,665 | | 3.45 | % | 4,875,860 | | 181,438 | | 3.72 | % |
Loans held for investment(1)(2) | 16,377,733 | | 691,731 | | 4.22 | % | 16,803,930 | | 934,228 | | 5.56 | % | 16,075,007 | | 877,688 | | 5.46 | % |
Less reserve for loan losses | 248,563 | | — | | — | | 200,283 | | — | | — | | 183,863 | | — | | — | |
Loans held for investment, net | 24,718,932 | | 976,943 | | 3.95 | % | 23,603,232 | | 1,175,893 | | 4.98 | % | 20,767,004 | | 1,059,126 | | 5.10 | % |
Total earning assets | 36,485,844 | | 1,061,006 | | 2.91 | % | 30,063,011 | | 1,371,567 | | 4.56 | % | 24,369,539 | | 1,170,116 | | 4.80 | % |
Cash and other assets | 1,030,357 | | | | 952,994 | | | | 828,150 | | | |
Total assets | $ | 37,516,201 | | | | $ | 31,016,005 | | | | $ | 25,197,689 | | | |
Liabilities and stockholders’ equity | | | | | | | | | |
Transaction deposits | $ | 4,090,591 | | $ | 32,836 | | 0.80 | % | $ | 3,535,282 | | $ | 68,908 | | 1.95 | % | $ | 3,044,300 | | $ | 47,738 | | 1.57 | % |
Savings deposits | 12,346,904 | | 74,950 | | 0.61 | % | 9,780,532 | | 168,856 | | 1.73 | % | 7,986,135 | | 114,255 | | 1.43 | % |
Time deposits | 2,867,579 | | 38,331 | | 1.34 | % | 2,351,698 | | 55,773 | | 2.37 | % | 1,292,864 | | 23,123 | | 1.79 | % |
| | | | | | | | | |
Total interest-bearing deposits | 19,305,074 | | 146,117 | | 0.76 | % | 15,667,512 | | 293,537 | | 1.87 | % | 12,323,299 | | 185,116 | | 1.50 | % |
Other borrowings | 3,115,416 | | 22,006 | | 0.71 | % | 3,038,095 | | 70,265 | | 2.31 | % | 2,102,404 | | 42,738 | | 2.03 | % |
Subordinated notes | 282,299 | | 16,764 | | 5.94 | % | 281,936 | | 16,764 | | 5.95 | % | 281,574 | | 16,764 | | 5.95 | % |
Trust preferred subordinated debentures | 113,406 | | 3,199 | | 2.82 | % | 113,406 | | 5,026 | | 4.43 | % | 113,406 | | 4,715 | | 4.16 | % |
Total interest-bearing liabilities | 22,816,195 | | 188,086 | | 0.82 | % | 19,100,949 | | 385,592 | | 2.02 | % | 14,820,683 | | 249,333 | | 1.68 | % |
Demand deposits | 11,567,549 | | | | 8,989,104 | | | | 7,890,304 | | | |
Other liabilities | 295,710 | | | | 246,931 | | | | 121,203 | | | |
Stockholders’ equity | 2,836,747 | | | | 2,679,021 | | | | 2,365,499 | | | |
Total liabilities and stockholders’ equity | $ | 37,516,201 | | | | $ | 31,016,005 | | | | $ | 25,197,689 | | | |
| | | | | | | | | |
Net interest income(2) | | $ | 872,920 | | | | $ | 985,975 | | | | $ | 920,783 | | |
Net interest margin | | | 2.39 | % | | | 3.28 | % | | | 3.78 | % |
Net interest spread | | | 2.09 | % | | | 2.54 | % | | | 3.12 | % |
Loan spread(3) | | | 3.43 | % | | | 3.59 | % | | | 4.04 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| 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 $61.3 million, $57.1 million and $71.0 million for the years ended December 31, 2020, 2019 and 2018, respectively. | |
(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. |
(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, |
| 2020/2019 | | 2019/2018 |
| 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 | $ | 8,906 | | | $ | 34,391 | | | $ | (25,485) | | | $ | 7,165 | | | $ | 5,787 | | | $ | 1,378 | |
Loans held for sale | (76,157) | | | (61,542) | | | (14,615) | | | 41,286 | | | 51,381 | | | (10,095) | |
Loans held for investment, mortgage finance loans | 43,547 | | | 56,230 | | | (12,683) | | | 60,227 | | | 78,979 | | | (18,752) | |
Loans held for investment | (242,497) | | | (22,700) | | | (219,797) | | | 56,540 | | | 38,729 | | | 17,811 | |
Federal funds sold and securities purchased under resale agreements | (836) | | | 1,092 | | | (1,928) | | | (2,263) | | | (2,329) | | | 66 | |
Interest-bearing deposits in other banks | (43,524) | | | 133,964 | | | (177,488) | | | 38,496 | | | 36,304 | | | 2,192 | |
Total | (310,561) | | | 141,435 | | | (451,996) | | | 201,451 | | | 208,851 | | | (7,400) | |
Interest expense: | | | | | | | | | | | |
Transaction deposits | (36,072) | | | 10,856 | | | (46,928) | | | 21,170 | | | 7,644 | | | 13,526 | |
Savings deposits | (93,906) | | | 45,495 | | | (139,401) | | | 54,601 | | | 27,534 | | | 27,067 | |
Time deposits | (17,442) | | | 12,330 | | | (29,772) | | | 32,650 | | | 15,517 | | | 17,133 | |
| | | | | | | | | | | |
Other borrowings | (48,259) | | | 1,741 | | | (50,000) | | | 27,527 | | | 18,344 | | | 9,183 | |
Long-term debt | (1,827) | | | 20 | | | (1,847) | | | 311 | | | 20 | | | 291 | |
Total | (197,506) | | | 70,442 | | | (267,948) | | | 136,259 | | | 69,059 | | | 67,200 | |
Net interest income | $ | (113,055) | | | $ | 70,993 | | | $ | (184,048) | | | $ | 65,192 | | | $ | 139,792 | | | $ | (74,600) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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. | |
(1) | Yield/rate and volume variances are allocated to yield/rate. |
| |
(2) | Taxable equivalent rates used where applicable assuming a 21% tax rate. |
(2)Taxable equivalent rates used where applicable assuming a 21% tax rate.
Net Interest Income
Net interest income was $979.7$868.8 million for the year ended December 31, 20192020 compared to $914.9$979.7 million for 2018.2019. The increasedecrease was primarily due to andecreases in yields on earning assets and a shift in earning asset composition, partially offset by a decrease in funding costs.
Average earning assets for the year ended December 31, 2020 increased by $6.4 billion compared to the same period in 2019, and included a $671.4 million increase in average earning assetstotal investment securities, reflecting the deployment 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 includedexcess liquidity into higher-yielding investment securities, a $1.1 billion increase in average loans held for sale, a $2.8 billion increase in average nettotal loans held for investment, primarily fromattributable to increases in average mortgage finance loans driven byrelated to lower long-term interest rates, a $143.2 million increase in average investment securities, and a $1.6$6.2 billion increase in average liquidity assets.assets, partially offset by a $1.6 billion decrease in average loans held for sale. The increase in average liquidity assets was the result of actions taken by management during 2020 to ensure that we have the balance sheet strength to serve our clients during the COVID-19 pandemic. While we intend to operate with above-average liquidity in response to the uncertain economic environment, we believe opportunities exist to improve core earnings by reducing or replacing higher-cost funding sources and improving the earning asset mix. The decrease in average loans held for sale compared to the year ended December 31, 2019 resulted from holding purchased loans for shorter durations than in prior periods in order to limit exposure to forbearance risk caused by current economic uncertainties. The decline in net interest income on loans held for sale resulting from shorter hold times was offset by an increase in non-interest income. Average interest-bearing liabilities includedincreased $3.7 billion for the year ended December 31, 2020 compared to the same period in 2019, primarily due to a $3.3$3.6 billion increase in average interest-bearing deposits and a $935.7 million increase in other borrowings.deposits. Average demand deposits for the year ended December 31, 20192020 increased to $11.6 billion from $9.0 billion from $7.9 billion for 2018. 2019.
Net interest margin for the year ended December 31, 20192020 was 3.28%2.39% compared to 3.78%3.28% for 2018.2019. The decrease was primarily due to the effect of decreases indeclining interest rates during 2019 on loanearning asset yields and highera shift in earning asset composition, primarily increases in lower-yielding liquidity assets and mortgage finance loans coupled with a decline in loans held for investment, excluding mortgage finance, partially offset by lower funding costs compared to 2018.2019.
The yield on total loans held for investment decreased to 4.98%3.95% for the year ended December 31, 20192020 compared to 5.10%4.98% for 20182019 and the yield on earning assets decreased to 4.56%2.91% for the year ended December 31, 20192020 compared to 4.80%4.56% for 2018.2019. The average cost of total deposits and borrowed funds increaseddecreased to 1.31%0.47% for 2020 from 1.19% for 2019 from 1.02% for 2018. The spread onand 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 increaseddecreased to 0.51% for 2020 compared to 1.25% for 2019 compared to 0.99% for 2018.2019.
Non-interest Income
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
(in thousands) | 2020 | | 2019 | | 2018 |
Service charges on deposit accounts | $ | 11,620 | | | $ | 11,320 | | | $ | 12,787 | |
Wealth management and trust fee income | 9,998 | | | 8,810 | | | 8,148 | |
| | | | | |
Brokered loan fees | 46,423 | | | 29,738 | | | 22,532 | |
Servicing income | 27,029 | | | 13,439 | | | 18,307 | |
Swap fees | 5,182 | | | 4,387 | | | 5,625 | |
Net gain/(loss) on sale of loans held for sale | 58,026 | | | (20,259) | | | (15,934) | |
Other(1) | 27,238 | | | 45,005 | | | 26,559 | |
Total non-interest income | $ | 185,516 | | | $ | 92,440 | | | $ | 78,024 | |
|
| | | | | | | | | | | |
| 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 items 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. | |
(1) | Other non-interest income includes such items 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. |
Non-interest income increased by $14.4$93.1 million during the year ended December 31, 20192020 to $185.5 million, compared 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 millionThis increase was primarily due to ana $78.3 million 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$16.7 million increase in brokered loan fees and a $13.4 million increase in servicing income, partially offset by a $17.8 million decrease in service chargesother non-interest income. The increase in net gain/(loss) on sale of loans held for sale was due to favorable economics and lower hedge costs in 2020 as a $1.2 millionresult of holding purchased loans for shorter durations than in prior periods, which was offset by the decline in net interest income on loans held for sale noted above. The increase in brokered loans fees was due to an increase in total mortgage finance volumes in 2020, and the increase in servicing income was due to an increase in the outstanding balance of our servicing portfolio. The decrease in swap fees. Swap fees are based upon customer swap transactions, are receivedother non-interest income resulted primarily from the institutionsettlement of $15.0 million in legal claims in 2019 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.did not recur in 2020.
Non-interest Expense
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
(in thousands) | | 2020 | | 2019(1) | | 2018(1) |
Salaries and employee benefits | | $ | 340,529 | | | $ | 328,483 | | | $ | 300,899 | |
Net occupancy expense | | 34,955 | | | 32,989 | | | 30,342 | |
Marketing | | 23,581 | | | 53,355 | | | 39,335 | |
Legal and professional | | 52,132 | | | 52,460 | | | 42,990 | |
Communications and technology | | 103,054 | | | 44,826 | | | 30,056 | |
FDIC insurance assessment | | 25,955 | | | 20,093 | | | 24,307 | |
Servicing-related expenses | | 64,625 | | | 22,573 | | | 14,934 | |
Merger-related expenses | | 17,756 | | | 1,370 | | | — | |
| | | | | | |
Other(2) | | 41,809 | | | 44,701 | | | 49,670 | |
Total non-interest expense | | $ | 704,396 | | | $ | 600,850 | | | $ | 532,533 | |
|
| | | | | | | | | | | | |
| | 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)Values have been adjusted to reflect revisions to certain previously reported financial information. See “Item 8, Note 1—Operations and Summary of Significant Accounting Policies—Revision of Prior Period Financial Statements” for additional information. | |
(1) | Other expense includes such items as courier expenses, regulatory assessments other than FDIC insurance, insurance expenses and other general operating expenses. |
(2)Other expense includes such items as courier expenses, regulatory assessments other than FDIC insurance, insurance expenses and other general operating expenses.
Non-interest expense for the year ended December 31, 20192020 increased $64.9$103.5 million compared to 2018.2019. The increase iswas primarily due to increases in salaries and employee benefits, net occupancy expense and communication and technology expenses, all of which were due to general business growthservicing-related expenses and continued build-out, as well as increases in marketing, legal and professional and servicing-relatedmerger-related expenses, partially offset by decreasesa decrease in FDIC insurance assessment and other non-interest expense.marketing expenses. The increase in marketingsalaries and employee benefits was primarily due to $18.0 million in severance expense related to our workforce reduction in 2020. The increase in communications and technology expense was primarily due to an increase in variable expenses tied to deposit balances. The increase in legal and professional expense includes $1.3$36.0 million in expenseswrite-offs of certain software assets in 2020 and $5.9 million in technology expense related to the roll-out of our pending merger with IBTX, as well as increases relatedPPP capabilities in 2020. The full impact on salaries and employee benefits expense from the reduction in workforce and on software amortization included in communications and technology expense from the software write-offs recorded during 2020 is expected to investmentbe realized in Bask Bank and new commercial loan verticals.non-interest expense in the first half of 2021, though we did experience improvements during the fourth quarter of 2020. The increase in servicing-related expenses iswas primarily due to higher MSR amortization and impairment expense, resulting primarily from higher mortgage prepayment rates, as well as an increase in impairment expense.
rates.
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) | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
Commercial | $ | 8,861,580 | | | $ | 9,133,444 | | | $ | 9,117,546 | | | $ | 8,373,398 | | | $ | 6,622,078 | |
Energy | 766,217 | | | 1,425,309 | | | 1,631,371 | | | 1,130,000 | | | 889,583 | |
Mortgage finance | 9,079,409 | | | 8,169,849 | | | 5,877,524 | | | 5,308,160 | | | 4,497,338 | |
Real estate | 5,794,624 | | | 6,008,040 | | | 6,050,083 | | | 5,960,785 | | | 5,560,909 | |
Total loans held for investment | $ | 24,501,830 | | | $ | 24,736,642 | | | $ | 22,676,524 | | | $ | 20,772,343 | | | $ | 17,569,908 | |
|
| | | | | | | | | | | | | | | | | | | |
| 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 totalTotal loans held for investment have grownwere $24.5 billion at an annual rateDecember 31, 2020, a decline of 9%, 9% and 18% in 2019, 2018 and 2017, respectively, with$234.8 million from 2019. While the majority of our portfolio segments declined in 2020, the growth in 2019 relating tobalance of mortgage finance loans. Theseloans increased $909.6 million to $9.1 billion at December 31, 2020. Mortgage finance 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%37% of total loans held for investment at December 31, 20192020 compared to 26%33% at December 31, 2018.2019. 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 20192020 resulted from increases in volumes driven by continued lower long-term interest rates. Offsetting this increase was a slight decline in traditionalTraditional loans held for investment in 2019. These declines reflect slower loan growth in 2019 as compared to 2018, as well as planned reductionsdecreased 7% during 2020. The majority of the decrease was in our leveraged lendingcommercial and energy balances.portfolios, and was partially offset by the addition of $617.5 million in PPP loan balances at December 31, 2020. Throughout 2020 we strategically reduced portfolios that have experienced higher historic losses, primarily energy and leveraged lending.
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, 2019,2020, we had $2.3$1.9 billion in syndicated loans, $621.1$435.5 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 million2020, none 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, 2019,2020, 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 loancredit losses.
43
The table below summarizes the industry concentrations of our loans held for investment on a gross basis at December 31, 2019.2020.
| | (in thousands except percentage data) | Amount | | Percent of Total Loans Held for Investment | (in thousands except percentage data) | Amount | | Percent of Total Loans Held for Investment |
Industry type: | | | | Industry type: | |
Mortgage finance loans | $ | 8,169,849 |
| | 33.0 | % | Mortgage finance loans | $ | 9,079,409 | | | 37.0 | % |
Real estate and construction | 5,430,580 |
| | 22.0 | % | Real estate and construction | 5,247,480 | | | 21.4 | % |
Financials excluding banks | 5,053,285 |
| | 20.4 | % | Financials excluding banks | 5,067,487 | | | 20.7 | % |
Oil & gas and pipelines | 1,665,422 |
| | 6.7 | % | Oil & gas and pipelines | 1,020,033 | | | 4.2 | % |
Government and education | 527,217 |
| | 2.1 | % | |
Healthcare and pharmaceuticals | 510,077 |
| | 2.1 | % | Healthcare and pharmaceuticals | 460,517 | | | 1.9 | % |
Machinery, equipment and parts manufacturing | 409,306 |
| | 1.7 | % | |
Commercial services | 368,394 |
| | 1.5 | % | Commercial services | 459,409 | | | 1.9 | % |
Retail | 360,463 |
| | 1.5 | % | Retail | 388,682 | | | 1.6 | % |
Technology, telecom and media | 309,237 |
| | 1.3 | % | Technology, telecom and media | 309,532 | | | 1.3 | % |
Machinery, equipment and parts manufacturing | | Machinery, equipment and parts manufacturing | 301,167 | | | 1.2 | % |
Materials and commodities | 260,896 |
| | 1.1 | % | Materials and commodities | 231,609 | | | 0.9 | % |
Entertainment and recreation | 200,181 |
| | 0.8 | % | |
Food and beverage manufacturing and wholesale | 193,964 |
| | 0.8 | % | Food and beverage manufacturing and wholesale | 225,003 | | | 0.9 | % |
Consumer services | 178,726 |
| | 0.7 | % | Consumer services | 222,009 | | | 0.9 | % |
Entertainment and recreation | | Entertainment and recreation | 203,605 | | | 0.8 | % |
Transportation services | 98,813 |
| | 0.4 | % | Transportation services | 172,344 | | | 0.7 | % |
Auto-related | 80,794 |
| | 0.3 | % | |
Government and education | | Government and education | 145,390 | | | 0.6 | % |
Diversified or miscellaneous | 919,438 |
| | 3.6 | % | Diversified or miscellaneous | 968,154 | | | 4.0 | % |
Total loans held for investment | $ | 24,736,642 |
| | 100.0 | % | Total loans held for investment | $ | 24,501,830 | | | 100.0 | % |
Our largest concentration of loans held for investment, excluding mortgage finance, in any single industry is in real estate and construction. Loans extended to borrowers within the real estate and construction industries generally include market risk real estate loans.loans, consisting of commercial real estate loans and loans made to residential builders and developers. Loan amounts are determined in part from an analysis of pro forma cash flows. Loans are also underwritten to comply with product-type specific advance rates against both cost and market value. We extend market riskcommercial 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, hotels/motels, senior living, apartment buildings and residential and commercial tract development located primarily within our five major metropolitan markets in Texas. Thesedevelopment. The primary source of repayment on these loans are generally repaid throughis expected to come from the borrower's sale, permanent financing or lease of the properties or through refinancing by other institutional sources offering long-term fixed rate financing. Loan amountsreal property collateral. Loans to residential builders are determinedtypically in part from an analysisthe form of pro forma cash flows. Loansuncommitted guidance lines and are also underwrittenfor the purpose of developing lots into single-family homes, while loans to comply with product-type specific advance rates against both costdevelopers are typically in the form of borrowing base lines extended for the purpose of acquiring and market value. Borrowers represented within the real estate and construction category are largely owners and managers of both residential and non-residential commercial real estate properties, including homebuilders.developing raw land into lots that can be further sold to home builders.
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.
44
We believe the loans we originate are appropriately collateralized under our credit standards. Approximately 97%98% of our loans held for investment are secured by collateral. Over 61%60.3% of the market risk real estate collateral is located in Texas. The table below sets forth information regarding the distribution of our loans held for investment on a gross basis among various types of collateral at December 31, 2019:2020:
| | (in thousands except percentage data) | Amount | | Percent of Total Loans Held for Investment | (in thousands except percentage data) | Amount | | Percent of Total Loans Held for Investment |
Collateral type: | | | | Collateral type: | |
Mortgage finance loans | $ | 8,169,849 |
| | 33.0 | % | Mortgage finance loans | $ | 9,079,409 | | | 37.1 | % |
Business assets | 7,257,383 |
| | 29.3 | % | Business assets | 6,848,036 | | | 28.0 | % |
Real property | 6,008,040 |
| | 24.3 | % | Real property | 5,794,624 | | | 23.6 | % |
Energy | 1,235,384 |
| | 5.0 | % | Energy | 766,217 | | | 3.1 | % |
U. S. Government guaranty | | U. S. Government guaranty | 620,919 | | | 2.5 | % |
Other assets | | Other assets | 368,633 | | | 1.5 | % |
Highly liquid assets | | Highly liquid assets | 226,783 | | | 0.9 | % |
Municipal tax- and revenue-secured | 635,061 |
| | 2.6 | % | Municipal tax- and revenue-secured | 186,061 | | | 0.8 | % |
Rolling stock | | Rolling stock | 23,872 | | | 0.1 | % |
Unsecured | 782,993 |
| | 3.2 | % | Unsecured | 587,276 | | | 2.4 | % |
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 | % | Total loans held for investment | $ | 24,501,830 | | | 100.0 | % |
As noted in the table above, approximately 24.3%21.4% of our loans held for investment as of December 31, 20192020 are secured by real property. The table below summarizes our total real estate loan portfolio, which includes real estate loans and construction loans, as segregated by the type of property securing the credit. Property type concentrations are stated as a percentage of year-end total real estate loans as of December 31, 2019:2020:
| | | | | | | | | | | |
(in thousands except percentage data) | Amount | | Percent of Total Real Estate Loans |
Property type: | | | |
Market risk | | | |
Apartment/condominium buildings | 1,195,645 | | | 20.8 | % |
Commercial buildings | 597,163 | | | 10.3 | % |
1-4 Family dwellings (other than condominium) | 585,267 | | | 10.1 | % |
Senior housing buildings | 387,601 | | | 6.7 | % |
Self-storage building | 348,442 | | | 6.0 | % |
Hotel/motel buildings | 327,327 | | | 5.6 | % |
Industrial buildings | 314,569 | | | 5.4 | % |
Residential lots | 286,981 | | | 5.0 | % |
Shopping center/mall buildings | 257,404 | | | 4.4 | % |
Commercial lots | 75,480 | | | 1.3 | % |
Other | 168,440 | | | 2.9 | % |
Other than market risk | | | |
Commercial buildings | 350,462 | | | 6.0 | % |
Industrial buildings | 358,825 | | | 6.2 | % |
1-4 Family dwellings (other than condominium) | 335,562 | | | 5.8 | % |
Other | 205,456 | | | 3.5 | % |
Total real estate loans | 5,794,624 | | | 100 | % |
45
|
| | | | | | |
(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, 20192020 as segregated by the geographic region in which the property is located:
| | (in thousands except percentage data) | Amount | | Percent of Total | (in thousands except percentage data) | Amount | | Percent of Total |
Geographic region: | | | | Geographic region: | |
Dallas/Fort Worth | $ | 1,095,967 |
| | 22.9 | % | Dallas/Fort Worth | $ | 1,040,163 | | | 22.9 | % |
Houston | 908,119 |
| | 19.0 | % | Houston | 725,827 | | | 16.0 | % |
San Antonio | 411,146 |
| | 8.6 | % | San Antonio | 428,795 | | | 9.4 | % |
Austin | 403,945 |
| | 8.4 | % | Austin | 453,389 | | | 10.0 | % |
Other Texas cities | 108,281 |
| | 2.3 | % | Other Texas cities | 89,935 | | | 2.0 | % |
Other states | 1,859,293 |
| | 38.8 | % | Other states | 1,806,210 | | | 39.7 | % |
Total market risk real estate loans | $ | 4,786,751 |
| | 100 | % | Total market risk real estate loans | $ | 4,544,319 | | | 100.0 | % |
The determination of collateral value is critically important when financing real estate. As a result, obtaining current and objectively prepared appraisals is a major part of our underwriting and monitoring processes. We engage a variety of professional firms to supply appraisals, market studies and feasibility reports, environmental assessments and project site inspections to complement our internal resources to underwrite and monitor these credit exposures. Generally, our policy requires a new appraisal every three years. However, in periods of economic uncertainty where real estate values can fluctuatemarket conditions may change 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 reasonableness of the appraised value. The third party reviewer will challenge whether or not the data used is appropriate and relevant, form an opinion as to the appropriateness of the appraisal methods and techniques used, and determine if overall the analysis and conclusions of the appraiser can be relied upon. Additionally, the third party reviewer provides a detailed report of that analysis. Further review may be conducted by our credit officers, as well as by the Bank’s managed asset committee as conditions warrant. These additional steps of review are undertaken to confirm that the underlying appraisal and the third party analysis can be relied upon. If we have differences, we address those with the reviewer and determine an appropriate resolution. Both the appraisal process and the appraisal review process can be less reliable in establishing accurate collateral values during and following periods of economic weakness due to the lack of comparable sales and the limited availability of financing to support an active market of potential purchasers.
Large Credit Relationships
We originate and maintain large credit relationships with numerous customers in the ordinary course of business. The legal lending limit of our Bank is approximately $489.3$506.4 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$60 million, may be exceeded with appropriate authorization for exceptionally strong borrowers and otherwise where business opportunity and perceived credit risk warrant a somewhat larger investment. We consider large credit relationships to be those with commitments equal to or in excess of $20.0 million. The following table provides additional information on our large held for investment credit relationships, excluding mortgage finance, outstanding at year-end:
|
| | | | | | | | | | | | | | | | | | | | | |
| 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| | | 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 | 190 | | | $ | 8,650,588 | | | $ | 4,252,488 | | | 177 | | | $ | 8,254,124 | | | $ | 4,251,321 | |
$20.0 million to $29.9 million | 167 | | | 4,095,449 | | | 2,414,768 | | | 196 | | | 4,708,982 | | | 3,103,200 | |
Growth in period-end outstanding balances related to large credit relationships primarily resulted from an increase in the number of commitments. The following table summarizes the average committed and outstanding loan balances per relationship related to our large held for investment credit relationships, excluding mortgage finance, at year-end:
| | | 2019 Average Balance per Relationship | | 2018 Average Balance per Relationship | | 2020 Average Balance per Relationship | | 2019 Average Balance per Relationship |
(in thousands) | Committed | | Outstanding | | Committed | | Outstanding | (in thousands) | Committed | | Outstanding | | Committed | | Outstanding |
$30.0 million and greater | $ | 46,633 |
| | $ | 24,019 |
| | $ | 46,021 |
| | $ | 24,198 |
| $30.0 million and greater | $ | 45,529 | | | $ | 22,382 | | | $ | 46,633 | | | $ | 24,019 | |
$20.0 million to $29.9 million | 24,025 |
| | 15,833 |
| | 23,538 |
| | 15,012 |
| $20.0 million to $29.9 million | 24,524 | | | 14,460 | | | 24,025 | | | 15,833 | |
Loan Maturities and Interest Rate Sensitivity
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
(in thousands) | Total | | Within 1 Year | | 1-5 Years | | After 5 Years |
Loan maturity: | | | | | | | |
Commercial | $ | 8,861,580 | | | $ | 3,175,247 | | | $ | 5,071,781 | | | $ | 614,552 | |
Energy | 766,217 | | | 241,164 | | | 525,053 | | | — | |
Mortgage finance | 9,079,409 | | | 9,079,409 | | | — | | | — | |
Real estate | 5,794,624 | | | 1,667,692 | | | 3,205,451 | | | 921,481 | |
Total loans held for investment | $ | 24,501,830 | | | $ | 14,163,512 | | | $ | 8,802,285 | | | $ | 1,536,033 | |
Interest rate sensitivity for selected loans with: | | | | | | | |
Predetermined interest rates | $ | 3,127,325 | | | $ | 1,476,707 | | | $ | 1,136,376 | | | $ | 514,242 | |
Floating or adjustable interest rates | 21,374,505 | | | 12,686,805 | | | 7,665,909 | | | 1,021,791 | |
Total loans held for investment | $ | 24,501,830 | | | $ | 14,163,512 | | | $ | 8,802,285 | | | $ | 1,536,033 | |
|
| | | | | | | | | | | | | | | |
| 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 of December 31, 20192020 and December 31, 2018,2019, we had $743.8$549.1 million and $718.5$743.8 million, respectively, in loans held for investment that included interest reserve arrangements, representing approximately 29%23% and 34%12%, respectively, of ouroutstanding construction loans, which are a component of real estate loans. Interest reserve provisions are common in construction loans. The use of interest reserves is carefully controlled by our underwriting standards, which consider the feasibility of the project, the creditworthiness of the borrower and guarantors and the loan-to-value coverage of the collateral. The interest reserve allows the borrower to draw loan funds to pay interest charges on the outstanding balance of the loan when financial conditions precedent are met. When drawn, the interest is capitalized and added to the loan balance, subject to conditions specified during the initial underwriting and at the time the credit is approved. We have ongoing controls for monitoring compliance with loan covenants, advancing funds and determining default conditions.
When we finance land on which improvements will be constructed, construction funds are generally not advanced until the borrower has received lease or purchase commitments which will meet cash flow coverage requirements and/or our analysis of market conditions and project feasibility indicates to our satisfaction that such lease or purchase commitments are forthcoming or other sources of repayment have been identified to repay the loan. It is our general policy to require a substantial equity investment by the borrower to complement the Bank's credit commitment. Any such required borrower investment is first contributed and invested in the project before any draws are allowed under the Bank's credit commitment. We require current financial statements of the borrowing entity and guarantors, as well as conduct periodic inspections of the project and analysis of whether the project is on schedule or delayed. Updated appraisals are ordered when necessary to validate the collateral values to support advances, including reserve interest. Advances of interest reserves are discontinued if collateral values do not support the advances or if the borrower does not comply with other terms and conditions in the loan agreements. In addition, most of our construction lending is performed in Texas and our lenders are very familiar with trends in local real estate. If at any time we believe that our collateral position is jeopardized, we retain the right to stop the use of interest reserves. As of December 31, 20192020 and December 31, 2018,2019, none of our loans with interest reserves were on non-accrual.
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) | 2020 | | 2019 | | 2018 |
Non-accrual loans(1) | | | | | |
Commercial | | | | | |
Assets of the borrowers | $ | 18,776 | | | $ | 57,901 | | | $ | 16,538 | |
Accounts receivable and inventory | 3,547 | | | 26,426 | | | 21,300 | |
Other | 9,773 | | | 4,308 | | | 2,548 | |
Total commercial | 32,096 | | | 88,635 | | | 40,386 | |
Energy | | | | | |
Oil and gas properties | 51,724 | | | 125,049 | | | 37,532 | |
Total Energy | 51,724 | | | 125,049 | | | 37,532 | |
Real estate | | | | | |
Assets of the borrowers | 14,496 | | | — | | | — | |
Commercial property | 13,569 | | | 1,751 | | | 988 | |
Hotel/motel | 4,619 | | | 8,500 | | | — | |
Single family residences | 218 | | | 1,449 | | | 1,469 | |
Other | 5,267 | | | — | | | — | |
Total real estate | 38,169 | | | 11,700 | | | 2,457 | |
Total non-accrual loans | 121,989 | | | 225,384 | | | 80,375 | |
OREO(2) | — | | | — | | | 79 | |
Total non-performing assets | $ | 121,989 | | | $ | 225,384 | | | $ | 80,454 | |
Restructured loans - accruing | $ | — | | | $ | — | | | $ | — | |
Loans held for investment past due 90 days and accruing(3) | $ | 12,541 | | | $ | 17,584 | | | $ | 9,353 | |
Loans held for sale non-accrual(4) | $ | 6,966 | | | $ | — | | | $ | — | |
Loans held for sale past due 90 days and accruing(5) | $ | 16,667 | | | $ | 8,207 | | | $ | 16,829 | |
|
| | | | | | | | | | | |
| 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, 2020, 2019 and 2018, non-accrual loans included $45.4 million, $35.1 million and $20.0 million, respectively, in loans that met the criteria for restructured. | |
(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. |
(2)At December 31, 2018, there was no valuation allowance recorded against the OREO balance.
(3)At December 31, 2020, 2019 and 2018, loans past due 90 days and still accruing includes premium finance loans of $6.4 million, $8.5 million and $9.2 million, respectively.
(4)Includes one non-accrual loan previously reported in loans HFI that was transferred to loans HFS as of December 31, 2020 and subsequently sold at carrying value.
(5)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 $144.92020 decreased $103.4 million from December 31, 2018.2019. The increasedecrease during 20192020 primarily related to increases in ourcharge-offs of energy and leveraged loan portfolios. Energylending loans during 2020. Non-accrual energy loans totaled $51.7 million (42% of total non-performing assets totaled $125.0 millionassets) at December 31, 20192020 compared to $37.5$125.0 million (55% of total non-performing assets) at December 31, 2018, and2019. Non-accrual leveraged lending loans totaled $18.9 million (15% of total non-performing assets totaledassets) at December 31, 2020 compared to $73.2 million and $28.8 million for the same periods, respectively.(32% of total non-performing assets) at December 31, 2019.
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, 2019,2020, we had $46.6$193.2 million in loans of this type, compared to $81.7$46.6 million at December 31, 2018.2019. Potential problem loan levels have remained elevated throughout 2020 as compared to 2019, primarily as a result of continued economic uncertainty related to the COVID-19 pandemic.
Summary of Loan Loss Experience
The provision for credit losses, which includes a provision for off-balance sheet credit losses, on unfunded commitments, is a charge to earnings to maintain the allowance for loancredit losses at a level consistent with management’s assessment of inherentexpected losses in the loan portfolio at the balance sheet date. We adopted ASU 2016-13 on January 1, 2020, which replaced the incurred loss methodology for determining our provision for credit losses and allowance for credit losses with the CECL model. Upon adoption, the allowance for credit losses was increased by $9.1 million, with no impact on the consolidated statement of income. We recorded a provision for credit losses of $258.0 million for the year ended December 31, 2020, $75.0 million for the year ended December 31, 2019, and $87.0 million for the year ended December 31, 2018, and $44.02018. Criticized loans totaled $918.4 million for the year endedat December 31, 2017. The decrease in provision recorded during 20192020, compared to 2018 was primarily related$1.1 billion at September 30, 2020 and $584.1 million at December 31, 2019. Criticized loan levels have declined in the fourth quarter of 2020 as compared to decreasesthe third quarter of 2020, however remain elevated due to the downgrade of loans to borrowers that have been impacted by the COVID-19 pandemic or that are in charge-offs and loans held for investment, excluding mortgage finance, balances.categories that are expected to be more significantly impacted by COVID-19.
The table below presents a summary of our loan loss experience for the past five years:
| | | Year Ended December 31, | | | Year Ended December 31, | |
(in thousands except percentage and multiple data) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | (in thousands except percentage and multiple data) | 2020 | | | 2019 | | | 2018 | | | 2017 | | | 2016 | |
Allowance for loan losses: | | | | | | | | | | | |
Allowance for credit losses: | | Allowance for credit losses: | | | | | | | | | |
Beginning balance | $ | 191,522 |
| | $ | 184,655 |
| | $ | 168,126 |
| | $ | 141,111 |
| | $ | 100,954 |
| | Beginning balance | $ | 195,047 | | | | $ | 191,522 | | | | $ | 184,655 | | | | $ | 168,126 | | | | $ | 141,111 | | |
Impact of CECL adoption | | Impact of CECL adoption | 8,585 | | | | — | | | | — | | | | — | | | | — | | |
Loans charged-off: |
| |
| |
| |
| |
| | Loans charged-off: | | | | | | | | | |
Commercial | 76,958 |
| | 79,692 |
| | 34,145 |
| | 56,558 |
| | 16,254 |
| | Commercial | 73,360 | | | | 44,352 | | | | 60,158 | | | | 13,673 | | | | 18,843 | | |
Construction | — |
| | — |
| | 59 |
| | — |
| | — |
| | |
Energy | | Energy | 133,522 | | | | 32,625 | | | | 20,620 | | | | 20,652 | | | | 37,762 | | |
Real estate | 662 |
| | — |
| | 290 |
| | 528 |
| | 389 |
| | Real estate | 180 | | | | 662 | | | | — | | | | 349 | | | | 528 | | |
Consumer | — |
| | 767 |
| | 180 |
| | 47 |
| | 62 |
| | |
Equipment leases | 19 |
| | 319 |
| | — |
| | — |
| | 25 |
| | |
Total charge-offs | 77,639 |
| | 80,778 |
| | 34,674 |
| | 57,133 |
| | 16,730 |
| | Total charge-offs | 207,062 | | | | 77,639 | | | | 80,778 | | | | 34,674 | | | | 57,133 | | |
Recoveries: |
| |
| |
| |
| |
| | Recoveries: | | | | | | | | | |
Commercial | 3,290 |
| | 2,468 |
| | 4,593 |
| | 9,364 |
| | 4,944 |
| | Commercial | 1,277 | | | | 3,054 | | | | 2,450 | | | | 4,022 | | | | 7,702 | | |
Construction | — |
| | — |
| | 104 |
| | 34 |
| | 400 |
| | |
Energy | | Energy | 6,999 | | | | 316 | | | | 489 | | | | 651 | | | | 1,760 | | |
Real estate | — |
| | 69 |
| | 75 |
| | 63 |
| | 33 |
| | Real estate | — | | | | — | | | | 69 | | | | 179 | | | | 97 | | |
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 |
| | Total recoveries | 8,276 | | | | 3,370 | | | | 3,008 | | | | 4,852 | | | | 9,559 | | |
Net charge-offs | 74,269 |
| | 77,770 |
| | 29,822 |
| | 47,574 |
| | 11,142 |
| | Net charge-offs | 198,786 | | | | 74,269 | | | | 77,770 | | | | 29,822 | | | | 47,574 | | |
Provision for loan losses | 77,794 |
| | 84,637 |
| | 46,351 |
| | 74,589 |
| | 51,299 |
| | |
Provision for credit losses on loans | | Provision for credit losses on loans | 249,769 | | | | 77,794 | | | | 84,637 | | | | 46,351 | | | | 74,589 | | |
Ending balance | $ | 195,047 |
| | $ | 191,522 |
| | $ | 184,655 |
| | $ | 168,126 |
| | $ | 141,111 |
| | Ending balance | $ | 254,615 | | | | $ | 195,047 | | | | $ | 191,522 | | | | $ | 184,655 | | | | $ | 168,126 | | |
Allowance for off-balance sheet credit losses: | | | | | | | | | | | Allowance for off-balance sheet credit losses: | | | | | | | | | |
Beginning balance | $ | 11,434 |
| | $ | 9,071 |
| | $ | 11,422 |
| | $ | 9,011 |
| | $ | 7,060 |
| | Beginning balance | $ | 8,640 | | | | $ | 11,434 | | | | $ | 9,071 | | | | $ | 11,422 | | | | $ | 9,011 | | |
Impact of CECL adoption | | Impact of CECL adoption | 563 | | | | — | | | | — | | | | — | | | | — | | |
Provision for off-balance sheet credit losses | (2,794 | ) | | 2,363 |
| | (2,351 | ) | | 2,411 |
| | 1,951 |
| | Provision for off-balance sheet credit losses | 8,231 | | | | (2,794) | | | | 2,363 | | | | (2,351) | | | | 2,411 | | |
Ending balance | $ | 8,640 |
| | $ | 11,434 |
| | $ | 9,071 |
| | $ | 11,422 |
| | $ | 9,011 |
| | Ending balance | $ | 17,434 | | | | $ | 8,640 | | | | $ | 11,434 | | | | $ | 9,071 | | | | $ | 11,422 | | |
Total allowance for credit losses | $ | 203,687 |
| | $ | 202,956 |
|
| $ | 193,726 |
|
| $ | 179,548 |
|
| $ | 150,122 |
| | Total allowance for credit losses | $ | 272,049 | | | | $ | 203,687 | | | | $ | 202,956 | | | | $ | 193,726 | | | | $ | 179,548 | | |
Total provision for credit losses | $ | 75,000 |
| | $ | 87,000 |
| | $ | 44,000 |
| | $ | 77,000 |
| | $ | 53,250 |
| | Total provision for credit losses | $ | 258,000 | | | | $ | 75,000 | | | | $ | 87,000 | | | | $ | 44,000 | | | | $ | 77,000 | | |
Allowance for loan losses to LHI | 0.79 |
| % | 0.85 |
| % | 0.89 |
| % | 0.96 |
| % | 0.84 |
| % | |
Allowance for credit losses on loans to LHI | | Allowance for credit losses on loans to LHI | 1.04 | | % | | 0.79 | | % | | 0.85 | | % | | 0.89 | | % | | 0.96 | | % |
Net charge-offs to average LHI | 0.31 |
| % | 0.37 |
| % | 0.16 |
| % | 0.29 |
| % | 0.07 |
| % | Net charge-offs to average LHI | 0.80 | | % | | 0.31 | | % | | 0.37 | | % | | 0.16 | | % | | 0.29 | | % |
Total provision for credit losses to average LHI | 0.32 |
| % | 0.42 |
| % | 0.24 |
| % | 0.46 |
| % | 0.35 |
| % | Total provision for credit losses to average LHI | 1.03 | | % | | 0.32 | | % | | 0.42 | | % | | 0.24 | | % | | 0.46 | | % |
Recoveries to total charge-offs | 4.34 |
| % | 3.72 |
| % | 13.99 |
| % | 16.73 |
| % | 33.40 |
| % | Recoveries to total charge-offs | 4.00 | | % | | 4.34 | | % | | 3.72 | | % | | 13.99 | | % | | 16.73 | | % |
Allowance for off-balance sheet credit losses to off-balance sheet credit commitments | 0.10 |
| % | 0.14 |
| % | 0.13 |
| % | 0.19 |
| % | 0.16 |
| % | Allowance for off-balance sheet credit losses to off-balance sheet credit commitments | 0.20 | | % | | 0.10 | | % | | 0.14 | | % | | 0.13 | | % | | 0.19 | | % |
Combined allowance for credit losses to LHI | 0.83 |
| % | 0.90 |
| % | 0.94 |
| % | 1.03 |
| % | 0.90 |
| % | |
Total allowance for credit losses to LHI | | Total allowance for credit losses to LHI | 1.11 | | % | | 0.83 | | % | | 0.90 | | % | | 0.94 | | % | | 1.03 | | % |
Allowance as a multiple of non-performing loans | 0.9 |
| x | 2.4 |
| x | 1.8 |
| x | 1.0 |
| x | 0.8 |
| x | Allowance as a multiple of non-performing loans | 2.1 | | x | | 0.9 | | x | | 2.4 | | x | | 1.8 | | x | | 1.0 | | x |
The allowance for credit losses, including the allowance for off-balance sheet credit losses on unfunded commitments reported on the consolidated balance sheets in other liabilities, totaled $272.0 million at December 31, 2020, $203.7 million at December 31, 2019 and $203.0 million at December 31, 2018 and $193.7 million at December 31, 2017.2018. The combinedtotal allowance as a percentage of loans held for investment decreasedincreased to 1.11% at December 31, 2020 from 0.83% and 0.90% at December 31, 2019 from 0.90% and 0.94% at December 31, 2018, and 2017, respectively. The downward trend in the combinedtotal allowance as a percentage of loans held for investment, that beganexcluding mortgage finance, increased to 1.77% at December 31, 2020 from 1.24% at December 31, 2019 and 1.22% at December 31, 2018. The increase in 2017 continued during 2018 andthe total allowance as a percentage of loans held for investment at December 31, 2020, compared to December 31, 2019, is due primarily to growthan increase in mortgage finance loans heldthe allowance for investment.
credit losses, resulting from reserve build related to higher criticized loan levels and continued economic uncertainty related to the COVID-19 pandemic.
The following table presents a summary of our allowance for loancredit losses on loans by portfolio segment for the past five years:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
(in thousands except percentage data) | | Reserve | | % of Loans | | Reserve | | % of Loans | | Reserve | | % of Loans | | Reserve | | % of Loans | | Reserve | | % of Loans |
Loan category: | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | 73,061 | | | 36 | % | | $ | 102,254 | | | 37 | % | | $ | 96,814 | | | 40 | % | | $ | 74,226 | | | 40 | % | | $ | 77,584 | | | 37 | % |
Energy | | 84,064 | | | 3 | % | | 60,253 | | | 6 | % | | 34,882 | | | 7 | % | | 48,479 | | | 5 | % | | 52,549 | | | 5 | % |
Mortgage finance loans | | 4,699 | | | 37 | % | | 2,265 | | | 33 | % | | — | | | 26 | % | | — | | | 26 | % | | — | | | 26 | % |
Real estate | | 92,791 | | | 24 | % | | 30,275 | | | 24 | % | | 52,595 | | | 27 | % | | 53,560 | | | 29 | % | | 32,293 | | | 32 | % |
Additional qualitative reserve | | — | | | — | | | — | | | — | | | 7,231 | | | — | | | 8,390 | | | — | | | 5,700 | | | — | |
Total allowance for credit losses on loans | | $ | 254,615 | | | 100 | % | | $ | 195,047 | | | 100 | % | | $ | 191,522 | | | 100 | % | | $ | 184,655 | | | 100 | % | | $ | 168,126 | | | 100 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 calculatingThe overall increase in 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, 20192020 compared to 2018 is due2019 resulted from reserve build related to an increase in totalhigher criticized loans primarily related to ourlevels and continued economic uncertainty from the COVID-19 pandemic, as mentioned above. We recorded $198.8 million in net charge-offs during the year ended December 31, 2020, including $126.5 million in energy net charge-offs and $58.8 million in leveraged lending portfolios. The decrease in allowance allocatednet charge-offs, all of which were loans that had been previously identified as problem loans, compared to construction and real estate loans recorded at$74.3 million during the year ended 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.2019.
See Note 1 - Operations and Summary of Significant Accounting Policies and Note 4 - Loans Held for Investment and Allowance for LoanCredit Losses on Loans in the accompanying notes to the consolidated financial statements included elsewhere in this report for details of the allowance for loancredit 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 65 - 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, 20192020 increased $4.4$6.2 billion compared to 2018.2019. Average demand deposits for the year ended December 31, 20192020 increased $1.1$2.6 billion compared to 2018,2019, and average interest-bearing deposits increased $3.3$3.6 billion. The average cost of total deposits increaseddecreased to 0.47% in 2020 from 1.19% in 2019 from 0.92% in 2018 due to increased
competition for deposits, as well as higherlower interest rates during the first half of 2019 prior to the interest rate reductions that began in August 2019.2020.
The following table discloses our average deposits:
| | | Year Ended December 31, | | Year Ended December 31, |
(in thousands) | 2019 | | 2018 | | 2017 | (in thousands) | 2020 | | 2019 | | 2018 |
Non-interest-bearing | $ | 8,989,104 |
| | $ | 7,890,304 |
| | $ | 8,320,650 |
| Non-interest-bearing | $ | 11,567,549 | | | $ | 8,989,104 | | | $ | 7,890,304 | |
Interest-bearing transaction | 3,535,282 |
| | 3,044,300 |
| | 2,159,375 |
| Interest-bearing transaction | 4,090,591 | | | 3,535,282 | | | 3,044,300 | |
Savings | 9,780,532 |
| | 7,986,135 |
| | 7,495,318 |
| Savings | 12,346,904 | | | 9,780,532 | | | 7,986,135 | |
Time deposits | 2,351,698 |
| | 1,292,864 |
| | 478,513 |
| Time deposits | 2,867,579 | | | 2,351,698 | | | 1,292,864 | |
| Total average deposits | $ | 24,656,616 |
| | $ | 20,213,603 |
| | $ | 18,453,856 |
| Total average deposits | $ | 30,872,623 | | | $ | 24,656,616 | | | $ | 20,213,603 | |
Uninsured deposits at December 31, 20192020 were 53%52% of total deposits, compared to 57% of total deposits53% at December 31, 20182019 and 59% of total deposits57% at December 31, 2017.2018. The insured deposit data for 2020, 2019 2018 and 20172018 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) | 2020 | | 2019 | | 2018 |
Months to maturity: | | | | | |
3 or less | $ | 159,428 | | | $ | 215,991 | | | $ | 193,982 | |
Over 3 through 6 | 133,921 | | | 75,632 | | | 89,529 | |
Over 6 through 12 | 203,626 | | | 165,973 | | | 100,177 | |
Over 12 | 67,703 | | | 50,619 | | | 15,834 | |
Total | $ | 564,678 | | | $ | 508,215 | | | $ | 399,522 | |
|
| | | | | | | | | | | |
| 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, 20192020 and 2018,2019, 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 increasedaccumulating liquidity assets in recent periods, which wereperiods. Throughout 2020 we have significantly increased our liquidity assets to ensure that we have the balance sheet strength to serve our clients during the COVID-19 pandemic. Liquidity assets totaled $9.0 billion at December 31, 2020 compared to $4.3 billion at December 31, 2019 and $2.9 billion at December 31, 2018.2019. The following table summarizes the growth in and composition of liquidity assets:
| | | | December 31, | | December 31, |
(in thousands except percentage data) | | 2019 | | 2018 | | 2017 | (in thousands except percentage data) | | 2020 | | 2019 | | 2018 |
Federal funds sold and securities purchased under resale agreements | | $ | 30,000 |
| | $ | 50,190 |
| | $ | 30,000 |
| Federal funds sold and securities purchased under resale agreements | | $ | — | | | $ | 30,000 | | | $ | 50,190 | |
Interest-bearing deposits | | 4,233,766 |
| | 2,815,684 |
| | 2,697,581 |
| Interest-bearing deposits | | 9,032,807 | | | 4,233,766 | | | 2,815,684 | |
Total liquidity assets | | $ | 4,263,766 |
| | $ | 2,865,874 |
| | $ | 2,727,581 |
| Total liquidity assets | | $ | 9,032,807 | | | $ | 4,263,766 | | | $ | 2,865,874 | |
| | | | | | | |
Total liquidity assets as a percent of: | | | | | | | Total liquidity assets as a percent of: | |
Total loans held for investment | | 17.3 | % | | 12.7 | % | | 13.2 | % | Total loans held for investment | | 37.0 | % | | 17.3 | % | | 12.7 | % |
Total earning assets | | 13.5 | % | | 10.5 | % | | 11.2 | % | Total earning assets | | 24.6 | % | | 13.5 | % | | 10.5 | % |
Total deposits | | 16.1 | % | | 13.9 | % | | 14.3 | % | Total deposits | | 29.1 | % | | 16.1 | % | | 13.9 | % |
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, | | December 31, |
(in thousands) | 2019 | | 2018 | (in thousands) | 2020 | | 2019 |
Deposits from core customers | $ | 22,549,568 |
| | $ | 17,015,541 |
| Deposits from core customers | $ | 27,581,532 | | | $ | 22,549,568 | |
Deposits from core customers as a percent of total deposits | 85.2 | % | | 82.6 | % | Deposits from core customers as a percent of total deposits | 89.0 | % | | 85.2 | % |
Relationship brokered deposits | $ | 1,617,247 |
| | $ | 2,027,850 |
| Relationship brokered deposits | $ | 1,771,883 | | | $ | 1,617,247 | |
Relationship brokered deposits as a percent of average total deposits | 6.1 | % | | 9.8 | % | Relationship brokered deposits as a percent of average total deposits | 5.7 | % | | 6.1 | % |
Traditional brokered deposits | $ | 2,311,778 |
| | $ | 1,562,722 |
| Traditional brokered deposits | $ | 1,643,174 | | | $ | 2,311,778 | |
Traditional brokered deposits as a percent of total deposits | 8.7 | % | | 7.6 | % | Traditional brokered deposits as a percent of total deposits | 5.3 | % | | 8.7 | % |
Average deposits from core customers | $ | 20,747,292 |
| | $ | 17,504,922 |
| Average deposits from core customers | $ | 26,537,612 | | | $ | 20,747,292 | |
Average deposits from core customers as a percent of average total deposits | 84.1 | % | | 86.6 | % | Average deposits from core customers as a percent of average total deposits | 86.0 | % | | 84.1 | % |
Average relationship brokered deposits | $ | 2,096,287 |
| | $ | 1,890,824 |
| Average relationship brokered deposits | $ | 2,099,652 | | | $ | 2,096,287 | |
Average relationship brokered deposits as a percent of average total deposits | 8.5 | % | | 9.4 | % | Average relationship brokered deposits as a percent of average total deposits | 6.8 | % | | 8.5 | % |
Average traditional brokered deposits | $ | 1,813,037 |
| | $ | 817,857 |
| Average traditional brokered deposits | $ | 2,235,359 | | | $ | 1,813,037 | |
Average traditional brokered deposits as a percent of average total deposits | 7.4 | % | | 4.0 | % | Average traditional brokered deposits as a percent of average total deposits | 7.2 | % | | 7.4 | % |
We have access to sources of traditional brokered deposits that we estimate to be $5.3$7.5 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 20182020 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, | | December 31, |
(in thousands) | | 2019 | 2018 | 2017 | (in thousands) | | 2020 | 2019 | 2018 |
Federal funds purchased | | $ | 132,270 |
| $ | 629,169 |
| $ | 359,338 |
| Federal funds purchased | | $ | 107,600 | | $ | 132,270 | | $ | 629,169 | |
Repurchase agreements | | 9,496 |
| 12,005 |
| 5,702 |
| Repurchase agreements | | 4,151 | | 9,496 | | 12,005 | |
FHLB borrowings | | 2,400,000 |
| 3,900,000 |
| 2,800,000 |
| FHLB borrowings | | 3,000,000 | | 2,400,000 | | 3,900,000 | |
Line of credit | | — |
| — |
| — |
| Line of credit | | — | | — | | — | |
Total short-term and other borrowings | | $ | 2,541,766 |
| $ | 4,541,174 |
| $ | 3,165,040 |
| Total short-term and other borrowings | | $ | 3,111,751 | | $ | 2,541,766 | | $ | 4,541,174 | |
|
For additional information on our short-term and other borrowings, see Note 1110 - 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$2.8 billion for the year ended December 31, 2019 as2020 compared to $2.7 billion in 2019 and $2.4 billion in 2018 and $2.1 billion in 2017.2018. We have not paid any cash dividends on our common stock since we commenced operations. While weWe have no plans to paynot paid any cash dividends on our common stock since we commenced operations and have no plans to do so 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.future.
For additional information on our capital, see Note 1413 - 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, 2019,2020, 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 | 9 | | | $ | 28,757,070 | | | $ | — | | | $ | — | | | $ | — | | | $ | 28,757,070 | |
Time deposits | 9 | | | 1,317,558 | | | 917,032 | | | 4,924 | | | 5 | | | 2,239,519 | |
Lease liabilities | 6 | | | 17,222 | | | 32,966 | | | 17,278 | | | 22,849 | | | 90,315 | |
Federal funds purchased and customer repurchase agreements | 10 | | | 111,751 | | | — | | | — | | | — | | | 111,751 | |
FHLB borrowings | 10 | | | 3,000,000 | | | — | | | — | | | — | | | 3,000,000 | |
| | | | | | | | | | | |
Subordinated notes | 11 | | | — | | | — | | | — | | | 282,490 | | | 282,490 | |
Trust preferred subordinated debentures | 11 | | | — | | | — | | | — | | | 113,406 | | | 113,406 | |
Total contractual obligations | | | $ | 33,203,601 | | | $ | 949,998 | | | $ | 22,202 | | | $ | 418,750 | | | $ | 34,594,551 | |
|
| | | | | | | | | | | | | | | | | | | | | | |
(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, 2019:2020:
| | (in thousands) | Within One Year | | After One But Within Three Years | | After Three But Within Five Years | | After Five Years | | Total | (in thousands) | Within One Year | | After One But Within Three Years | | After Three But Within Five Years | | After Five Years | | Total |
Commitments to extend credit | $ | 2,672,791 |
| | $ | 3,112,661 |
| | $ | 2,066,169 |
| | $ | 215,034 |
| | $ | 8,066,655 |
| Commitments to extend credit | $ | 3,021,442 | | | $ | 3,650,051 | | | $ | 1,638,198 | | | $ | 220,762 | | | $ | 8,530,453 | |
Standby and commercial letters of credit | 186,377 |
| | 58,301 |
| | 16,727 |
| | — |
| | 261,405 |
| Standby and commercial letters of credit | 178,571 | | | 78,912 | | | 11,411 | | | — | | | 268,894 | |
Total financial instruments with off-balance sheet risk | $ | 2,859,168 |
| | $ | 3,170,962 |
| | $ | 2,082,896 |
| | $ | 215,034 |
| | $ | 8,328,060 |
| Total financial instruments with off-balance sheet risk | $ | 3,200,013 | | | $ | 3,728,963 | | | $ | 1,649,609 | | | $ | 220,762 | | | $ | 8,799,347 | |
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 LoanCredit Losses
Management considers the policies related to the allowance for loancredit losses as the most critical to the financial statement presentation. The total allowance for loancredit losses includes activity related to allowances calculated in accordance with Accounting Standards Codification (“ASC”) 310,326, Receivables, and ASC 450, ContingenciesCredit Losses. The allowance for loancredit 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 loancredit losses inherentexpected to be recognized over the life of the loans in the loan portfolio at the balance sheet date.our portfolio. The allowance for loancredit losses on loans is comprised of general reserves and specific reserves assigneda valuation account that is deducted from the loans' amortized cost basis to certain impaired loans. Factors contributingpresent the net amount expected to be collected on 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,allowance for credit losses, the loan portfolio is segregated by product types in order to recognize differing risk profiles among categories, and then further segregated by credit grades. Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. Management estimates the allowance balance using relevant available information from internal and external
sources relating to past events, current conditions and reasonable and supportable forecasts. Adjustments to historical loss information are made to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments using a Portfolio Level Qualitative Factor ("PLQF") and/or a Portfolio Segment Level Qualitative Factor ("SLQF"). The PLQF and SLQF are utilized to address factors that are not present in historical loss rates and are otherwise unaccounted for in the quantitative process. A reserve is recorded upon origination or purchase of a loan. See “Summary of LoanCredit Loss Experience” above and Note 4 – Loans Held for Investment and Allowance for LoanCredit Losses on Loans in the accompanying notes to the consolidated financial statements included elsewhere in this report for further discussion of the risk factors considered by management in establishing the allowance for loancredit losses.
New Accounting StandardsImpact of Inflation and Changing Prices
ASU 2018-15 "Intangibles - GoodwillThe preparation of financial statements in conformity with GAAP requires management to measure the company’s financial position and Other - Internal-Use Software (Subtopic 350-40 - Customer's Accounting for Implementation Costs Incurredoperating results primarily in a Cloud Computing Arrangement That Is a Service Contract)" ("ASU 2018-15") alignsterms of historic dollars. Changes in the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurredrelative value of money due to developinflation 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 isrecession are generally not expected to have an impactconsidered. The primary effect of inflation on our consolidated financial statements as we currently apply this guidanceoperations is reflected 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 discloseincreased operating expenses. Management considers changes in unrealized gainsinterest rates to impact our financial condition and losses forresults of operations to a far greater degree than changes in prices due to inflation. Although interest rates are greatly influenced by changes in the period included in other comprehensive income for recurring Level 3 fair value measurements heldinflation rate, they do not necessarily change at the end ofsame rate or in 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 knownsame magnitude as the current expected credit loss ("CECL") modelinflation rate. We manage our interest rate risk in several ways. Refer 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“Interest Rate Risk Management” in Item 7A for further discussion. There can 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 measuresno assurance 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 maywill not be comparablematerially adversely affected by future changes in interest rates, as interest rates are highly sensitive to similarly-titled measures reported by other companies. These non-GAAP measuresmany factors that 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.beyond our control.
|
| | | | | | | | | | | | | | | | | | | |
| 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 |
|
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK | |
(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, 2019,2020, 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, 20192020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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 | $ | 9,032,807 | | | $ | — | | | $ | — | | | $ | — | | | $ | 9,032,807 | |
Investment securities(1) | 46,444 | | | 1,724 | | | 605 | | | 3,148,197 | | | 3,196,970 | |
Total variable loans | 21,278,748 | | | 62,769 | | | 28,117 | | | 267,871 | | | 21,637,505 | |
Total fixed loans | 237,836 | | | 1,239,653 | | | 877,452 | | | 792,549 | | | 3,147,490 | |
Total loans(2) | 21,516,584 | | | 1,302,422 | | | 905,569 | | | 1,060,420 | | | 24,784,995 | |
Total interest sensitive assets | $ | 30,595,835 | | | $ | 1,304,146 | | | $ | 906,174 | | | $ | 4,208,617 | | | $ | 37,014,772 | |
Liabilities: | | | | | | | | | |
Interest-bearing customer deposits | $ | 16,016,123 | | | $ | — | | | $ | — | | | $ | — | | | $ | 16,016,123 | |
CDs & IRAs | 166,858 | | | 352,776 | | | 71,782 | | | 4,929 | | | 596,345 | |
Traditional brokered deposits | 286,736 | | | 511,188 | | | 845,250 | | | — | | | 1,643,174 | |
Total interest-bearing deposits | 16,469,717 | | | 863,964 | | | 917,032 | | | 4,929 | | | 18,255,642 | |
Repurchase agreements, federal funds purchased, FHLB borrowings | 3,111,751 | | | — | | | — | | | — | | | 3,111,751 | |
Subordinated notes | — | | | — | | | — | | | 282,490 | | | 282,490 | |
Trust preferred subordinated debentures | — | | | — | | | — | | | 113,406 | | | 113,406 | |
Total borrowings | 3,111,751 | | | — | | | — | | | 395,896 | | | 3,507,647 | |
Total interest sensitive liabilities | $ | 19,581,468 | | | $ | 863,964 | | | $ | 917,032 | | | $ | 400,825 | | | $ | 21,763,289 | |
GAP | $ | 11,014,367 | | | $ | 440,182 | | | $ | (10,858) | | | $ | 3,807,792 | | | $ | — | |
Cumulative GAP | $ | 11,014,367 | | | $ | 11,454,549 | | | $ | 11,443,691 | | | $ | 15,251,483 | | | $ | 15,251,483 | |
| | | | | | | | | |
Demand deposits | | | | | | | | | 12,740,947 | |
Stockholders’ equity | | | | | | | | | 2,871,224 | |
Total | | | | | | | | | $ | 15,612,171 | |
(1)Investment securities based on fair market value.
(2)Total loans includes loans held for investments, stated at gross, and loans held for sale. |
| | | | | | | | | | | | | | | | | | | |
(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, except for MSRs, although we may do so in the future if that appears advisable.
For modeling purposes, the “shock test” scenarios as of December 31, 2019 assume immediate, sustained 100 and 200 basis point increases in interest rates and a 100 basis point decrease in interest rates. As short-term rates have declined during 2020, we do not believe that analysis of an assumed decrease in interest rates would provide meaningful results. As such, the scenarios as of December 31, 2020 assume immediate, sustained 100 and 200 basis point increases only. We will continue to evaluate these scenarios as interest rates change, until short-term rates rise above 3.0%, at which point we will resume evaluations of shock scenarios in which interest rates decrease.
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 | | Anticipated Impact Over the Next Twelve Months as Compared to Most Likely Scenario |
| December 31, 2019 | | December 31, 2018 | | December 31, 2020 | | December 31, 2019 |
(in thousands) | 100 bps Increase | | 200 bps Increase | | 100 bps Decrease | | 100 bps Increase | | 200 bps Increase | | 100 bps Decrease | (in thousands) | 100 bps Increase | | 200 bps Increase | | | 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 | ) | Change in net interest income | $ | 35,286 | | | $ | 87,613 | | | | $ | 93,290 | | | $ | 187,968 | | | $ | (81,988) | |
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 administrator of LIBOR has proposed to extend publication of the most commonly used U.S. Dollar LIBOR settings to June 30, 2023 and to cease publishing other LIBOR settings on December 31, 2021. The U.S. federal banking agencies issued guidance strongly encouraging banking organizations to cease using U.S. dollar LIBOR as a reference rate in new contracts as soon as practicable and in any event by December 31, 2021. It is not possible to know whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR or what the effect of any such changes in views or alternatives may have on the financial markets for LIBOR-linked financial instruments. The full 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 understandingensure that our technology systems are prepared for the transition, our loan documents that reference LIBOR-based rates have been appropriately amended to reference other methods of interest rate determinations and internal and external stakeholders are apprised of the specific products, information technology systems, borrowing arrangements and legal agreements that will be impacted by the change.transition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| |
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Index to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
To the ShareholdersStockholders 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, 20192020 and 2018,2019, the related consolidated statements of income and other comprehensive income, shareholders'stockholders' equity and cash flows for each of the three years in the period ended December 31, 2019,2020, and the related notes (collectively referred to as “the consolidatedthe “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, 20192020 and 2018,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2020, 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, 2019,2020, 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, 20209, 2021 expressed an unqualified opinion thereon.
Adoption of new accounting standard
As discussed in Note 1 to the consolidated financial statements, the Company changed its method for accounting for credit losses in 2020. As explained below, auditing the Company’s allowance for credit losses, including adoption of the new accounting guidance related to the estimate of allowance for credit losses, was a critical audit matter.
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 regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accountsaccount or disclosuredisclosures to which it relates.
|
| | | | |
| Allowance for LoanCredit Losses (“ALL”)- Loans |
Description of the Matter | The Company’s loans held for investment (“LHFI”) portfolio totaled $24.6$24.4 billion as of December 31, 2019,2020, and the associated ALLallowance for credit losses (ACL) was $195.0$272.0 million. As discussed above and in both NotesNote 1 and Note 4 of the Company’s Form 10-K, the Company adopted new accounting guidance related to the consolidated financial statements,estimate of the ALLACL resulting in a pre-tax cumulative-effect transition adjustment increasing the ACL by $9.1 million. The ACL represents management’s best estimate of expected credit losses over the contractual life of loans and for off-balance sheet commitments.The ACL is comprised of general reservesestimated using relevant available information relating to past events, current conditions, and specificreasonable and supportable forecasts, as well as qualitative adjustments using a Portfolio Level Qualitative Factor and/or Portfolio Segment Level Qualitative Factor (collectively the “qualitative factors”). The qualitative factors are used to bring the ACL to the level management believes is appropriate based on factors that are otherwise unaccounted for in the quantitative process. The ACL also includes 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 computedloans evaluated on an individual basis, such as a measurecertain loans graded substandard or worse. Management applies judgment in the determination of the relative risk of loans in each segment comparedqualitative factors and reserves assigned on an individual basis to estimate 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.ACL. 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 involvedACL is complex due to the models utilized, and involves a high degree of subjectivity due to the judgmental nature of adjustments made to the historical loss experience through (1) the quantification and aggregationjudgment required in evaluating management’s determination of the Q Factor adjustment applied toqualitative factors and 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.reserve assumptions for loans evaluated on an individual basis. |
|
| | | | |
How We Addressed the Matter in Our Audit | Our considerations and procedures performed included evaluation of the process utilized by management to challenge the model results and determine the best estimate of the ACL as of the balance sheet date. We obtained an understanding of the Company’s process for establishing the ACL, including determination of the qualitative factors and reserve assumptions for loans evaluated on an individual basis. We evaluated the design and tested the operating effectiveness of the Company’s controls overassociated with the ALLACL process, including those overcontrols around the identificationreliability and determinationaccuracy of individual Q Factors,data used in the precision ofmodel, management’s review and approval of the computationselected qualitative factors, the reserve assumptions for loans evaluated on an individual basis, the governance of the Q Factor adjustment, the identificationcredit loss methodology, and determination of segment weight adjustments, and the precision of management’s review and approval of the computed segment weight adjustments.ACL. To test
We performed specific substantive tests of the judgmental adjustments mademodels utilized, qualitative factors and the reserve assumptions for loans evaluated on an individual basis. We involved EY specialists to historical loss experienceassist in the ALL, our audit procedures included, among others,testing management models including evaluating the Company’s ALLmodel methodology and key modeling assumptions, as well as the underlying data used by management in developingappropriateness of management’s qualitative framework, and reserve assumptions for loans evaluated on an individual basis. We evaluated if the judgmental adjustments to the ALL. Wequalitative factors were applied based on a comprehensive framework and compared the judgmental adjustments madeutilized 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.adjustments. We searched for and evaluated information that corroborates or contradicts management’s reasonable and supportable forecast as well as identification and measurement of qualitative factors. Within our reserve testing for loans evaluated on an individual basis, we evaluated management’s assumptions including collateral valuations. In addition, we evaluated the dataCompany’s estimate of the overall ACL giving consideration to the Company’s borrowers, loan portfolio, and information utilized by management to support the judgmental adjustments bymacroeconomic trends, independently obtaining internalobtained and external data andcompared such information to assess the reliabilitycomparable financial institutions and appropriateness of the data andconsidered whether new or contrary 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.existed. |
We have served as the Company's auditor since 1999.
Dallas, TX
February 12, 20209, 2021
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
| | | December 31, | | December 31, |
(in thousands except per share data) | 2019 | | 2018 | (in thousands except per share data) | 2020 | | 2019 |
Assets | | | | Assets | |
Cash and due from banks | $ | 161,817 |
| | $ | 214,191 |
| Cash and due from banks | $ | 173,573 | | | $ | 161,817 | |
Interest-bearing deposits in other banks | 4,233,766 |
| | 2,815,684 |
| Interest-bearing deposits in other banks | 9,032,807 | | | 4,233,766 | |
Federal funds sold and securities purchased under resale agreements | 30,000 |
| | 50,190 |
| Federal funds sold and securities purchased under resale agreements | 0 | | | 30,000 | |
Investment securities | 239,871 |
| | 120,216 |
| Investment securities | 3,196,970 | | | 239,871 | |
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 sale ($239.1 million and $2,571.3 million at December 2020 and 2019, respectively, at fair value) | | Loans held for sale ($239.1 million and $2,571.3 million at December 2020 and 2019, respectively, at fair value) | 283,165 | | | 2,577,134 | |
Loans held for investment, mortgage finance | 8,169,849 |
| | 5,877,524 |
| Loans held for investment, mortgage finance | 9,079,409 | | | 8,169,849 | |
Loans held for investment (net of unearned income) | 16,476,413 |
| | 16,690,550 |
| Loans held for investment (net of unearned income) | 15,351,451 | | | 16,476,413 | |
Less: Allowance for loan losses | 195,047 |
| | 191,522 |
| |
Less: Allowance for credit losses on loans | | Less: Allowance for credit losses on loans | 254,615 | | | 195,047 | |
Loans held for investment, net | 24,451,215 |
| | 22,376,552 |
| Loans held for investment, net | 24,176,245 | | | 24,451,215 | |
Mortgage servicing rights, net | 64,904 |
| | 42,474 |
| Mortgage servicing rights, net | 105,424 | | | 64,904 | |
Premises and equipment, net | 31,212 |
| | 23,802 |
| Premises and equipment, net | 24,546 | | | 31,212 | |
Accrued interest receivable and other assets | 740,051 |
| | 626,614 |
| Accrued interest receivable and other assets | 715,699 | | | 740,051 | |
Goodwill and intangible assets, net | 18,099 |
| | 18,570 |
| Goodwill and intangible assets, net | 17,667 | | | 18,099 | |
Total assets | $ | 32,548,069 |
| | $ | 28,257,767 |
| Total assets | $ | 37,726,096 | | | $ | 32,548,069 | |
Liabilities and Stockholders’ Equity | | | | Liabilities and Stockholders’ Equity | |
Liabilities: | | | | Liabilities: | |
Deposits: | | | | Deposits: | |
Non-interest-bearing | $ | 9,438,459 |
| | $ | 7,317,161 |
| Non-interest-bearing | $ | 12,740,947 | | | $ | 9,438,459 | |
Interest-bearing | 17,040,134 |
| | 13,288,952 |
| Interest-bearing | 18,255,642 | | | 17,040,134 | |
| Total deposits | 26,478,593 |
| | 20,606,113 |
| Total deposits | 30,996,589 | | | 26,478,593 | |
Accrued interest payable | 12,760 |
| | 20,675 |
| Accrued interest payable | 11,150 | | | 12,760 | |
Other liabilities | 287,157 |
| | 194,238 |
| Other liabilities | 339,486 | | | 318,094 | |
Federal funds purchased and repurchase agreements | 141,766 |
| | 641,174 |
| Federal funds purchased and repurchase agreements | 111,751 | | | 141,766 | |
Other borrowings | 2,400,000 |
| | 3,900,000 |
| Other borrowings | 3,000,000 | | | 2,400,000 | |
Subordinated notes, net | 282,129 |
| | 281,767 |
| Subordinated notes, net | 282,490 | | | 282,129 | |
Trust preferred subordinated debentures | 113,406 |
| | 113,406 |
| Trust preferred subordinated debentures | 113,406 | | | 113,406 | |
Total liabilities | 29,715,811 |
| | 25,757,373 |
| Total liabilities | 34,854,872 | | | 29,746,748 | |
Stockholders’ equity: | | | | Stockholders’ equity: | |
Preferred stock, $.01 par value, $1,000 liquidation value: | | | | |
Preferred stock, $0.01 par value, $1,000 liquidation value: | | Preferred stock, $0.01 par value, $1,000 liquidation value: | |
Authorized shares—10,000,000 | | | | 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: | | | | |
Issued shares—6,000,000 shares issued at December 31, 2020 and 2019 | | Issued shares—6,000,000 shares issued at December 31, 2020 and 2019 | 150,000 | | | 150,000 | |
Common stock, $0.01 par value: | | Common stock, $0.01 par value: | |
Authorized shares—100,000,000 | | | | Authorized shares—100,000,000 | |
Issued shares—50,338,158 and 50,201,127 at December 31, 2019 and 2018, respectively | 503 |
| | 502 |
| |
Issued shares—50,470,867 and 50,338,158 at December 31, 2020 and 2019, respectively | | Issued shares—50,470,867 and 50,338,158 at December 31, 2020 and 2019, respectively | 504 | | | 503 | |
Additional paid-in capital | 978,205 |
| | 967,890 |
| Additional paid-in capital | 991,898 | | | 978,205 | |
Retained earnings | 1,694,608 |
| | 1,381,492 |
| Retained earnings | 1,713,056 | | | 1,663,671 | |
Treasury stock (shares at cost: 417 at December 31, 2019 and 2018) | (8 | ) | | (8 | ) | |
Treasury stock (shares at cost: 417 at December 31, 2020 and 2019) | | Treasury stock (shares at cost: 417 at December 31, 2020 and 2019) | (8) | | | (8) | |
Accumulated other comprehensive income, net of taxes | 8,950 |
| | 518 |
| Accumulated other comprehensive income, net of taxes | 15,774 | | | 8,950 | |
Total stockholders’ equity | 2,832,258 |
| | 2,500,394 |
| Total stockholders’ equity | 2,871,224 | | | 2,801,321 | |
Total liabilities and stockholders’ equity | $ | 32,548,069 |
| | $ | 28,257,767 |
| Total liabilities and stockholders’ equity | $ | 37,726,096 | | | $ | 32,548,069 | |
See accompanying notes to consolidated financial statements.
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND OTHER
COMPREHENSIVE INCOME | | | Year ended December 31, | | Year ended December 31, |
(in thousands except per share data) | 2019 | | 2018 | | 2017 | (in thousands except per share data) | 2020 | | 2019 | | 2018 |
Interest income | | | | | | Interest income | |
Interest and fees on loans | $ | 1,284,036 |
| | $ | 1,124,970 |
| | $ | 846,292 |
| Interest and fees on loans | $ | 1,011,175 | | | $ | 1,284,036 | | | $ | 1,124,970 | |
Investment securities | 8,654 |
| | 2,834 |
| | 1,066 |
| Investment securities | 17,475 | | | 8,654 | | | 2,834 | |
Federal funds sold and securities purchased under resale agreements | 1,529 |
| | 3,792 |
| | 2,542 |
| Federal funds sold and securities purchased under resale agreements | 693 | | | 1,529 | | | 3,792 | |
Interest-bearing deposits in other banks | 71,093 |
| | 32,597 |
| | 29,399 |
| Interest-bearing deposits in other banks | 27,569 | | | 71,093 | | | 32,597 | |
Total interest income | 1,365,312 |
| | 1,164,193 |
| | 879,299 |
| Total interest income | 1,056,912 | | | 1,365,312 | | | 1,164,193 | |
Interest expense | | | | | | Interest expense | |
Deposits | 293,537 |
| | 185,116 |
| | 79,886 |
| Deposits | 146,117 | | | 293,537 | | | 185,116 | |
Federal funds purchased | 11,872 |
| | 6,531 |
| | 2,592 |
| Federal funds purchased | 1,083 | | | 11,872 | | | 6,531 | |
| Other borrowings | 58,393 |
| | 36,207 |
| | 15,137 |
| Other borrowings | 20,923 | | | 58,393 | | | 36,207 | |
Subordinated notes | 16,764 |
| | 16,764 |
| | 16,764 |
| Subordinated notes | 16,764 | | | 16,764 | | | 16,764 | |
Trust preferred subordinated debentures | 5,026 |
| | 4,715 |
| | 3,592 |
| Trust preferred subordinated debentures | 3,199 | | | 5,026 | | | 4,715 | |
Total interest expense | 385,592 |
| | 249,333 |
| | 117,971 |
| Total interest expense | 188,086 | | | 385,592 | | | 249,333 | |
Net interest income | 979,720 |
| | 914,860 |
| | 761,328 |
| Net interest income | 868,826 | | | 979,720 | | | 914,860 | |
Provision for credit losses | 75,000 |
| | 87,000 |
| | 44,000 |
| Provision for credit losses | 258,000 | | | 75,000 | | | 87,000 | |
Net interest income after provision for credit losses | 904,720 |
| | 827,860 |
| | 717,328 |
| Net interest income after provision for credit losses | 610,826 | | | 904,720 | | | 827,860 | |
Non-interest income | | | | | | Non-interest income | |
Service charges on deposit accounts | 11,320 |
| | 12,787 |
| | 12,432 |
| Service charges on deposit accounts | 11,620 | | | 11,320 | | | 12,787 | |
Wealth management and trust fee income | 8,810 |
| | 8,148 |
| | 6,153 |
| Wealth management and trust fee income | 9,998 | | | 8,810 | | | 8,148 | |
| Brokered loan fees | 29,738 |
| | 22,532 |
| | 23,331 |
| Brokered loan fees | 46,423 | | | 29,738 | | | 22,532 | |
Servicing income | 13,439 |
| | 18,307 |
| | 15,657 |
| Servicing income | 27,029 | | | 13,439 | | | 18,307 | |
Swap fees | 4,387 |
| | 5,625 |
| | 3,990 |
| Swap fees | 5,182 | | | 4,387 | | | 5,625 | |
Net gain/(loss) on sale of loans held for sale | (20,259 | ) | | (15,934 | ) | | (2,387 | ) | Net gain/(loss) on sale of loans held for sale | 58,026 | | | (20,259) | | | (15,934) | |
Other | 45,005 |
| | 26,559 |
| | 15,080 |
| Other | 27,238 | | | 45,005 | | | 26,559 | |
Total non-interest income | 92,440 |
| | 78,024 |
| | 74,256 |
| Total non-interest income | 185,516 | | | 92,440 | | | 78,024 | |
Non-interest expense | | | | | | Non-interest expense | |
Salaries and employee benefits | 315,080 |
| | 291,768 |
| | 264,231 |
| Salaries and employee benefits | 340,529 | | | 328,483 | | | 300,899 | |
Net occupancy expense | 32,989 |
| | 30,342 |
| | 25,811 |
| Net occupancy expense | 34,955 | | | 32,989 | | | 30,342 | |
Marketing | 53,355 |
| | 39,335 |
| | 26,787 |
| Marketing | 23,581 | | | 53,355 | | | 39,335 | |
Legal and professional | 53,830 |
| | 42,990 |
| | 29,731 |
| Legal and professional | 52,132 | | | 52,460 | | | 42,990 | |
Communications and technology | 44,826 |
| | 30,056 |
| | 31,004 |
| Communications and technology | 103,054 | | | 44,826 | | | 30,056 | |
FDIC insurance assessment | 20,093 |
| | 24,307 |
| | 23,510 |
| FDIC insurance assessment | 25,955 | | | 20,093 | | | 24,307 | |
Servicing related expenses | 22,573 |
| | 14,934 |
| | 15,506 |
| |
Allowance and other carrying costs for other real estate owned | 7 |
| | 474 |
| | 6,437 |
| |
Servicing-related expenses | | Servicing-related expenses | 64,625 | | | 22,573 | | | 14,934 | |
Merger-related expenses | | Merger-related expenses | 17,756 | | | 1,370 | | | 0 | |
| Other | 47,246 |
| | 50,890 |
| | 42,859 |
| Other | 41,809 | | | 44,701 | | | 49,670 | |
Total non-interest expense | 589,999 |
| | 525,096 |
| | 465,876 |
| Total non-interest expense | 704,396 | | | 600,850 | | | 532,533 | |
Income before income taxes | 407,161 |
| | 380,788 |
| | 325,708 |
| Income before income taxes | 91,946 | | | 396,310 | | | 373,351 | |
Income tax expense | 84,295 |
| | 79,964 |
| | 128,645 |
| Income tax expense | 25,657 | | | 84,295 | | | 79,964 | |
Net income | 322,866 |
| | 300,824 |
| | 197,063 |
| Net income | 66,289 | | | 312,015 | | | 293,387 | |
Preferred stock dividends | 9,750 |
| | 9,750 |
| | 9,750 |
| Preferred stock dividends | 9,750 | | | 9,750 | | | 9,750 | |
Net income available to common stockholders | $ | 313,116 |
| | $ | 291,074 |
| | $ | 187,313 |
| Net income available to common stockholders | $ | 56,539 | | | $ | 302,265 | | | $ | 283,637 | |
Other comprehensive income (loss) | | | | | | |
Other comprehensive income | | Other comprehensive income | |
Change in unrealized gain (loss) on available-for-sale debt securities arising during period, before tax | $ | 10,674 |
| | $ | 7 |
| | $ | 19 |
| Change in unrealized gain (loss) on available-for-sale debt securities arising during period, before tax | $ | 8,639 | | | $ | 10,674 | | | $ | 7 | |
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 |
| |
Income tax expense/(benefit) | | Income tax expense/(benefit) | 1,815 | | | 2,242 | | | 1 | |
Other comprehensive income, net of tax | | Other comprehensive income, net of tax | 6,824 | | | 8,432 | | | 6 | |
Comprehensive income | $ | 331,298 |
| | $ | 300,830 |
| | $ | 197,076 |
| Comprehensive income | $ | 73,113 | | | $ | 320,447 | | | $ | 293,393 | |
Basic earnings per common share | $ | 6.23 |
| | $ | 5.83 |
| | $ | 3.78 |
| Basic earnings per common share | $ | 1.12 | | | $ | 6.01 | | | $ | 5.68 | |
Diluted earnings per common share | $ | 6.21 |
| | $ | 5.79 |
| | $ | 3.73 |
| Diluted earnings per common share | $ | 1.12 | | | $ | 5.99 | | | $ | 5.64 | |
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, 2017 | 6,000,000 | | | $ | 150,000 | | | 49,643,761 | | | $ | 496 | | | $ | 961,305 | | | $ | 1,077,851 | | | (417) | | | $ | (8) | | | $ | 428 | | | $ | 2,190,072 | |
Impact of adoption of new accounting standards(1) | — | | | — | | | — | | | — | | | — | | | (82) | | | — | | | — | | | 84 | | | 2 | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 293,387 | | | — | | | — | | | — | | | 293,387 | |
Change in unrealized gain (loss) on available-for-sale debt securities, net of taxes | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 6 | | | 6 | |
Total comprehensive income | | | | | | | | | | | | | | | | | | | 293,393 | |
| | | | | | | | | | | | | | | | | | | |
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) | | | — | | | — | | | — | | | — | | | 0 | |
Balance at December 31, 2018 | 6,000,000 | | | $ | 150,000 | | | 50,201,127 | | | $ | 502 | | | $ | 967,890 | | | $ | 1,361,406 | | | (417) | | | $ | (8) | | | $ | 518 | | | $ | 2,480,308 | |
| | | | | | | | | | | | | | | | | | | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 312,015 | | | — | | | — | | | — | | | 312,015 | |
Change in unrealized gain (loss) on available-for-sale debt securities, net of taxes | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 8,432 | | | 8,432 | |
Total comprehensive income | | | | | | | | | | | | | | | | | | | 320,447 | |
| | | | | | | | | | | | | | | | | | | |
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 | | | 0 | | | 0 | | | — | | | — | | | — | | | — | | | 0 | |
Balance at December 31, 2019 | 6,000,000 | | | $ | 150,000 | | | 50,338,158 | | | $ | 503 | | | $ | 978,205 | | | $ | 1,663,671 | | | (417) | | | $ | (8) | | | $ | 8,950 | | | $ | 2,801,321 | |
Impact of adoption of new accounting standards(2) | — | | | — | | | — | | | — | | | — | | | (7,154) | | | — | | | — | | | 0 | | | (7,154) | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 66,289 | | | — | | | — | | | — | | | 66,289 | |
Change in unrealized gain (loss) on available-for-sale debt securities, net of taxes | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 6,824 | | | 6,824 | |
Total comprehensive income | | | | | | | | | | | | | | | | | | | 73,113 | |
| | | | | | | | | | | | | | | | | | | |
Stock-based compensation expense recognized in earnings | — | | | — | | | — | | | — | | | 15,681 | | | — | | | — | | | — | | | — | | | 15,681 | |
Preferred stock dividend | — | | | — | | | — | | | — | | | — | | | (9,750) | | | — | | | — | | | — | | | (9,750) | |
Issuance of stock related to stock-based awards | — | | | — | | | 132,709 | | | 1 | | | (1,988) | | | — | | | — | | | — | | | — | | | (1,987) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2020 | 6,000,000 | | | $ | 150,000 | | | 50,470,867 | | | $ | 504 | | | $ | 991,898 | | | $ | 1,713,056 | | | (417) | | | $ | (8) | | | $ | 15,774 | | | $ | 2,871,224 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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. | |
(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. |
(2) Represents the impact of adopting ASU 2016-13. 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, | | Year ended December 31, |
(in thousands) | 2019 | | 2018 | | 2017 | (in thousands) | 2020 | | 2019 | | 2018 |
Operating activities | | | | | | Operating activities | |
Net income | $ | 322,866 |
| | $ | 300,824 |
| | $ | 197,063 |
| Net income | $ | 66,289 | | | $ | 312,015 | | | $ | 293,387 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Adjustments to reconcile net income to net cash provided by/(used in) operating activities: | | Adjustments to reconcile net income to net cash provided by/(used in) operating activities: | |
Provision for credit losses | 75,000 |
| | 87,000 |
| | 44,000 |
| Provision for credit losses | 258,000 | | | 75,000 | | | 87,000 | |
Deferred tax expense (benefit) | 10,796 |
| | (6,400 | ) | | 31,276 |
| Deferred tax expense (benefit) | (7,964) | | | 10,796 | | | (6,400) | |
Depreciation and amortization | 37,267 |
| | 32,022 |
| | 27,871 |
| Depreciation and amortization | 74,925 | | | 37,267 | | | 32,022 | |
Net (gain)/loss on sale of loans held for sale | 20,259 |
| | 15,934 |
| | 2,387 |
| Net (gain)/loss on sale of loans held for sale | (58,026) | | | 20,259 | | | 15,934 | |
Increase (decrease) in valuation allowance on mortgage servicing rights | 5,803 |
| | (2,823 | ) | | 2,823 |
| Increase (decrease) in valuation allowance on mortgage servicing rights | 20,164 | | | 5,803 | | | (2,823) | |
| Stock-based compensation expense | 17,604 |
| | 16,938 |
| | 22,019 |
| Stock-based compensation expense | 17,441 | | | 17,604 | | | 16,938 | |
| Purchases and originations of loans held for sale | (10,183,057 | ) | | (6,753,709 | ) | | (5,556,964 | ) | Purchases and originations of loans held for sale | (11,366,986) | | | (10,183,057) | | | (6,753,709) | |
Proceeds from sales and repayments of loans held for sale | 9,508,927 |
| | 5,759,067 |
| | 5,457,117 |
| Proceeds from sales and repayments of loans held for sale | 13,619,623 | | | 9,508,927 | | | 5,759,067 | |
| Changes in operating assets and liabilities: | | | | | | Changes in operating assets and liabilities: | |
Accrued interest receivable and other assets | (143,617 | ) | | (123,542 | ) | | (105,720 | ) | Accrued interest receivable and other assets | 10,654 | | | (143,617) | | | (123,542) | |
Accrued interest payable and other liabilities | 87,884 |
| | (5,026 | ) | | 10,289 |
| Accrued interest payable and other liabilities | 5,749 | | | 98,735 | | | 2,411 | |
Net cash (used in)/provided by operating activities | (240,268 | ) | | (679,715 | ) | | 132,161 |
| |
Net cash provided by/(used in) operating activities | | Net cash provided by/(used in) operating activities | 2,639,869 | | | (240,268) | | | (679,715) | |
Investing activities | | | | | | Investing activities | |
Purchases of investment securities | (113,233 | ) | | (101,558 | ) | | (97,776 | ) | Purchases of investment securities | (3,001,746) | | | (113,233) | | | (101,558) | |
Maturities and calls of available-for-sale securities | — |
| | — |
| | 94,775 |
| Maturities and calls of available-for-sale securities | 0 | | | 0 | | | 0 | |
Principal payments received on investment securities | 6,185 |
| | 3,426 |
| | 4,383 |
| Principal payments received on investment securities | 52,609 | | | 6,185 | | | 3,426 | |
Originations of mortgage finance loans | (138,759,289 | ) | | (99,151,237 | ) | | (86,931,566 | ) | Originations of mortgage finance loans | (216,234,122) | | | (138,759,289) | | | (99,151,237) | |
Proceeds from pay-offs of mortgage finance loans | 136,466,964 |
| | 98,581,873 |
| | 86,120,744 |
| Proceeds from pay-offs of mortgage finance loans | 215,324,562 | | | 136,466,964 | | | 98,581,873 | |
Net (increase)/decrease in loans held for investment, excluding mortgage finance loans | 139,868 |
| | (1,402,068 | ) | | (2,395,063 | ) | Net (increase)/decrease in loans held for investment, excluding mortgage finance loans | 926,176 | | | 139,868 | | | (1,402,068) | |
Purchase of premises and equipment, net | (16,651 | ) | | (7,651 | ) | | (12,265 | ) | Purchase of premises and equipment, net | (2,796) | | | (16,651) | | | (7,651) | |
Proceeds from sale of MSRs | — |
| | 70,824 |
| | — |
| Proceeds from sale of MSRs | 0 | | | 0 | | | 70,824 | |
Proceeds from sale of other real estate owned, net | 79 |
| | 13,645 |
| | 1,023 |
| Proceeds from sale of other real estate owned, net | 0 | | | 79 | | | 13,645 | |
| Net cash used in investing activities | (2,276,077 | ) | | (1,992,746 | ) | | (3,215,745 | ) | Net cash used in investing activities | (2,935,317) | | | (2,276,077) | | | (1,992,746) | |
Financing activities | | | | | | Financing activities | |
Net increase in deposits | 5,872,480 |
| | 1,482,933 |
| | 2,106,349 |
| Net increase in deposits | 4,517,996 | | | 5,872,480 | | | 1,482,933 | |
Costs from issuance of stock related to stock-based awards and warrants | (1,459 | ) | | (2,382 | ) | | (2,241 | ) | Costs from issuance of stock related to stock-based awards and warrants | (1,986) | | | (1,459) | | | (2,382) | |
| Preferred dividends paid | (9,750 | ) | | (9,750 | ) | | (9,750 | ) | 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 other borrowings | 600,000 | | | (1,500,000) | | | 1,100,000 | |
| Net increase/(decrease) in federal funds purchased and repurchase agreements | (499,408 | ) | | 276,134 |
| | 255,465 |
| Net increase/(decrease) in federal funds purchased and repurchase agreements | (30,015) | | | (499,408) | | | 276,134 | |
| Net cash provided by financing activities | 3,861,863 |
| | 2,846,935 |
| | 3,149,823 |
| Net cash provided by financing activities | 5,076,245 | | | 3,861,863 | | | 2,846,935 | |
Net increase in cash and cash equivalents | 1,345,518 |
| | 174,474 |
| | 66,239 |
| Net increase in cash and cash equivalents | 4,780,797 | | | 1,345,518 | | | 174,474 | |
Cash and cash equivalents at beginning of period | 3,080,065 |
| | 2,905,591 |
| | 2,839,352 |
| Cash and cash equivalents at beginning of period | 4,425,583 | | | 3,080,065 | | | 2,905,591 | |
Cash and cash equivalents at end of period | $ | 4,425,583 |
| | $ | 3,080,065 |
| | $ | 2,905,591 |
| Cash and cash equivalents at end of period | $ | 9,206,380 | | | $ | 4,425,583 | | | $ | 3,080,065 | |
Supplemental disclosures of cash flow information: | | | | | | 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 interest | $ | 189,696 | | | $ | 393,507 | | | $ | 236,338 | |
Cash paid during the period for income taxes | 89,967 |
| | 75,405 |
| | 103,871 |
| Cash paid during the period for income taxes | 26,152 | | | 89,967 | | | 75,405 | |
|
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” or "TCBI"), 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 and IBTX entered into a merger agreementthe Merger Agreement, pursuant to which, on the terms and subject to the conditions therein, the Company would be merged with IBTX,and into IBTX. On May 22, 2020, the holding company for Independent Bank, under which TCBICompany and IBTX will combineentered into an agreement pursuant to which the parties mutually agreed to terminate the Merger Agreement. Neither party paid a termination fee in an all-stock merger of equals. Underconnection with the termstermination 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.Merger Agreement.
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.
Revision of Prior Period Financial Statements
During the second quarter of 2020, the Company identified an error in our historical financial statements related to the accounting for certain share-based liabilities of a consolidated entity that contained put features, whereby the liabilities were not remeasured to their puttable value at each period end. The aggregate amount of the errors at each period end represented 1% or less of our stockholders' equity in all prior periods. In accordance with the guidance set forth in SEC Staff Bulletin 99, Materiality, and SEC Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financials, the Company concluded that the error was not material, individually or in the aggregate with other previously identified immaterial errors, to any prior periods, the current period or the trend in earnings from a quantitative and qualitative perspective. However, correcting the cumulative effect of the errors in the current period would have resulted in a material misstatement in the current period and, as such, we have revised our previously reported financial information contained in our Annual Report on Form 10-K for the year ended December 31, 2019 to correct the immaterial error, as well as other previously identified immaterial errors.
A summary of revisions to certain previously reported financial information is presented below:
Revised Consolidated Balance Sheets
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 | | December 31, 2017 | | |
(in thousands) | | As Reported | Adjustment | As Revised | | As Reported | Adjustment | As Revised | | As Reported | Adjustment | As Revised | | | | | | |
Other liabilities | | $ | 287,157 | | $ | 30,937 | | $ | 318,094 | | | $ | 194,238 | | $ | 20,086 | | $ | 214,324 | | | $ | 182,212 | | $ | 12,649 | | $ | 194,861 | | | | | | | |
Total liabilities | | 29,715,811 | | 30,937 | | 29,746,748 | | | 25,757,373 | | 20,086 | | $ | 25,777,459 | | | 22,872,924 | | 12,649 | | 22,885,573 | | | | | | | |
Retained Earnings | | 1,694,608 | | (30,937) | | 1,663,671 | | | 1,381,492 | | (20,086) | | $ | 1,361,406 | | | 1,090,500 | | (12,649) | | 1,077,851 | | | | | | | |
Total Equity | | 2,832,258 | | (30,937) | | 2,801,321 | | | 2,500,394 | | (20,086) | | $ | 2,480,308 | | | 2,202,721 | | (12,649) | | 2,190,072 | | | | | | | |
Revised Consolidated Statement of Income and Other Comprehensive Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2019 | | Year Ended December 31, 2018 | | Year Ended December 31, 2017 |
(in thousands) | | As Reported | Adjustment | As Revised | | As Reported | Adjustment | As Revised | | As Reported | Adjustment | As Revised |
Salaries and employee benefits expense | | $ | 315,080 | | $ | 13,403 | | $ | 328,483 | | | $ | 291,768 | | $ | 9,131 | | $ | 300,899 | | | $ | 264,231 | | $ | 2,230 | | $ | 266,461 | |
Other non-interest expense | | 47,253 | | (2,552) | | 44,701 | | | 51,364 | | (1,694) | | 49,670 | | | 49,296 | | (1,248) | | 48,048 | |
Total non-interest expense | | 589,999 | | 10,851 | | 600,850 | | | 525,096 | | 7,437 | | 532,533 | | | 465,876 | | 982 | | 466,858 | |
Income before tax | | 407,161 | | (10,851) | | 396,310 | | | 380,788 | | (7,437) | | 373,351 | | | 325,708 | | (982) | | 324,726 | |
Net income | | 322,866 | | (10,851) | | 312,015 | | | 300,824 | | (7,437) | | 293,387 | | | 197,063 | | (982) | | 196,081 | |
Net income available to common stockholders | | 313,116 | | (10,851) | | 302,265 | | | 291,074 | | (7,437) | | 283,637 | | | 187,313 | | (982) | | 186,331 | |
Comprehensive income | | 331,298 | | (10,851) | | 320,447 | | | 300,830 | | (7,437) | | 293,393 | | | 197,076 | | (982) | | 196,094 | |
Revised Consolidated Statement of Stockholders' Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2019 | | Year Ended December 31, 2018 | | Year Ended December 31, 2017 |
(in thousands) | | As Reported | Adjustment | As Revised | | As Reported | Adjustment | As Revised | | As Reported | Adjustment | As Revised |
Beginning balance retained earnings | | $ | 1,381,492 | | $ | (20,086) | | $ | 1,361,406 | | | $ | 1,090,500 | | $ | (12,649) | | $ | 1,077,851 | | | $ | 903,187 | | $ | (11,667) | | $ | 891,520 | |
Beginning balance total equity | | 2,500,394 | | (20,086) | | 2,480,308 | | | 2,202,721 | | (12,649) | | 2,190,072 | | | 2,009,557 | | (11,667) | | 1,997,890 | |
Ending balance retained earnings | | 1,694,608 | | (30,937) | | 1,663,671 | | | 1,381,492 | | (20,086) | | 1,361,406 | | | 1,090,500 | | (12,649) | | 1,077,851 | |
Ending balance total equity | | 2,832,258 | | (30,937) | | 2,801,321 | | | 2,500,394 | | (20,086) | | 2,480,308 | | | 2,202,721 | | (12,649) | | 2,190,072 | |
The share-based liabilities relate to agreements with certain employees of a subsidiary of the Company that was acquired in 2005. The terms of the agreements include a put feature that, when exercised, requires mandatory settlement by the Company of the share-based liability at a formulaic price. The put feature causes the liability to be remeasured to current puttable value at each period end. The impact of adjusting the liability to puttable value at each period end is recorded in salaries and employee benefits expense. During the second quarter of 2020, put features were exercised on a portion of the outstanding liability. As of December 31, 2020, the carrying value of these share-based liabilities totaled $7.8 million and is recorded in other liabilities on the consolidated balance sheets.
Accounting Changes
On January 1, 2020, we adopted ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"), which replaces the incurred loss methodology for determining our provision for credit losses and allowance for credit losses with an expected loss methodology that is referred to as the Current Expected Credit Loss ("CECL") model. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with ASU 2016-02 "Leases (Topic 842)". In addition, ASU 2016-13 made changes to the accounting for available-for-sale debt securities. One such change is to require credit-related impairments to be recognized in the allowance for credit losses rather than as a write-down of the securities' amortized cost basis when management does not intend to sell or believes that it is not more likely than not that they will be required to sell the securities prior to recovery of the securities amortized cost basis.
We adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost, off-balance sheet credit exposures and net investments in leases. Results for reporting periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. Our accounting policies changed significantly upon the adoption of CECL on January 1, 2020. Prior to January 1, 2020, the allowance for loan losses was based on incurred credit losses in accordance with accounting policies disclosed in Note 1 - Operations and Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year-ended December 31, 2019.
We adopted ASU 2016-13 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2020. As a result, the amortized cost basis remains the same before and after the effective date of ASU 2016-13.
The following table illustrates the impact of adopting ASU 2016-13 and details how outstanding loan balances have been reclassified as a result of changes made to our primary portfolio segments under CECL:
| | | | | | | | | | | | | | | | | | | | |
| | January 1, 2020 |
(in thousands) | | As Reported Under ASU 2016-13 | | Pre-ASU 2016-13 | | Impact of ASU 2016-13 Adoption |
Assets: | | | | | | |
Loans held for investment (outstanding balance) | | | | | | |
Commercial | | $ | 9,133,444 | | | $ | 10,230,828 | | | $ | (1,097,384) | |
Energy | | 1,425,309 | | | 0 | | 1,425,309 | |
Mortgage finance | | 8,169,849 | | | 8,169,849 | | | 0 | |
Construction | | 0 | | 2,563,339 | | | (2,563,339) | |
Real estate | | 6,008,040 | | | 3,444,701 | | | 2,563,339 | |
Consumer | | 0 | | 71,463 | | | (71,463) | |
Equipment leases | | 0 | | 256,462 | | | (256,462) | |
Allowance for credit losses on loans | | (203,632) | | | (195,047) | | | (8,585) | |
Total loans held for investment, net | | 24,442,630 | | | 24,451,215 | | | (8,585) | |
Net deferred tax asset | | 23,058 | | | 21,064 | | | 1,994 | |
Liabilities: | | | | | | |
Allowance for credit losses on off-balance sheet exposures | | 9,203 | | | 8,640 | | | 563 | |
Equity: | | | | | | |
Retained earnings | | 1,656,517 | | | 1,663,671 | | | (7,154) | |
In connection with our adoption of ASU 2016-13, changes were made to our primary portfolio segments to align with the methodology applied in determining the allowance under CECL. These changes included segregating energy loans into a stand-alone portfolio segment and reclassifying consumer and equipment leases into the commercial loan portfolio segment. Additionally, construction and real estate loans were combined into a single portfolio segment, referred to as real estate. The real estate loan portfolio segment includes loans further categorized as commercial real estate, residential homebuilder finance, secured by 1-4 family and an "other" category. See Allowance for Credit Losses below for further discussion of these portfolio segments.
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 loancredit 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 share for the reported periods is provided in Note 2 — Earnings Per Share.
Accumulated Other Comprehensive Income
Unrealized gains or losses on our available-for-sale debt securities (after applicable income tax expense or benefit) are included in accumulated other comprehensive income (loss), net ("AOCI"). AOCI is reported in the accompanying consolidated statements of stockholders’ equity and consolidated statements of income and other comprehensive income.
GAAP does not permit the adjustment of tax amounts in AOCI for changes in tax rates; as a result the effects become "stranded" in AOCI. Stranded tax effects caused by the 2018 revaluation of deferred taxes resulting from the corporate tax rates established by the Tax Cuts and Jobs Act (the "Tax Act") are reclassified from AOCI to retained earnings in accordance with our early adoption of ASU 2018-02 "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income."
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. All debt securities are available-for-sale as of December 31, 2020 and 2019.
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 unrealizedvalue. Unrealized gains and lossesare reported as a separate component of AOCI, net of tax. For available-for-sale debt securities in an unrealized loss position, we first assess whether we intend to sell, or it is more-likely-than-not that we will be required to sell, the securities before recovery of the amortized cost basis. If either of these criteria is met, the securities' amortized cost basis is written down to fair value as a current period expense. If either of the above criteria is not met, we evaluate whether the decline in fair value is the result of credit losses or other factors. In making this assessment, we may consider various factors including the extent to which fair value is less than amortized cost, performance of any underlying collateral and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess of the amortized cost basis over the present value of expected cash flows is recorded as an allowance for credit loss, limited to the amount by which the fair value is less than the amortized cost basis. Any impairment not recorded through an allowance for credit loss is recognized in AOCI, net of tax, as a non credit-related impairment.
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.
AllWe have made a policy election to exclude accrued interest from the amortized cost basis of available-for-sale debt securities and report accrued interest separately in accrued interest and other assets in the consolidated balance sheets. Available-for-sale debt securities are placed on non-accrual status when we no longer expect to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on non-accrual status. Accordingly, we do not recognize an allowance for credit loss against accrued interest receivable.
Included in debt securities available-for-sale are Credit Risk Transfer ("CRT") securities.CRT securities represent unsecured obligations issued by government sponsored entities ("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 December 31, 2019a 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. Unrealized losses recognized in AOCI for the CRT securities are primarily related to the difference between the current market rate for similar securities and 2018.the stated interest rate and are not considered to be related to credit loss events. The CRT securities are generally interest-only for an initial period of time and may be restricted from being transferred until a future date.
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-interestsimple interest method on the daily balances of the principal amounts outstanding. Loan origination fees, net of direct loan origination costs, and commitment fees are deferred and amortized as an adjustment to yield over the life of the loan, or over the commitment period, as applicable.
A loan held for investment is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due (both principal and interest) according to the terms of the loan agreement. Reserves on impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral, less cost to sell. Impaired loans, or portions thereof, are charged off when a confirmed loss exists.
Restructured loans are loans on which, due to the borrower’s financial difficulties, we have granted a concession that we would not otherwise consider for borrowers of similar credit quality. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two. Modifications of terms that could potentially qualify as a restructuring include reduction of contractual interest rate, extension of the maturity date at a contractual interest rate lower than the current rate for new debt with similar risk, a reduction of the face amount of debt or forgiveness of either principal or accrued interest. A loan continues to qualify as restructured until a consistent payment history or change in the borrower’s financial condition has been evidenced, generally for no less than twelve months. Assuming thatIf 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 is 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 interestA loan is considered past due when a contractually due payment has not been received by the contractual due date. We place a loan on loans is discontinuednon-accrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed.reversed as a reduction of current period interest income. 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 loancredit losses or be subject to charge offcharge-off in the event the loans become impaired.
Allowance for LoanCredit Losses
The allowance for credit losses is an estimate of the expected credit losses in the loans held for investment and available-for-sale debt securities portfolio. The following is our discussion of the allowance for credit losses on loans held for investment. See "Investment Securities - Available-for-Sale" above for discussion of the allowance for credit losses on available-for-sale debt securities.
ASU 2016-13 replaces the incurred loss impairment model, which recognizes losses when it becomes probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, credit quality, or term, as well as for changes in macroeconomic conditions, such as changes in unemployment rates, crude oil prices, property values or other relevant factors.
The allowance for loancredit losses is comprised of general reserves and specific reserves for impaired loans, allmeasured on a collective (pool) basis based on our estimate of losses inherent in the portfolio at the balance sheet date.a lifetime loss-rate model when similar risk characteristics exist. Reserves on loans that do not share risk characteristics are evaluated on an individual basis. In order to determine the allowance for loancredit losses, all loans are assigned a credit grade. Loan commitmentsLoans graded substandard or worse and greater than $500,000 are specifically reviewed for loss potential. Loanspotential and when deemed to be impaired, as well as restructured loans and loans formerly reported as restructured,appropriate are assigned a specific reserve based on the losses expected to be realized from those loans.an individual evaluation. For purposes of determining the generalpool-basis reserve, the remainder of the portfolio, representing all loans not assigned an individual reserve, is segregated first by portfolio segment, then by product typestype, to recognize differing risk profiles amongwithin portfolio segments, and then further segregatedfinally by credit grades.grade. Each credit grade within each product type is assigned a risk factor, historical loss rate. These historical loss rates are then modified to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments using a Portfolio Level Qualitative Factor ("PLQF") and/or reserve allocation percentage.a Portfolio Segment Level Qualitative Factor ("SLQF"). These risk factorsmodified historical loss rates 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. The PLQF and SLQF are utilized to address factors that are not present in historical loss rates and are otherwise unaccounted for in the quantitative process. The PLQF is used to apply a qualitative adjustment across the entire portfolio of loans, while the SLQF is designed to apply a qualitative adjustment across a single portfolio segment. 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 generally use a two-year forecast period, based on a single consensus forecast scenario, using variables we believe are most relevant to each portfolio segment. For periods beyond which we are able to develop reasonable and supportable forecasts, we immediately revert to the average historical loss rate. The forecast period and scenario used is reviewed on a quarterly basis and may be adjusted based on management's view of the current economic conditions and level of predictability the forecast can provide.
Portfolio segments are used to pool loans with similar risk characteristics and align with our methodology for measuring expected credit losses. A summary of our primary portfolio segments is as follows:
Commercial. Our commercial loan portfolio is comprised of lines of credit for working capital, term loans and leases to finance equipment and other business assets across a variety of industries. These loans are used for general corporate purposes including financing working capital, internal growth, acquisitions and business insurance premiums and are generally secured by accounts receivable, inventory, equipment and other assets of our clients’ businesses. Our commercial loan portfolio also includes consumer loans because our small portfolio of consumer loans is largely comprised of accommodation loans to individuals associated with our commercial clients.
Energy. Our energy loan portfolio is primarily comprised of loans to exploration and production (“E&P”) companies that are generally collateralized with proven reserves based on appropriate valuation standards that take into account the risk of oil and gas price volatility. The majority of this portfolio is first lien, senior secured, reserve-based lending, which we believe is the lowest-risk form of energy lending. Energy loans are impacted by commodity price volatility, as well as changes in consumer and business demand.
Mortgage finance. Mortgage finance loans relate to our mortgage warehouse lending operations in which we purchase mortgage loan ownership interests from unaffiliated mortgage originators that are generally held by us for a period of less than 30 days and more typically 10-20 days before they are sold to an approved investor. 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 housing demand and tend to peak at the end of each month. Mortgage finance loans are consistently underwritten based on standards established by the approved investors. Market conditions or events of default by an investor or originator could require that we repurchase the remaining interests in the mortgage loans and hold them beyond the expected 10-20 days.
Real estate. Our real estate portfolio is comprised of the following types of loans:
Commercial real estate ("CRE"). Our CRE portfolio is comprised of both construction/development financing and limited term financing provided to professional real estate developers and owners/managers of commercial real estate projects and properties who have a demonstrated record of past success with similar properties. Collateral properties include office buildings, warehouse/distribution buildings, shopping centers, hotels/motels, senior living, apartment buildings and residential and commercial tract development. The primary source of repayment on these loans is expected to come from the sale, permanent financing or lease of the real property collateral. CRE loans are impacted by fluctuations in collateral values, as well as the ability of the borrower to obtain permanent financing.
Residential homebuilder finance ("RBF"). The RBF portfolio is comprised of loans made to residential builders and developers. Loans to residential builders are typically in the form of uncommitted guidance lines and are for the purpose of developing lots into single-family homes, while loans to developers are typically in the form of borrowing base lines extended for the purpose of acquiring and developing raw land into lots that can be further sold to home builders. RBF loans, if not structured and monitored correctly, can be impacted by volatility in consumer demand, as well as fluctuation in housing prices.
Secured by 1-4 family. This category of loans includes both first and second lien loans made for the purpose of purchasing or constructing 1-4 family residential dwellings, as well as home equity revolving lines of credit and loans to purchase lots for future construction of 1-4 family residential dwellings.
Other. The "other" category is primarily comprised of real estate loans originated through a Small Business Administration (SBA) program where repayment is partially guaranteed by the SBA, as well as other loans secured by real estate where the primary source of repayment is not expected to come from the sale or lease of the real property collateral.
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 inappropriatelyinadequately 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 appropriatenessestimation of the allowance, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality.quality and forecasted economic conditions. Changes are reflected in the general pool-basis
allowance and in specific reserves assigned on an individual basis 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'sour consolidated financial statements.
When management determines that foreclosure is probable, and for certain collateral-dependent loans where foreclosure is not considered probable, expected credit losses are based on the estimated fair value of the collateral adjusted for selling costs, when appropriate. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless either of the following applies: management has a reasonable expectation that a loan will be restructured, or the extension or renewal options are included in the borrower contract and are not unconditionally cancellable by us.
We do not measure an allowance for credit losses on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when loans are placed on non-accrual status as discussed above.
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 loancredit 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 relatedservicing-related expenses in the consolidated statements of income and other comprehensive income.
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.
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, repurchase and repurchasemake-whole 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. Operating lease agreements may 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. 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 76 – 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.
Unrecognized tax benefits for the uncertain portion of recorded tax benefits and related interest may result from the application of complex tax laws, rules, regulations and interpretations. Unrecognized tax benefits, as well as estimated penalties and interest, are assessed quarterly and may be adjusted through current income tax expense in future periods based on changing facts and circumstances, completion of examinations by taxing authorities or expiration of a statute of limitations.
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,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.
Also required are disclosures of fair value information about financial instruments, are based upon quoted market prices,whether or not recognized on the balance sheet, for which it is practical to estimate that value. In cases where available. If such quoted market prices are not available, fair value isvalues 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. The disclosure of fair value information about financial instruments does not and is not intended to represent the fair value of the Company.
The following are descriptions of the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents, Variable Rate Loans, and Variable Rate Debt
The fair value of these financial instruments approximates carrying value.
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. We also hold Community Reinvestment Act equity securities that are valued using quoted market prices for identical equity securities in an inactive market that we classify as Level 2 assets in the fair value hierarchy.The fair value of our U.S. government agency and residential mortgage-backed securities 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 obtain documentation from our primary pricing service regarding their processes and controls applicable to pricing investment securities, and on a quarterly basis 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
The 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.
Derivative Assets and Liabilities
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 sale 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 sale 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. The derivative instruments related to our residential MSRs include interest rate swap futures and forward sale commitments. The interest rate swap futures are valued based on quoted market prices obtained from brokers for similar derivative contracts, while the forward sale commitments are valued based on the fair value of the underlying mortgage loans to be purchased, which is based on observable market data for similar loans. As such, these derivative instruments are characterized as Level 2 assets and liabilities in the fair value hierarchy.
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 designeddesignateed 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 alsoAs part of our MCA program, we 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 or to deliver mortgage-backed securities at a future date, as part of our MCA program.date. 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 expensegain/(loss) on sale of loans held for sale in the consolidated statements of income and other comprehensive income.
To mitigate exposure to potential impairment losses from adverse changes in the fair value of our residential MSR portfolio, we enter into interest rate derivative contracts, primarily interest rate swap futures and forward sale commitments of mortgage-backed securities. These derivative instruments are considered highly liquid and can be settled daily, which allows us to dynamically manage our exposure. The derivative instruments are used to economically hedge the fair value of the residential MSR portfolio impacted by changes in anticipated prepayments resulting from mortgage interest rate movements and are classified as other assets and other liabilities on the consolidated balance sheets. Any unrealized or realized gains/(losses) related to derivatives economically hedging the residential MSR portfolio are recognized in servicing-related expenses along with changes to the MSR valuation allowance.
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) | 2020 | | 2019 | | 2018 |
Numerator: | | | | | |
Net income | $ | 66,289 | | | $ | 312,015 | | | $ | 293,387 | |
Preferred stock dividends | 9,750 | | | 9,750 | | | 9,750 | |
Net income available to common stockholders | $ | 56,539 | | | $ | 302,265 | | | $ | 283,637 | |
Denominator: | | | | | |
Denominator for basic earnings per share—weighted average shares | 50,430,326 | | | 50,286,300 | | | 49,936,702 | |
Effect of employee stock-based awards(1) | 152,653 | | | 132,904 | | | 218,275 | |
Effect of warrants to purchase common stock | 0 | | | 0 | | | 117,895 | |
Denominator for dilutive earnings per share—adjusted weighted average shares and assumed conversions | 50,582,979 | | | 50,419,204 | | | 50,272,872 | |
Basic earnings per common share | $ | 1.12 | | | $ | 6.01 | | | $ | 5.68 | |
Diluted earnings per common share | $ | 1.12 | | | $ | 5.99 | | | $ | 5.64 | |
|
| | | | | | | | | | | |
| 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 453,024, 86,308 and 27,100 in 2020, 2019 and 2018, respectively, have not been included in diluted earnings per share because to do so would have been antidilutive for the periods presented. | |
(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 DebtEquity 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 commitment period, as applicable.
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 the borrower’s financial condition has been evidenced, generally for no less than twelve months. If 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 is no longer considered a restructuring if it is in compliance with the modified terms in calendar years after the year of the restructure.
A loan is considered past due when a contractually due payment has not been received by the contractual due date. We place a loan on non-accrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed as a reduction of current period interest income. 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 credit losses or be subject to charge-off in the event the loans become impaired.
Allowance for Credit Losses
The allowance for credit losses is an estimate of the expected credit losses in the loans held for investment and available-for-sale debt securities portfolio. The following is a summaryour discussion of the allowance for credit losses on loans held for investment. See "Investment Securities - Available-for-Sale" above for discussion of the allowance for credit losses on available-for-sale debt securities: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 |
|
DuringASU 2016-13 replaces the first quarter of 2019, we acquiredincurred loss impairment model, which recognizes losses when it becomes probable that a $92.0 million tax-exempt security backedcredit loss will be incurred, with underlying cash flowsa requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The allowance for credit losses is a valuation account that is deducted 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 | ) |
At December 31, 2019, the CRT securities were the only available-for-sale debt securities in an unrealized loss position. There were no available-for-sale debt securities in an unrealized loss position at December 31, 2018.
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 loans to present the securitynet amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, credit quality, or term, as well as for changes in macroeconomic conditions, such as changes in unemployment rates, crude oil prices, property values or other relevant factors.
The allowance for credit losses is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Reserves on loans that do not share risk characteristics are evaluated on an individual basis. In order to determine the allowance for credit losses, all loans are assigned a credit grade. Loans graded substandard or worse and greater than $500,000 are specifically reviewed for loss potential and when deemed appropriate are assigned a reserve based on an individual evaluation. For purposes of determining the pool-basis reserve, the remainder of the portfolio, representing all loans not assigned an individual reserve, is segregated first by portfolio segment, then by product type, to recognize differing risk profiles within portfolio segments, and finally by credit grade. Each credit grade within each product type is assigned a historical loss rate. These historical loss rates are then modified to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments using a Portfolio Level Qualitative Factor ("PLQF") and/or a Portfolio Segment Level Qualitative Factor ("SLQF"). These modified historical loss rates are multiplied by the outstanding principal balance of each loan 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. The PLQF and SLQF are utilized to address factors that are not present in historical loss rates and are otherwise unaccounted for in the quantitative process. The PLQF is used to apply a qualitative adjustment across the entire portfolio of loans, while the SLQF is designed to apply a qualitative adjustment across a single portfolio segment. 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 generally use a two-year forecast period, based on a single consensus forecast scenario, using variables we believe are most relevant to each portfolio segment. For periods beyond which we are able to develop reasonable and supportable forecasts, we immediately revert to the average historical loss rate. The forecast period and scenario used is reviewed on a quarterly basis and may be adjusted based on management's view of the current economic conditions and level of predictability the forecast can provide.
Portfolio segments are used to pool loans with similar risk characteristics and align with our methodology for measuring expected credit losses. A summary of our primary portfolio segments is as follows:
Commercial. Our commercial loan portfolio is comprised of lines of credit for working capital, term loans and leases to finance equipment and other business assets across a variety of industries. These loans are used for general corporate purposes including financing working capital, internal growth, acquisitions and business insurance premiums and are generally secured by accounts receivable, inventory, equipment and other assets of our clients’ businesses. Our commercial loan portfolio also includes consumer loans because our small portfolio of consumer loans is largely comprised of accommodation loans to individuals associated with our commercial clients.
Energy. Our energy loan portfolio is primarily comprised of loans to exploration and production (“E&P”) companies that are generally collateralized with proven reserves based on appropriate valuation standards that take into account the risk of oil and gas price volatility. The majority of this portfolio is first lien, senior secured, reserve-based lending, which we believe is the lowest-risk form of energy lending. Energy loans are impacted by commodity price volatility, as well as changes in consumer and business demand.
Mortgage finance. Mortgage finance loans relate to our mortgage warehouse lending operations in which we purchase mortgage loan ownership interests from unaffiliated mortgage originators that are generally held by us for a period of less than 30 days and more typically 10-20 days before they are sold to an approved investor. 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 housing demand and tend to peak at the end of each month. Mortgage finance loans are consistently underwritten based on standards established by the approved investors. Market conditions or events of default by an investor or originator could require that we repurchase the remaining interests in the mortgage loans and hold them beyond the expected 10-20 days.
Real estate. Our real estate portfolio is comprised of the following types of loans:
Commercial real estate ("CRE"). Our CRE portfolio is comprised of both construction/development financing and limited term financing provided to professional real estate developers and owners/managers of commercial real estate projects and properties who have a demonstrated record of past success with similar properties. Collateral properties include office buildings, warehouse/distribution buildings, shopping centers, hotels/motels, senior living, apartment buildings and residential and commercial tract development. The primary source of repayment on these loans is expected to come from the sale, permanent financing or lease of the real property collateral. CRE loans are impacted by fluctuations in collateral values, as well as the ability of the borrower to obtain permanent financing.
Residential homebuilder finance ("RBF"). The RBF portfolio is comprised of loans made to residential builders and developers. Loans to residential builders are typically in the form of uncommitted guidance lines and are for the purpose of developing lots into single-family homes, while loans to developers are typically in the form of borrowing base lines extended for the purpose of acquiring and developing raw land into lots that can be further sold to home builders. RBF loans, if not structured and monitored correctly, can be impacted by volatility in consumer demand, as well as fluctuation in housing prices.
Secured by 1-4 family. This category of loans includes both first and second lien loans made for the purpose of purchasing or constructing 1-4 family residential dwellings, as well as home equity revolving lines of credit and loans to purchase lots for future construction of 1-4 family residential dwellings.
Other. The "other" category is primarily comprised of real estate loans originated through a Small Business Administration (SBA) program where repayment is partially guaranteed by the SBA, as well as other loans secured by real estate where the primary source of repayment is not expected to come from the sale or lease of the real property collateral.
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 inadequately 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 in full highly questionable and improbable. The possibility of loss is extremely high. All doubtful loans are on non-accrual.
The methodology used in the estimation of the allowance, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and forecasted economic conditions. Changes are reflected in the pool-basis
allowance and in reserves assigned on an individual basis as the collectability of classified loans is evaluated with new information. As our portfolio has matured, historical loss ratios have been closely monitored. 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 our consolidated financial statements.
When management determines that foreclosure is probable, and for certain collateral-dependent loans where foreclosure is not considered probable, expected credit losses are based on the estimated fair value of the collateral adjusted for selling costs, when appropriate. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless either of the following applies: management has a reasonable expectation that a loan will be restructured, or the extension or renewal options are included in the borrower contract and are not unconditionally cancellable by us.
We do not measure an allowance for credit losses on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when loans are placed on non-accrual status as discussed above.
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 credit 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.
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.
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, repurchase and make-whole 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. Operating lease agreements may 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. 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 6 – 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 collectedrecovered or settled. As changes in tax law or rates are enacted, deferred tax assets and wasliabilities 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.
Unrecognized tax benefits for the uncertain portion of recorded tax benefits and related interest may result from the application of complex tax laws, rules, regulations and interpretations. Unrecognized tax benefits, as well as estimated penalties and interest, are assessed quarterly and may be adjusted through current income tax expense in future periods based on changing facts and circumstances, completion of examinations by taxing authorities or expiration of a statute of limitations.
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. 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.
Also required are disclosures 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. The disclosure of fair value information about financial instruments does not and is not intended to represent the fair value of the Company.
The following are descriptions of the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents, Variable Rate Loans, and Variable Rate Debt
The fair value of these financial instruments approximates carrying value.
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. We also hold Community Reinvestment Act equity securities that are valued using quoted market prices for identical equity securities in an inactive market that we classify as Level 2 assets in the fair value hierarchy.The fair value of our U.S. government agency and residential mortgage-backed securities 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 obtain documentation from our primary pricing service regarding their processes and controls applicable to pricing investment securities, and on a quarterly basis 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
The 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.
Derivative Assets and Liabilities
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 sale 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 sale 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. The derivative instruments related to our residential MSRs include interest rate swap futures and forward sale commitments. The interest rate swap futures are valued based on quoted market prices obtained from brokers for similar derivative contracts, while the forward sale commitments are valued based on the fair value of the underlying mortgage loans to be purchased, which is based on observable market data for similar loans. As such, these derivative instruments are characterized as Level 2 assets and liabilities in the fair value hierarchy.
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 designateed 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.
As part of our MCA program, we 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 or to deliver mortgage-backed securities at a future date. 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 gain/(loss) on sale of loans held for sale in the consolidated statements of income and other non-interest expense. Basedcomprehensive income.
To mitigate exposure to potential impairment losses from adverse changes in the fair value of our residential MSR portfolio, we enter into interest rate derivative contracts, primarily interest rate swap futures and forward sale commitments of mortgage-backed securities. These derivative instruments are considered highly liquid and can be settled daily, which allows us to dynamically manage our exposure. The derivative instruments are used to economically hedge the fair value of the residential MSR portfolio impacted by changes in anticipated prepayments resulting from mortgage interest rate movements and are classified as other assets and other liabilities on the results of our periodic review at December 31, 2019, no additional other-than-temporary credit-related impairment was recorded onconsolidated balance sheets. Any unrealized or realized gains/(losses) related to derivatives economically hedging 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 investmentsresidential MSR portfolio are recognized in relationservicing-related expenses along with changes to the severity and duration of the unrealized losses. Based on that evaluation weMSR valuation allowance.
Segment Reporting
We have determined that weall 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 abilitychief operating decision maker.
(2) Earnings Per Share
The following table presents the computation of basic and intentdiluted earnings per share:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
(in thousands except per share data) | 2020 | | 2019 | | 2018 |
Numerator: | | | | | |
Net income | $ | 66,289 | | | $ | 312,015 | | | $ | 293,387 | |
Preferred stock dividends | 9,750 | | | 9,750 | | | 9,750 | |
Net income available to common stockholders | $ | 56,539 | | | $ | 302,265 | | | $ | 283,637 | |
Denominator: | | | | | |
Denominator for basic earnings per share—weighted average shares | 50,430,326 | | | 50,286,300 | | | 49,936,702 | |
Effect of employee stock-based awards(1) | 152,653 | | | 132,904 | | | 218,275 | |
Effect of warrants to purchase common stock | 0 | | | 0 | | | 117,895 | |
Denominator for dilutive earnings per share—adjusted weighted average shares and assumed conversions | 50,582,979 | | | 50,419,204 | | | 50,272,872 | |
Basic earnings per common share | $ | 1.12 | | | $ | 6.01 | | | $ | 5.68 | |
Diluted earnings per common share | $ | 1.12 | | | $ | 5.99 | | | $ | 5.64 | |
(1)SARs and RSUs outstanding of 453,024, 86,308 and 27,100 in 2020, 2019 and 2018, respectively, have not been included in diluted earnings per share because to holddo so would have been antidilutive for the investments until recovery of fair value.periods presented.
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.
(3) Investment Securities
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 consistwithout 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 investments relateddeliver 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 non-qualified deferred compensation plan.election of the fair value option in accordance with Accounting Standards Codification ("ASC") 825, Financial Instruments. At December 31, 2019the 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 December 31, 2018, we had $25.6 millionincludes the fair value of the mortgage servicing rights. Adjustments to reflect unrealized gains and $17.2 million, respectively,losses resulting from changes in equity securities recorded at fair value. The following is a summary of unrealizedvalue and realized gains/(losses) recognizedgains and losses upon ultimate sale of the loans are classified as gain/(loss) on equity securities and included in other non-interest incomesale of loans held for sale 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:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Commercial | | Mortgage Finance | | Construction | | Real Estate | | Consumer | | Equipment Leases | | Total |
December 31, 2019 | | | | | | | | | | | | | |
Grade: | | | | | | | | | | | | | |
Pass | $ | 9,751,645 |
| | $ | 8,169,849 |
| | $ | 2,540,059 |
| | $ | 3,364,554 |
| | $ | 71,289 |
| | $ | 255,171 |
| | $ | 24,152,567 |
|
Special mention | 198,269 |
| | — |
| | 6,590 |
| | 52,919 |
| | 140 |
| | 1,062 |
| | 258,980 |
|
Substandard-accruing | 67,454 |
| | — |
| | 16,690 |
| | 15,528 |
| | — |
| | 39 |
| | 99,711 |
|
Non-accrual | 213,460 |
| | — |
| | — |
| | 11,700 |
| | 34 |
| | 190 |
| | 225,384 |
|
Total loans held for investment | $ | 10,230,828 |
| | $ | 8,169,849 |
| | $ | 2,563,339 |
| | $ | 3,444,701 |
| | $ | 71,463 |
| | $ | 256,462 |
| | $ | 24,736,642 |
|
| | | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | | | |
Grade: | | | | | | | | | | | | |
|
Pass | $ | 10,034,597 |
| | $ | 5,877,524 |
| | $ | 2,099,955 |
| | $ | 3,850,811 |
| | $ | 61,815 |
| | $ | 309,775 |
| | $ | 22,234,477 |
|
Special mention | 120,531 |
| | — |
| | 21,011 |
| | 47,644 |
| | — |
| | 2,223 |
| | 191,409 |
|
Substandard-accruing | 140,297 |
| | — |
| | — |
| | 28,205 |
| | 1,568 |
| | 193 |
| | 170,263 |
|
Non-accrual | 77,863 |
| | — |
| | — |
| | 2,457 |
| | 55 |
| | — |
| | 80,375 |
|
Total loans held for investment | $ | 10,373,288 |
| | $ | 5,877,524 |
| | $ | 2,120,966 |
| | $ | 3,929,117 |
| | $ | 63,438 |
| | $ | 312,191 |
| | $ | 22,676,524 |
|
The allowance for loan losses is comprised of general reserves and specific reserves for impaired loans based on our estimate of losses inherent in the portfolio at the balance sheet date. For further discussion of the components of the allowance for loan losses as well as details regarding how the estimate of inherent losses is determined, refer to the Allowance for Loan Losses subheading in Note 1 – Operations and Summary of Significant Accounting Policies. We believe the allowance at December 31, 2019 to be appropriate, given management's assessment of losses inherent in the portfolio as of the evaluation date, the growth in the loan and lease portfolio, current economic conditions in our market areasincome 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 basis of our impairment methodology. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Commercial | Mortgage Finance | Construction | Real Estate | Consumer | Equipment Leases | Additional Qualitative Reserve | Total |
Year ended December 31, 2019 | | | | | | | | |
Allowance for loan losses: | | | | | | | | |
Beginning balance | $ | 129,442 |
| $ | — |
| $ | 19,242 |
| $ | 33,353 |
| $ | 425 |
| $ | 1,829 |
| $ | 7,231 |
| $ | 191,522 |
|
Provision for loan losses | 106,345 |
| 2,265 |
| (4,469 | ) | (17,189 | ) | (441 | ) | (1,486 | ) | (7,231 | ) | 77,794 |
|
Charge-offs | 76,958 |
| — |
| — |
| 662 |
| — |
| 19 |
| — |
| 77,639 |
|
Recoveries | 3,290 |
| — |
| — |
| — |
| 69 |
| 11 |
| — |
| 3,370 |
|
Net charge-offs (recoveries) | 73,668 |
| — |
| — |
| 662 |
| (69 | ) | 8 |
| — |
| 74,269 |
|
Ending balance | $ | 162,119 |
| $ | 2,265 |
| $ | 14,773 |
| $ | 15,502 |
| $ | 53 |
| $ | 335 |
| $ | — |
| $ | 195,047 |
|
Period end allowance for loan losses allocated to: | | | | | | | | |
Loans individually evaluated for impairment | $ | 59,832 |
| $ | — |
| $ | — |
| $ | 549 |
| $ | 7 |
| $ | 36 |
| $ | — |
| $ | 60,424 |
|
Loans collectively evaluated for impairment | 102,287 |
| 2,265 |
| 14,773 |
| 14,953 |
| 46 |
| 299 |
| — |
| 134,623 |
|
Total | $ | 162,119 |
| $ | 2,265 |
| $ | 14,773 |
| $ | 15,502 |
| $ | 53 |
| $ | 335 |
| $ | — |
| $ | 195,047 |
|
Period end loans allocated to: | | | | | | | | |
Loans individually evaluated for impairment | $ | 213,460 |
| $ | — |
| $ | — |
| $ | 11,700 |
| $ | 34 |
| $ | 190 |
| $ | — |
| $ | 225,384 |
|
Loans collectively evaluated for impairment | 10,017,368 |
| 8,169,849 |
| 2,563,339 |
| 3,433,001 |
| 71,429 |
| 256,272 |
| — |
| 24,511,258 |
|
Total | $ | 10,230,828 |
| $ | 8,169,849 |
| $ | 2,563,339 |
| $ | 3,444,701 |
| $ | 71,463 |
| $ | 256,462 |
| $ | — |
| $ | 24,736,642 |
|
| | | | | | | | |
Year ended December 31, 2018 | | | | | | | | |
Allowance for loan losses: | | | | | | | | |
Beginning balance | $ | 118,806 |
| $ | — |
| $ | 19,273 |
| $ | 34,287 |
| $ | 357 |
| $ | 3,542 |
| $ | 8,390 |
| $ | 184,655 |
|
Provision for loan losses | 87,860 |
| — |
| (31 | ) | (1,003 | ) | 397 |
| (1,427 | ) | (1,159 | ) | 84,637 |
|
Charge-offs | 79,692 |
| — |
| — |
| — |
| 767 |
| 319 |
| — |
| 80,778 |
|
Recoveries | 2,468 |
| — |
| — |
| 69 |
| 438 |
| 33 |
| — |
| 3,008 |
|
Net charge-offs (recoveries) | 77,224 |
| — |
| — |
| (69 | ) | 329 |
| 286 |
| — |
| 77,770 |
|
Ending balance | $ | 129,442 |
| $ | — |
| $ | 19,242 |
| $ | 33,353 |
| $ | 425 |
| $ | 1,829 |
| $ | 7,231 |
| $ | 191,522 |
|
Period end allowance for loan losses allocated to: | | | | | | | | |
Loans individually evaluated for impairment | $ | 8,252 |
| $ | — |
| $ | — |
| $ | 48 |
| $ | 10 |
| $ | — |
| $ | — |
| $ | 8,310 |
|
Loans collectively evaluated for impairment | 121,190 |
| — |
| 19,242 |
| 33,305 |
| 415 |
| 1,829 |
| 7,231 |
| 183,212 |
|
Total | $ | 129,442 |
| $ | — |
| $ | 19,242 |
| $ | 33,353 |
| $ | 425 |
| $ | 1,829 |
| $ | 7,231 |
| $ | 191,522 |
|
Period end loans allocated to: | | | | | | | | |
Loans individually evaluated for impairment | $ | 78,428 |
| $ | — |
| $ | — |
| $ | 8,857 |
| $ | 55 |
| $ | — |
| $ | — |
| $ | 87,340 |
|
Loans collectively evaluated for impairment | 10,294,860 |
| 5,877,524 |
| 2,120,966 |
| 3,920,260 |
| 63,383 |
| 312,191 |
| — |
| 22,589,184 |
|
Total | $ | 10,373,288 |
| $ | 5,877,524 |
| $ | 2,120,966 |
| $ | 3,929,117 |
| $ | 63,438 |
| $ | 312,191 |
| $ | — |
| $ | 22,676,524 |
|
comprehensive income.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 currentResidential 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, 2019are subject to both credit and December 31, 2018, we had $8.2 millioninterest rate risk. Credit risk is managed through underwriting policies 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 guaranteedprocedures, including collateral requirements, which are generally accepted by the U.S. government. Also includedsecondary 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 $8.2 million were $1.9 million in loans that, pursuantnext 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 arehave been 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 ofexercised, we account for these loans as if they had been repurchased and recognize the $16.8 million in loans and a corresponding liability as held for sale wereand other liabilities, respectively, in the consolidated balance sheets. If the loans guaranteed by U.S. government agencies that were purchased out ofare actually repurchased, the liability is extinguished and the loans continue to be reported as held for sale. As a Ginnie Mae securities and recorded asapproved lender, we may recover losses incurred on repurchased loans held for sale, at fair value, onthrough a claims process with the balance sheet.
government agency.
From time to time we retainhold for sale the rightguaranteed 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 serviceyield over the life of the loan, or over the commitment period, as applicable.
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 the borrower’s financial condition has been evidenced, generally for no less than twelve months. If 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 is no longer considered a restructuring if it is in compliance with the modified terms in calendar years after the year of the restructure.
A loan is considered past due when a contractually due payment has not been received by the contractual due date. We place a loan on non-accrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed as a reduction of current period interest income. 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 credit losses or be subject to charge-off in the event the loans sold throughbecome impaired.
Allowance for Credit Losses
The allowance for credit losses is an estimate of the expected credit losses in the loans held for investment and available-for-sale debt securities portfolio. The following is our MCA program, creating MSRsdiscussion of the allowance for credit losses on loans held for investment. See "Investment Securities - Available-for-Sale" above for discussion of the allowance for credit losses on available-for-sale debt securities.
ASU 2016-13 replaces the incurred loss impairment model, which recognizes losses when it becomes probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, credit quality, or term, as well as for changes in macroeconomic conditions, such as changes in unemployment rates, crude oil prices, property values or other relevant factors.
The allowance for credit losses is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Reserves on loans that do not share risk characteristics are evaluated on an individual basis. In order to determine the allowance for credit losses, all loans are assigned a credit grade. Loans graded substandard or worse and greater than $500,000 are specifically reviewed for loss potential and when deemed appropriate are assigned a reserve based on an individual evaluation. For purposes of determining the pool-basis reserve, the remainder of the portfolio, representing all loans not assigned an individual reserve, is segregated first by portfolio segment, then by product type, to recognize differing risk profiles within portfolio segments, and finally by credit grade. Each credit grade within each product type is assigned a historical loss rate. These historical loss rates are then modified to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments using a Portfolio Level Qualitative Factor ("PLQF") and/or a Portfolio Segment Level Qualitative Factor ("SLQF"). These modified historical loss rates are multiplied by the outstanding principal balance of each loan 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 as assetsin other liabilities. The PLQF and SLQF are utilized to address factors that are not present in historical loss rates and are otherwise unaccounted for in the quantitative process. The PLQF is used to apply a qualitative adjustment across the entire portfolio of loans, while the SLQF is designed to apply a qualitative adjustment across a single portfolio segment. 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 generally use a two-year forecast period, based on a single consensus forecast scenario, using variables we believe are most relevant to each portfolio segment. For periods beyond which we are able to develop reasonable and supportable forecasts, we immediately revert to the average historical loss rate. The forecast period and scenario used is reviewed on a quarterly basis and may be adjusted based on management's view of the current economic conditions and level of predictability the forecast can provide.
Portfolio segments are used to pool loans with similar risk characteristics and align with our balance sheet.methodology for measuring expected credit losses. A summary of MSR activityour primary portfolio segments 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 |
|
69
Commercial. Our commercial loan portfolio is comprised of lines of credit for working capital, term loans and 2018,leases to finance equipment and other business assets across a variety of industries. These loans are used for general corporate purposes including financing working capital, internal growth, acquisitions and business insurance premiums and are generally secured by accounts receivable, inventory, equipment and other assets of our servicingclients’ businesses. Our commercial loan portfolio also includes consumer loans because our small portfolio of residential mortgageconsumer loans had an outstanding principal balanceis largely comprised of $6.7 billionaccommodation loans to individuals associated with our commercial clients.
Energy. Our energy loan portfolio is primarily comprised of loans to exploration and $3.9 billion, respectively.
In connectionproduction (“E&P”) companies that are generally collateralized with proven reserves based on appropriate valuation standards that take into account the servicingrisk of theseoil and gas price volatility. The majority of this portfolio is first lien, senior secured, reserve-based lending, which we believe is the lowest-risk form of energy lending. Energy loans we hold deposits in the name of investors representing escrow funds for taxes and insurance,are impacted by commodity price volatility, as well as collectionschanges in transitconsumer and business demand.
Mortgage finance. Mortgage finance loans relate to our mortgage warehouse lending operations in which we purchase mortgage loan ownership interests from unaffiliated mortgage originators that are generally held by us for a period of less than 30 days and more typically 10-20 days before they are sold to an approved investor. 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 housing demand and tend to peak at the end of each month. Mortgage finance loans are consistently underwritten based on standards established by the approved investors. Market conditions or events of default by an investor or originator could require that we repurchase the remaining interests in the mortgage loans and hold them beyond the expected 10-20 days.
Real estate. Our real estate portfolio is comprised of the following types of loans:
Commercial real estate ("CRE"). Our CRE portfolio is comprised of both construction/development financing and limited term financing provided to professional real estate developers and owners/managers of commercial real estate projects and properties who have a demonstrated record of past success with similar properties. Collateral properties include office buildings, warehouse/distribution buildings, shopping centers, hotels/motels, senior living, apartment buildings and residential and commercial tract development. The primary source of repayment on these loans is expected to come from the sale, permanent financing or lease of the real property collateral. CRE loans are impacted by fluctuations in collateral values, as well as the ability of the borrower to obtain permanent financing.
Residential homebuilder finance ("RBF"). The RBF portfolio is comprised of loans made to residential builders and developers. Loans to residential builders are typically in the form of uncommitted guidance lines and are for the purpose of developing lots into single-family homes, while loans to developers are typically in the form of borrowing base lines extended for the purpose of acquiring and developing raw land into lots that can be further sold to home builders. RBF loans, if not structured and monitored correctly, can be impacted by volatility in consumer demand, as well as fluctuation in housing prices.
Secured by 1-4 family. This category of loans includes both first and second lien loans made for the purpose of purchasing or constructing 1-4 family residential dwellings, as well as home equity revolving lines of credit and loans to purchase lots for future construction of 1-4 family residential dwellings.
Other. The "other" category is primarily comprised of real estate loans originated through a Small Business Administration (SBA) program where repayment is partially guaranteed by the SBA, as well as other loans secured by real estate where the primary source of repayment is not expected to come from the sale or lease of the real property collateral.
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 investors. These escrow fundsexistence of financial or administrative deficiencies. Substandard loans have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are segregatedcharacterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Some substandard loans are inadequately protected by the sound worth and heldpaying 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 separate non-interest-bearing bank accountssubstandard loans with the added characteristics that the weaknesses make collection in full highly questionable and improbable. The possibility of loss is extremely high. All doubtful loans are on non-accrual.
The methodology used in the estimation of the allowance, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and forecasted economic conditions. Changes are reflected in the pool-basis
allowance and in reserves assigned on an individual basis as the collectability of classified loans is evaluated with new information. As our portfolio has matured, historical loss ratios have been closely monitored. 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 our consolidated financial statements.
When management determines that foreclosure is probable, and for certain collateral-dependent loans where foreclosure is not considered probable, expected credit losses are based on the estimated fair value of the collateral adjusted for selling costs, when appropriate. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless either of the following applies: management has a reasonable expectation that a loan will be restructured, or the extension or renewal options are included in the borrower contract and are not unconditionally cancellable by us.
We do not measure an allowance for credit losses on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when loans are placed on non-accrual status as discussed above.
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 credit 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 Bank. These deposits, included in total non-interest-bearing depositsdate of sale using values derived from a valuation model. MSRs are reported on the consolidated balance sheets were $63.7 million at December 31, 2019amortized 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 $37.9 million at December 31, 2018.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.
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.
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, repurchase and make-whole 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. Operating lease agreements may 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. 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 6 – 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.
Unrecognized tax benefits for the uncertain portion of recorded tax benefits and related interest may result from the application of complex tax laws, rules, regulations and interpretations. Unrecognized tax benefits, as well as estimated penalties and interest, are assessed quarterly and may be adjusted through current income tax expense in future periods based on changing facts and circumstances, completion of examinations by taxing authorities or expiration of a statute of limitations.
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. 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.
Also required are disclosures 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. The disclosure of fair value information about financial instruments does not and is not intended to represent the fair value of the Company.
The following are descriptions of the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents, Variable Rate Loans, and Variable Rate Debt
The fair value of these financial instruments approximates carrying value.
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. We also hold Community Reinvestment Act equity securities that are valued using quoted market prices for identical equity securities in an inactive market that we classify as Level 2 assets in the fair value hierarchy.The fair value of our U.S. government agency and residential mortgage-backed securities 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 obtain documentation from our primary pricing service regarding their processes and controls applicable to pricing investment securities, and on a quarterly basis 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
The 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.
Derivative Assets and Liabilities
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 sale 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 sale 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. The derivative instruments related to our residential MSRs include interest rate swap futures and forward sale commitments. The interest rate swap futures are valued based on quoted market prices obtained from brokers for similar derivative contracts, while the forward sale commitments are valued based on the fair value of the underlying mortgage loans to be purchased, which is based on observable market data for similar loans. As such, these derivative instruments are characterized as Level 2 assets and liabilities in the fair value hierarchy.
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 designateed 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.
As part of our MCA program, we 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 or to deliver mortgage-backed securities at a future date. 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 gain/(loss) on sale of loans held for sale in the consolidated statements of income and other comprehensive income.
To mitigate exposure to potential impairment losses from adverse changes in the fair value of our residential MSR portfolio, we enter into interest rate derivative contracts, primarily interest rate swap futures and forward sale commitments of mortgage-backed securities. These derivative instruments are considered highly liquid and can be settled daily, which allows us to dynamically manage our exposure. The derivative instruments are used to economically hedge the fair value of the residential MSR portfolio impacted by changes in anticipated prepayments resulting from mortgage interest rate movements and are classified as other assets and other liabilities on the consolidated balance sheets. Any unrealized or realized gains/(losses) related to derivatives economically hedging the residential MSR portfolio are recognized in servicing-related expenses along with changes to the MSR valuation allowance.
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) | 2020 | | 2019 | | 2018 |
Numerator: | | | | | |
Net income | $ | 66,289 | | | $ | 312,015 | | | $ | 293,387 | |
Preferred stock dividends | 9,750 | | | 9,750 | | | 9,750 | |
Net income available to common stockholders | $ | 56,539 | | | $ | 302,265 | | | $ | 283,637 | |
Denominator: | | | | | |
Denominator for basic earnings per share—weighted average shares | 50,430,326 | | | 50,286,300 | | | 49,936,702 | |
Effect of employee stock-based awards(1) | 152,653 | | | 132,904 | | | 218,275 | |
Effect of warrants to purchase common stock | 0 | | | 0 | | | 117,895 | |
Denominator for dilutive earnings per share—adjusted weighted average shares and assumed conversions | 50,582,979 | | | 50,419,204 | | | 50,272,872 | |
Basic earnings per common share | $ | 1.12 | | | $ | 6.01 | | | $ | 5.68 | |
Diluted earnings per common share | $ | 1.12 | | | $ | 5.99 | | | $ | 5.64 | |
(1)SARs and RSUs outstanding of 453,024, 86,308 and 27,100 in 2020, 2019 and 2018, 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(1) | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
December 31, 2020 | | | | | | | |
| | | | | | | |
U.S. government agency securities | $ | 125,000 | | | $ | 1 | | | $ | (1,412) | | | $ | 123,589 | |
Residential mortgage-backed securities | 2,818,518 | | | 11,566 | | | (1,128) | | | 2,828,956 | |
| | | | | | | |
Tax-exempt asset-backed securities | 184,940 | | | 14,236 | | | 0 | | | 199,176 | |
Credit risk transfer securities | 14,713 | | | 0 | | | (3,296) | | | 11,417 | |
Total | $ | 3,143,171 | | | $ | 25,803 | | | $ | (5,836) | | | $ | 3,163,138 | |
December 31, 2019 | | | | | | | |
| | | | | | | |
Residential mortgage-backed securities | $ | 4,991 | | | $ | 275 | | | $ | 0 | | | $ | 5,266 | |
| | | | | | | |
Tax-exempt asset-backed securities | 183,225 | | | 13,802 | | | 0 | | | 197,027 | |
Credit risk asset-backed securities | 14,713 | | | 0 | | | (2,749) | | | 11,964 | |
Total | $ | 202,929 | | | $ | 14,077 | | | $ | (2,749) | | | $ | 214,257 | |
(1) Excludes accrued interest receivable of $6.0 million and $1.6 million at December 31, 2020 and 2019, respectively, that is recorded in accrued interest receivable and other assets.
The amortized cost and estimated fair value, excluding accrued interest receivable, and weighted average yield 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, 2020 | | | | | | | | | |
| | | | | | | | | |
U.S. government agency securities:(1) | | | | | | | | | |
Amortized cost | $ | 0 | | | $ | 0 | | | $ | 125,000 | | | $ | 0 | | | $ | 125,000 | |
Estimated fair value | 0 | | | 0 | | | 123,589 | | | 0 | | | 123,589 | |
Weighted average yield(3) | 0 | % | | 0 | % | | 1.13 | % | | 0 | % | | 1.13 | % |
Residential mortgage-backed securities:(1) | | | | | | | | | |
Amortized cost | $ | 0 | | | $ | 545 | | | $ | 17,500 | | | $ | 2,800,473 | | | $ | 2,818,518 | |
Estimated fair value | 0 | | | 605 | | | 17,490 | | | 2,810,861 | | | 2,828,956 | |
Weighted average yield(3) | 0 | % | | 4.58 | % | | 1.08 | % | | 1.25 | % | | 1.25 | % |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Tax-exempt asset-backed securities:(1) | | | | | | | | | |
Amortized Cost | 0 | | | 0 | | | 0 | | | 184,940 | | | 184,940 | |
Estimated fair value | 0 | | | 0 | | | 0 | | | 199,176 | | | 199,176 | |
Weighted average yield(2)(3) | 0 | % | | 0 | % | | 0 | % | | 4.92 | % | | 4.92 | % |
CRT securities:(1) | | | | | | | | | |
Amortized Cost | 0 | | | 0 | | | 0 | | | 14,713 | | | 14,713 | |
Estimated fair value | 0 | | | 0 | | | 0 | | | 11,417 | | | 11,417 | |
Weighted average yield(3) | 0 | % | | 0 | % | | 0 | % | | 0.15 | % | | 0.15 | % |
Total available-for-sale debt securities: | | | | | | | | | |
Amortized cost | | | | | | | | | $ | 3,143,171 | |
Estimated fair value | | | | | | | | | $ | 3,163,138 | |
December 31, 2019 | | | | | | | | | |
| | | | | | | | | |
Residential mortgage-backed securities:(1) | | | | | | | | | |
Amortized cost | $ | 0 | | | $ | 1,005 | | | $ | 0 | | | $ | 3,986 | | | $ | 4,991 | |
Estimated fair value | 0 | | | 1,088 | | | 0 | | | 4,178 | | | 5,266 | |
Weighted average yield(3) | 0 | % | | 5.54 | % | | 0 | % | | 4.31 | % | | 4.55 | % |
Tax-exempt asset-backed securities:(1) | | | | | | | | | |
Amortized Cost | 0 | | | 0 | | | 0 | | | 183,225 | | | 183,225 | |
Estimated fair value | 0 | | | 0 | | | 0 | | | 197,027 | | | 197,027 | |
Weighted average yield(2)(3) | 0 | % | | 0 | % | | 0 | % | | 5.32 | % | | 5.32 | % |
CRT securities:(1) | | | | | | | | | |
Amortized Cost | 0 | | | 0 | | | 0 | | | 14,713 | | | 14,713 | |
Estimated fair value | 0 | | | 0 | | | 0 | | | 11,964 | | | 11,964 | |
Weighted average yield(3) | 0 | % | | 0 | % | | 0 | % | | 1.71 | % | | 1.71 | % |
Total available-for-sale debt securities: | | | | | | | | | |
Amortized cost | | | | | | | | | $ | 202,929 | |
Estimated fair value | | | | | | | | | $ | 214,257 | |
(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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less Than 12 Months | | 12 Months or Longer | | Total |
(in thousands) | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
December 31, 2020 | | | | | | | | | | | |
U.S. government agency securities | $ | 98,588 | | | $ | (1,412) | | | $ | 0 | | | $ | 0 | | | $ | 98,588 | | | $ | (1,412) | |
Residential mortgage-backed securities | 354,387 | | | (1,128) | | | 0 | | | 0 | | | 354,387 | | | (1,128) | |
CRT securities | 0 | | | 0 | | | 11,417 | | | (3,296) | | | 11,417 | | | (3,296) | |
Total | $ | 452,975 | | | $ | (2,540) | | | $ | 11,417 | | | $ | (3,296) | | | $ | 464,392 | | | $ | (5,836) | |
December 31, 2019 | | | | | | | | | | | |
CRT securities | $ | 11,964 | | | $ | (2,749) | | | $ | 0 | | | $ | 0 | | | $ | 11,964 | | | $ | (2,749) | |
Total | $ | 11,964 | | | $ | (2,749) | | | $ | 0 | | | $ | 0 | | | $ | 11,964 | | | $ | (2,749) | |
Based upon our December 31, 2020 review of securities with unrealized losses we have determined that all losses resulted from factors not deemed credit-related. We have evaluated the near-term prospects of each securities portfolio in relation to the severity of the unrealized losses and adverse conditions related to the securities among other factors. Based on that evaluation management has determined that we have the ability and intent to hold the securities until recovery of fair value and have recorded the unrealized losses in AOCI.
Available-for-sale debt securities with carrying values of approximately $31.7 million and $1.9 million were pledged to secure certain customer repurchase agreements and deposits, respectively, at December 31, 2020. The comparative amounts at December 31, 2019 were $3.5 million and $1.2 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, 2020 and December 31, 2019, we had $33.8 million and $25.6 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) | | 2020 | | | 2019 | |
Net gains/(losses) recognized during the period | $ | 2,998 | | | $ | 2,383 | | |
Less: Realized net gains/(losses) recognized during the period on equity securities sold | | 1,418 | | | | 119 | | |
Unrealized net gains/(losses) recognized during the period on equity securities still held | $ | 1,580 | | | $ | 2,264 | | |
(4) Loans Held for Investment and Allowance for Credit Losses on Loans
Loans held for investment are summarized by portfolio segment as follows:
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2020 | | 2019 |
Commercial | $ | 8,861,580 | | | $ | 9,133,444 | |
Energy | 766,217 | | | 1,425,309 | |
Mortgage finance(1) | 9,079,409 | | | 8,169,849 | |
Real estate | 5,794,624 | | | 6,008,040 | |
| | | |
| | | |
| | | |
Gross loans held for investment(2) | 24,501,830 | | | 24,736,642 | |
Deferred income (net of direct origination costs) | (70,970) | | | (90,380) | |
Allowance for credit losses on loans | (254,615) | | | (195,047) | |
Total loans held for investment, net(2) | $ | 24,176,245 | | | $ | 24,451,215 | |
(1) Balances at December 31, 2020 and December 31, 2019 are stated net of $1.2 billion and $682.7 million of participations sold, respectively.
(2) Excludes accrued interest receivable of $56.5 million and $63.4 million at December 31, 2020 and December 31, 2019, respectively, that is recorded in accrued interest receivable and other assets.
The following table summarizes our gross loans held for investment by year of origination and internally assigned credit grades:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 and prior | | Revolving lines of credit | | Revolving lines of credit converted to term loans | | Total |
December 31, 2020 | | | | | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | | | | |
(1-7) Pass | | $ | 1,259,949 | | | $ | 2,816,425 | | | $ | 543,438 | | | $ | 374,455 | | | $ | 192,060 | | | $ | 213,212 | | | $ | 3,020,353 | | | $ | 40,253 | | | $ | 8,460,145 | |
(8) Special mention | | 2,664 | | | 115,015 | | | 38,751 | | | 26,423 | | | 1,983 | | | 290 | | | 19,971 | | | 22,797 | | | 227,894 | |
(9) Substandard - accruing | | 15,773 | | | 15,854 | | | 18,068 | | | 32,241 | | | 15,297 | | | 19,639 | | | 22,932 | | | 1,641 | | | 141,445 | |
(9+) Non-accrual | | 1,820 | | | 8,360 | | | 377 | | | 1,292 | | | 802 | | | 15,157 | | | 3,836 | | | 452 | | | 32,096 | |
Total commercial | | $ | 1,280,206 | | | $ | 2,955,654 | | | $ | 600,634 | | | $ | 434,411 | | | $ | 210,142 | | | $ | 248,298 | | | $ | 3,067,092 | | | $ | 65,143 | | | $ | 8,861,580 | |
Energy | | | | | | | | | | | | | | | | | | |
(1-7) Pass | | $ | 0 | | | $ | 12,020 | | | $ | 7,598 | | | $ | 26,931 | | | $ | 0 | | | $ | 23,750 | | | $ | 553,970 | | | $ | 0 | | | $ | 624,269 | |
(8) Special mention | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 13,358 | | | 76,866 | | | 0 | | | 90,224 | |
(9) Substandard - accruing | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
(9+) Non-accrual | | 0 | | | 0 | | | 0 | | | 5,705 | | | 1,972 | | | 8,009 | | | 36,038 | | | 0 | | | 51,724 | |
Total energy | | $ | 0 | | | $ | 12,020 | | | $ | 7,598 | | | $ | 32,636 | | | $ | 1,972 | | | $ | 45,117 | | | $ | 666,874 | | | $ | 0 | | | $ | 766,217 | |
Mortgage finance | | | | | | | | | | | | | | | | | | |
(1-7) Pass | | $ | 755,309 | | | $ | 1,063,641 | | | $ | 821,122 | | | $ | 483,436 | | | $ | 106,013 | | | $ | 5,849,888 | | | $ | 0 | | | $ | 0 | | | $ | 9,079,409 | |
(8) Special mention | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
(9) Substandard - accruing | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
(9+) Non-accrual | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Total mortgage finance | | $ | 755,309 | | | $ | 1,063,641 | | | $ | 821,122 | | | $ | 483,436 | | | $ | 106,013 | | | $ | 5,849,888 | | | $ | 0 | | | $ | 0 | | | $ | 9,079,409 | |
Real estate | | | | | | | | | | | | | | | | | | |
CRE | | | | | | | | | | | | | | | | | | |
(1-7) Pass | | $ | 352,688 | | | $ | 892,831 | | | $ | 923,762 | | | $ | 444,587 | | | $ | 208,426 | | | $ | 451,283 | | | $ | 62,336 | | | $ | 61,133 | | | $ | 3,397,046 | |
(8) Special mention | | 3,475 | | | 11,170 | | | 6,485 | | | 88,633 | | | 11,153 | | | 17,623 | | | 0 | | | 1,247 | | | 139,786 | |
(9) Substandard - accruing | | 0 | | | 327 | | | 47,708 | | | 11,601 | | | 32,645 | | | 30,766 | | | 0 | | | 15,940 | | | 138,987 | |
(9+) Non-accrual | | 0 | | | 0 | | | 0 | | | 0 | | | 5,749 | | | 4,852 | | | 0 | | | 0 | | | 10,601 | |
RBF | | | | | | | | | | | | | | | | | | |
(1-7) Pass | | 162,397 | | | 60,077 | | | 65,271 | | | 3,727 | | | 5,888 | | | 8,483 | | | 551,703 | | | 0 | | | 857,546 | |
(8) Special mention | | 0 | | | 353 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 353 | |
(9) Substandard - accruing | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
(9+) Non-accrual | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Other | | | | | | | | | | | | | | | | | | |
(1-7) Pass | | 190,995 | | | 150,787 | | | 119,696 | | | 120,817 | | | 82,465 | | | 113,105 | | | 16,630 | | | 39,129 | | | 833,624 | |
(8) Special mention | | 0 | | | 6,700 | | | 2,240 | | | 0 | | | 1,843 | | | 7,195 | | | 0 | | | 1,018 | | | 18,996 | |
(9) Substandard - accruing | | 0 | | | 0 | | | 2,567 | | | 14,452 | | | 3,301 | | | 14,453 | | | 0 | | | 0 | | | 34,773 | |
(9+) Non-accrual | | 0 | | | 0 | | | 0 | | | 927 | | | 5,524 | | | 6,403 | | | 0 | | | 14,496 | | | 27,350 | |
Secured by 1-4 family | | | | | | | | | | | | | | | | | | |
(1-7) Pass | | 58,515 | | | 63,031 | | | 46,623 | | | 54,096 | | | 72,527 | | | 31,880 | | | 4,697 | | | 0 | | | 331,369 | |
(8) Special mention | | 646 | | | 0 | | | 0 | | | 635 | | | 0 | | | 1,768 | | | 0 | | | 0 | | | 3,049 | |
(9) Substandard - accruing | | 0 | | | 0 | | | 0 | | | 817 | | | 0 | | | 109 | | | 0 | | | 0 | | | 926 | |
(9+) Non-accrual | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 218 | | | 0 | | | 0 | | | 218 | |
Total real estate | | $ | 768,716 | | | $ | 1,185,276 | | | $ | 1,214,352 | | | $ | 740,292 | | | $ | 429,521 | | | $ | 688,138 | | | $ | 635,366 | | | $ | 132,963 | | | $ | 5,794,624 | |
Total loans held for investment | | $ | 2,804,231 | | | $ | 5,216,591 | | | $ | 2,643,706 | | | $ | 1,690,775 | | | $ | 747,648 | | | $ | 6,831,441 | | | $ | 4,369,332 | | | $ | 198,106 | | | $ | 24,501,830 | |
The following table details activity in the allowance for credit losses on loans. 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 | Energy | Mortgage Finance | Real Estate | Additional Qualitative Reserve | Total |
Year ended December 31, 2020 | | | | | | |
Beginning balance | $ | 102,254 | | $ | 60,253 | | $ | 2,265 | | $ | 30,275 | | $ | 0 | | $ | 195,047 | |
Impact of CECL adoptions | (15,740) | | 24,154 | | 2,031 | | (1,860) | | 0 | | 8,585 | |
Provision for credit losses on loans | 58,630 | | 126,180 | | 403 | | 64,556 | | 0 | | 249,769 | |
Charge-offs | 73,360 | | 133,522 | | 0 | | 180 | | 0 | | 207,062 | |
Recoveries | 1,277 | | 6,999 | | 0 | | 0 | | 0 | | 8,276 | |
Net charge-offs (recoveries) | 72,083 | | 126,523 | | 0 | | 180 | | 0 | | 198,786 | |
Ending balance | $ | 73,061 | | $ | 84,064 | | $ | 4,699 | | $ | 92,791 | | $ | 0 | | $ | 254,615 | |
Year ended December 31, 2019 | | | | | | |
Beginning balance | $ | 96,814 | | $ | 34,882 | | $ | 0 | | $ | 52,595 | | $ | 7,231 | | $ | 191,522 | |
Provision for credit losses on loans | 46,738 | | 57,680 | | 2,265 | | (21,658) | | (7,231) | | 77,794 | |
Charge-offs | 44,352 | | 32,625 | | 0 | | 662 | | 0 | | 77,639 | |
Recoveries | 3,054 | | 316 | | 0 | | 0 | | 0 | | 3,370 | |
Net charge-offs (recoveries) | 41,298 | | 32,309 | | 0 | | 662 | | 0 | | 74,269 | |
Ending balance | $ | 102,254 | | $ | 60,253 | | $ | 2,265 | | $ | 30,275 | | $ | 0 | | $ | 195,047 | |
In the first quarter of 2020, we adopted ASU 2016-13, which replaced the incurred loss methodology for determining our provision for credit losses and allowance for credit losses with an expected loss methodology that is referred to as the CECL model. Upon adoption, the allowance for credit losses was increased by $9.1 million, which included a $563,000 increase to the allowance for off-balance sheet credit losses, with no impact to the consolidated statement of income. We recorded a $258.0 million provision for credit losses for the year ended December 31, 2020, compared to $75.0 million for the same period of 2019. We recorded $198.8 million in net charge-offs during the year ended December 31, 2020, compared to $74.3 million during the same period of 2019. Criticized loans total $918.4 million at December 31, 2020 and $584.1 million at December 31, 2019. Criticized loan levels have increased during 2020 as compared to 2019 due to the downgrade of loans to borrowers that have been impacted by the COVID-19 pandemic or that are in categories that are expected to be more significantly impacted by COVID-19.
A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table summarizes collateral-dependent gross loans held for investment by collateral type as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Collateral Type |
(in thousands) | | | Business Assets | Real Property | Oil/Gas Mineral Reserves | | | | | Rolling Stock | | Total |
December 31, 2020 | | | | | | | | | | | | |
Commercial | | | $ | 3,361 | | $ | 0 | | $ | 0 | | | | | | $ | 774 | | | $ | 4,135 | |
Energy | | | 0 | | 0 | | 5,156 | | | | | | 0 | | | 5,156 | |
| | | | | | | | | | | | |
Real estate | | | | | | | | | | | | |
CRE | | | 0 | | 4,619 | | 0 | | | | | | 0 | | | 4,619 | |
| | | | | | | | | | | | |
Other | | | 0 | | 11,372 | | 0 | | | | | | 0 | | | 11,372 | |
| | | | | | | | | | | | |
Total collateral-dependent loans held for investment | | | $ | 3,361 | | $ | 15,991 | | $ | 5,156 | | | | | | $ | 774 | | | $ | 25,282 | |
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(2) | | Current | | Total | | Non-accrual With No Allowance |
December 31, 2020 | | | | | | | | | | | | | | | |
Commercial | $ | 6,171 | | | $ | 2,602 | | | $ | 9,325 | | | $ | 18,098 | | | $ | 32,096 | | | $ | 8,811,386 | | | $ | 8,861,580 | | | $ | 6,917 | |
Energy | 0 | | | 0 | | | 0 | | | 0 | | | 51,724 | | | 714,493 | | | 766,217 | | | 17,759 | |
Mortgage finance loans | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 9,079,409 | | | 9,079,409 | | | 0 | |
Real estate | | | | | | | | | | | | | | | |
CRE | 2,926 | | | 297 | | | 0 | | | 3,223 | | | 10,601 | | | 3,672,596 | | | 3,686,420 | | | 5,749 | |
RBF | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 857,899 | | | 857,899 | | | 0 | |
Other | 3,471 | | | 493 | | | 0 | | | 3,964 | | | 27,350 | | | 883,429 | | | 914,743 | | | 13,263 | |
Secured by 1-4 family | 1,340 | | | 1,467 | | | 3,216 | | | 6,023 | | | 218 | | | 329,321 | | | 335,562 | | | 0 | |
Total loans held for investment | $ | 13,908 | | | $ | 4,859 | | | $ | 12,541 | | | $ | 31,308 | | | $ | 121,989 | | | $ | 24,348,533 | | | $ | 24,501,830 | | | $ | 43,688 | |
(1)Loans past due 90 days and still accruing includes premium finance loans of $6.4 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.
(2)As of December 31, 2020 and December 31, 2019, none of our non-accrual loans were earning interest income on a cash basis. Additionally, no interest income was recognized on non-accrual loans for the year ended December 31, 2020. Accrued interest of $1.3 million was reversed during the year ended December 31, 2020.
On January 1, 2020, the date we adopted CECL, non-accrual loans totaled $225.4 million, and included $88.6 million in commercial loans, $125.0 million in energy loans, $9.4 million in CRE loans, $881,000 in real estate-other loans and $1.4 million in secured by 1-4 family loans.
As of December 31, 2020 and December 31, 2019, we did not have any loans considered restructured that were not on non-accrual. Of the non-accrual loans at December 31, 2020 and 2019, $45.4 million and $35.1 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, 2020 and 2019 of loans that have been restructured during the years ended December 31, 2020 and 2019 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, 2020 | | | | | | | | | |
Commercial | | 2 | | $ | 7,390 | | | 2 | | $ | 14,496 | | | 4 | | $ | 21,886 | |
Energy loans | | 1 | | 5,705 | | | 3 | | 12,935 | | | 4 | | 18,640 | |
Total | | 3 | | $ | 13,095 | | | 5 | | $ | 27,431 | | | $ | 8 | | $ | 40,526 | |
Year Ended December 31, 2019 | | | | | | | | | |
Commercial | | 1 | | $ | 1,753 | | | 3 | | $ | 21,193 | | | $ | 4 | | $ | 22,946 | |
Energy loans | | 1 | | 3,935 | | | 0 | | 0 | | | 1 | | 3,935 | |
Total | | 2 | | $ | 5,688 | | | 3 | | $ | 21,193 | | | $ | 5 | | $ | 26,881 | |
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, 2020 and 2019, all of the above restructured loans were on non-accrual. The restructuring of the loans did not have a significant impact on our allowance for credit losses at December 31, 2020 or 2019. As of December 31, 2020 and 2019, we did not have any loans that were restructured within the last 12 months that subsequently defaulted.
In response to the COVID-19 pandemic, we implemented a short-term modification program in late March 2020 to provide temporary payment relief to borrowers who meet the program's qualifications. This program allows for a deferral of payments for 90 days, which we may extend for an additional 90 days, for a maximum of 180 days on a cumulative basis. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan. Through December 31, 2020, we granted temporary modifications on 483 loans with a total outstanding balance of $1.3 billion, resulting in the deferral of $7.7 million in interest payments. As of December 31, 2020, 48 loans with a total outstanding balance of $90.2 million remain on deferral, of which $50.7 million have been granted a second deferral. Under the applicable guidance, none of these loans were considered restructured as of December 31, 2020.
(5) 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) | | 2020 | | 2019 |
Outstanding balance(1): | | | | |
Beginning balance | | $ | 2,568,362 | | | $ | 1,949,785 | |
Loans purchased and originated | | 11,366,986 | | | 10,183,057 | |
Payments and loans sold | | (13,654,211) | | | (9,564,480) | |
Ending balance | | 281,137 | | | 2,568,362 | |
Fair value adjustment: | | | | |
Beginning balance | | 8,772 | | | 19,689 | |
Increase/(decrease) to fair value | | (6,744) | | | (10,917) | |
Ending balance | | 2,028 | | | 8,772 | |
Loans held for sale at fair value | | $ | 283,165 | | | $ | 2,577,134 | |
(1) Includes $44.1 million and $5.8 million of loans held for sale that are carried at lower of cost or market as of December 31, 2020 and 2019, respectively, as well as $299,000 as of December 31, 2018.
At December 31, 2020, we had $7.0 million in in non-accrual loans held for sale, comprised of one loan previously reported in loans held for investment that was transferred to loans held for sale as of December 31, 2020 and subsequently sold at carrying value. At December 31, 2019 there were 0 non-accrual loans held for sale. At December 31, 2020 and December 31, 2019, we had $16.7 million and $8.2 million, respectively, in loans held for sale that were 90 days or more past due. The $16.7 million in loans held for sale that were 90 days or more past due at December 31, 2020 included $3.3 million of 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 $16.7 million were $13.4 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, 2019, $6.0 million of the $8.2
million in loans held for sale that were 90 days or more past due 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 and $1.9 million were loans that we have the unilateral right, but not the obligation, to repurchase if defined delinquent criteria are met.
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) | 2020 | | 2019 |
MSRs: | | | |
Balance, beginning of year | $ | 70,707 | | | $ | 42,474 | |
Capitalized servicing rights | 99,678 | | | 39,774 | |
Amortization | (38,994) | | | (11,541) | |
Sales | 0 | | | 0 | |
Balance, end of period | $ | 131,391 | | | $ | 70,707 | |
Valuation allowance: | | | |
Balance, beginning of year | $ | 5,803 | | | $ | 0 | |
Increase (decrease) in valuation allowance | 20,164 | | | 5,803 | |
Balance, end of period | $ | 25,967 | | | $ | 5,803 | |
MSRs, net | $ | 105,424 | | | $ | 64,904 | |
MSRs, fair value | $ | 105,424 | | | $ | 64,904 | |
At December 31, 2020 and 2019, our servicing portfolio of residential mortgage loans had an outstanding principal balance of $13.8 billion and $6.7 billion, respectively.
In connection with the servicing of these loans, we hold segregated non-interested-bearing deposit accounts in the name of investors representing escrow funds for taxes and insurance, as well as collections in transit to the investors. These deposits, included in total non-interest-bearing deposits on the consolidated balance sheets, were $152.6 million at December 31, 2020 and $63.7 million at December 31, 2019.
At December 31, 2020, the estimated fair value of MSRs was adjusted as a result ofnegatively impacted by the decline in mortgageincreased prepayment speeds from continued low interest rates, during the year, which resulted in an impairment charge of $5.8 million. There was no impairment at$20.2 million being recorded for the year ended December 31, 2018.2020, compared to a $5.8 million impairment charge for the year ended December 31, 2019. To mitigate exposure to potential impairment charges from adverse changes in the fair value of our residential MSR portfolio, we enter into certain derivative contracts as are disclosed in Note 17 - Derivative Financial Instruments. 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 |
|
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
Average discount rates | 9.09 | % | | 9.06 | % |
Expected prepayment speeds | 16.37 | % | | 13.11 | % |
Weighted-average life, in years | 4.9 | | 5.8 |
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 | ) |
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2020 | | 2019 |
50 bp adverse change in prepayment speed | $ | (12,203) | | | $ | (10,768) | |
100 bp adverse change in prepayment speed | (16,062) | | | (17,965) | |
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$621,000 and $1.6$3.6 million at December 31, 20192020 and December 31, 2018,2019, respectively, and is recorded in other liabilities in the consolidated
balance sheets. We incurred $9.0$8.4 million in losses due to make-whole obligationsobligation payments were made during the year ended December 31, 20192020 compared to $258,000$9.0 million 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.2019.
(7)(6) 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 ofAt December 31, 2019,2020, operating lease ROU assets and liabilities were $67.0 million and $82.5 million, respectively, compared to $80.0 million and $95.9 million, respectively.respectively, at December 31, 2019. We do not currently have any significant finance leases in which we are the lessee.
The table below summarizes our net lease cost:
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in thousands) | | 2020 | | 2019 |
| | | | |
| | | | |
| | | | |
| | | | |
Operating lease cost | | $ | 15,544 | | | $ | 14,844 | |
Short-term lease cost | | 19 | | | 19 | |
Variable lease cost | | 4,476 | | | 3,918 | |
Sublease income | | (107) | | | (126) | |
Net lease cost | | $ | 19,932 | | | $ | 18,655 | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash flows from operating leases | | $ | 16,568 | | | $ | 14,711 | |
Non-cash changes in ROU assets | | $ | 765 | | | $ | 98,369 | |
Non-cash changes in lease liabilities(1) | | $ | 784 | | | $ | 108,189 | |
|
| | | | |
(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 $833,000 and $87.9 million in lease liabilities from new ROU assets obtained during the years ended December 31, 2020 and December 31, 2019, respectively. | |
(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 | % |
| | | | | | | | | | | | | | | | |
| | | | December 31, |
| | | | 2020 | | 2019 |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Weighted-average remaining lease term - operating leases, in years | | | | 6.5 | | 7.2 |
| | | | | | |
Weighted-average discount rate - operating leases | | | | 2.74 | % | | 2.75 | % |
The table below summarizes the maturity of remaining lease liabilities:
| | | | | | | | |
(in thousands) | | December 31, 2020 |
2021 | | $ | 17,222 | |
2022 | | 16,455 | |
2023 | | 16,511 | |
2024 | | 11,754 | |
2025 | | 5,524 | |
2026 and thereafter | | 22,849 | |
Total lease payments | | 90,315 | |
Less: Interest | | (7,786) | |
Present value of lease liabilities | | $ | 82,529 | |
|
| | | | |
(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)(7) 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 |
|
| | | | | | | | | | | | | | | | | |
(in thousands) | Gross Goodwill and Intangible Assets | | Accumulated Amortization | | Net Goodwill and Intangible Assets |
December 31, 2020 | | | | | |
Goodwill | $ | 15,468 | | | $ | (374) | | | $ | 15,094 | |
Intangible assets—customer relationships and trademarks | 9,006 | | | (6,433) | | | 2,573 | |
Total goodwill and intangible assets | $ | 24,474 | | | $ | (6,807) | | | $ | 17,667 | |
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 | |
Amortization expense related to intangible assets totaled $432,000 in 2020, $471,000 in 2019 and $470,000 in 2018 and $472,000 in 2017.2018. The estimated aggregate future amortization expense for intangible assets remaining as of December 31, 20192020 is as follows: |
| | | |
(in thousands) | |
2020 | $ | 432 |
|
2021 | 405 |
|
2022 | 405 |
|
2023 | 382 |
|
2024 | 268 |
|
Thereafter | 1,113 |
|
Total | $ | 3,005 |
|
| | | | | |
(in thousands) | |
2021 | $ | 405 | |
2022 | 405 | |
2023 | 382 | |
2024 | 268 | |
2025 | 268 | |
Thereafter | 845 | |
Total | $ | 2,573 | |
(9)(8) 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 |
|
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2020 | | 2019 |
Premises | $ | 32,231 | | | $ | 30,181 | |
Furniture and equipment | 41,627 | | | 42,176 | |
Total cost | 73,858 | | | 72,357 | |
Accumulated depreciation | (49,312) | | | (41,145) | |
Total premises and equipment, net | $ | 24,546 | | | $ | 31,212 | |
Depreciation expense for the above premises and equipment was approximately $9.5 million, $9.2 million and $9.0 million in 2020, 2019 and $6.9 million in 2019, 2018, and 2017, respectively.
(10)(9) Deposits
Deposits are summarized as follows:
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2020 | | 2019 |
Non-interest-bearing demand deposits | $ | 12,740,947 | | | $ | 9,438,459 | |
Interest-bearing deposits: | | | |
Transaction | 4,396,243 | | | 3,651,128 | |
Savings | 11,619,880 | | | 10,517,975 | |
Time | 2,239,519 | | | 2,871,031 | |
| | | |
Total interest-bearing deposits | 18,255,642 | | | 17,040,134 | |
Total deposits | $ | 30,996,589 | | | $ | 26,478,593 | |
|
| | | | | | | |
| 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, 2019:2020:
|
| | | |
(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 |
|
| | | | | |
(in thousands) | |
2021 | $ | 1,317,558 | |
2022 | 795,656 | |
2023 | 121,376 | |
2024 | 1,921 | |
2025 | 3,003 | |
2026 and after | 5 | |
Total | $ | 2,239,519 | |
At December 31, 20192020 and 2018,2019, interest-bearing time deposits of $250,000 or more were approximately $347.7$386.9 million and $270.2$347.7 million, respectively.
(11)(10) 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 |
|
| | | | | | | | | | | | | | | | | | | | |
(dollar amounts in thousands) | | Federal Funds Purchased | | Customer Repurchase Agreements | | FHLB Borrowings |
December 31, 2020 | | | | | | |
Amount outstanding at year-end | | $ | 107,600 | | | $ | 4,151 | | | $ | 3,000,000 | |
Interest rate at year-end | | 0.15 | % | | 0.35 | % | | 0.46 | % |
Average balance outstanding during the year | | $ | 207,121 | | | $ | 5,563 | | | $ | 2,902,732 | |
Weighted-average interest rate during the year | | 0.52 | % | | 0.47 | % | | 0.72 | % |
Maximum month-end outstanding during the year | | $ | 300,430 | | | $ | 8,314 | | | $ | 4,900,000 | |
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 | |
The following table summarizes our other borrowing capacities net of balances outstanding. As of December 31, 2019,2020, all are scheduled to mature within one year. | | | | | | | | | | | | | | | | | |
| December 31, |
(in thousands) | 2020 | | 2019 | | 2018 |
FHLB borrowing capacity relating to loans | $ | 7,653,317 | | | $ | 8,964,019 | | | $ | 4,568,842 | |
FHLB borrowing capacity relating to securities | 2,946,539 | | | 589 | | | 721 | |
Total FHLB borrowing capacity(1) | $ | 10,599,856 | | | $ | 8,964,608 | | | $ | 4,569,563 | |
Unused federal funds lines available from commercial banks | $ | 1,030,000 | | | $ | 1,432,000 | | | $ | 620,000 | |
Unused Federal Reserve borrowings capacity | $ | 2,179,000 | | | $ | 3,637,238 | | | $ | 4,933,965 | |
Unused revolving line of credit(2) | $ | 130,000 | | | $ | 130,000 | | | $ | 130,000 | |
|
| | | | | | | | | | | |
| 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 14, 2021. 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 2020, 2019, or 2018.
86
| |
(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)(11) 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, 2019,2020, 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 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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, subject to applicable limitations.
(13)(12) 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 |
|
| | | | | | | | | | | |
| Year Ended December 31, |
(in thousands) | 2020 | | 2019 |
Beginning balance of allowance for off-balance sheet credit losses | $ | 8,640 | | | $ | 11,434 | |
Impact of CECL adoption | 563 | | | — | |
Provision for off-balance sheet credit losses | 8,231 | | | (2,794) | |
Ending balance of allowance for off-balance sheet credit losses | $ | 17,434 | | | $ | 8,640 | |
| |
| | | |
Commitments to extend credit - period end balance | $ | 8,530,453 | | | $ | 8,066,655 | |
Standby letters of credit - period end balance | $ | 268,894 | | | $ | 261,405 | |
(14)(13) Regulatory Restrictions
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material 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 2.5% 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.
In February 2019, the federal bank regulatory agencies issued a final rule (the "2019 CECL Rule") that revised certain capital regulations to account for changes to credit loss accounting under GAAP. The 2019 CECL Rule included a transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of adopting the new accounting standard related to the measurement of current expected credit losses on their regulatory capital ratios (three-year transition option). In March 2020, the federal bank regulatory agencies issued an interim final rule that maintains the three-year transition option of the 2019 CECL Rule and also provides banking organizations that were required under GAAP to implement CECL before the end of 2020 the option to delay for two years an estimate of the effect of CECL on regulatory capital, relative to the incurred loss methodology's effect on regulatory capital, followed by a three-year transition period (five-year transition option). We adopted CECL on January 1, 2020 and have elected to utilize the five-year transition option.
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, 2019,2020, 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"adequately capitalized as of December 31, 20192020 and 2018.2019. 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.
88
The table below summarizes our actual and required capital ratios under the Basel III Capital Rules:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual | | 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 |
December 31, 2020 | | | | | | | | | |
CET1 | | | | | | | | | |
Company | | $ | 2,708,150 | | 9.35 | % | | $ | 2,026,400 | | 7.00 | % | | N/A | N/A |
Bank | | 2,744,211 | | 9.48 | % | | 2,025,417 | | 7.00 | % | | 1,880,745 | | 6.50 | % |
Total capital (to risk-weighted assets) | | | | | | | | | |
Company | | 3,498,737 | | 12.09 | % | | 3,039,600 | | 10.50 | % | | N/A | N/A |
Bank | | 3,375,983 | | 11.67 | % | | 3,038,126 | | 10.50 | % | | 2,893,453 | | 10.00 | % |
Tier 1 capital (to risk-weighted assets) | | | | | | | | | |
Company | | 2,968,150 | | 10.25 | % | | 2,460,628 | | 8.50 | % | | N/A | N/A |
Bank | | 2,904,211 | | 10.04 | % | | 2,459,435 | | 8.50 | % | | 2,314,763 | | 8.00 | % |
Tier 1 capital (to average assets)(1) | | | | | | | | | |
Company | | 2,968,150 | | 7.52 | % | | 1,578,651 | | 4.00 | % | | N/A | N/A |
Bank | | 2,904,211 | | 7.36 | % | | 1,578,207 | | 4.00 | % | | 1,972,758 | | 5.00 | % |
December 31, 2019 | | | | | | | | | |
CET1 | | | | | | | | | |
Company | | $ | 2,653,999 | | 8.88 | % | | $ | 2,091,591 | | 7.00 | % | | N/A | N/A |
Bank | | 2,676,513 | | 8.96 | % | | 2,090,870 | | 7.00 | % | | 1,941,522 | | 6.50 | % |
Total capital (to risk-weighted assets) | | | | | | | | | |
Company | | 3,398,345 | | 11.37 | % | | 3,137,926 | | 10.50 | % | | N/A | N/A |
Bank | | 3,262,144 | | 10.92 | % | | 3,136,305 | | 10.50 | % | | 2,986,957 | | 10.00 | % |
Tier 1 capital (to risk-weighted assets) | | | | | | | | | |
Company | | 2,912,529 | | 9.75 | % | | 2,540,226 | | 8.50 | % | | N/A | N/A |
Bank | | 2,835,043 | | 9.49 | % | | 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 | % | | N/A | N/A |
Bank | | 2,835,043 | | 8.20 | % | | 1,383,190 | | 4.00 | % | | 1,728,988 | | 5.00 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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.
| |
(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, 2019,2020, our mortgage finance loans were $8.2$9.1 billion compared to the average for the quarter ended December 31, 20192020 of $7.9$9.6 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 2020, 2019 2018 or 2017.2018.
On March 15, 2020, to encourage banks to lend all available funds during the COVID-19 pandemic, the Federal Reserve announced it had reduced the reserve requirement ratio to zero effective March 26, 2020 and continuing through December 31, 2020. The required reserve balances at the Federal Reserve at December 31, 2019 and 2018 werewas approximately $283.4 million and $157.7 million, respectively.
million.
(15)(14) Stock-Based Compensation and Employee Benefits
We have a qualified retirement plan with a salary deferral feature designed to qualify under Section 401 of the Internal Revenue Code (“the 401(k) Plan”). The 401(k) Plan permits our employees to defer a portion of their compensation. Matching contributions may be made in amounts and at times determined by the Company. We contributed approximately $10.3 million, $9.5 million, $9.6 million, and $8.4$9.6 million for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively. Employees are eligible to participate in the 401(k) Plan when they meet certain requirements concerning minimum age and period of credited service. All contributions to the 401(k) Plan are invested in accordance with participant elections among certain investment options.
We also offer a non-qualified deferred compensation plan for our executives and key members of management in order to assist us in attracting and retaining these individuals. Participants in the plan may elect to defer up to 75% of their annual salary and/or short-term incentive payout into deferral accounts that mirror the gains or losses of investments selected by the participants. The plan allows us to make discretionary contributions on behalf of a participant as well as matching contributions. We made matching contributions of $1.0 million in botheach of 2020, 2019 and 2018 and made discretionary contributions of $260,000 in 2017.2018. All participant contributions to the plan and any related earnings are immediately vested and may be withdrawn upon the participant's separation from service, death or disability or upon a date specified by the participant. Salary deferrals are recorded as salaries and employee benefits expense in the consolidated statements of income with an offsetting payable to participants in other liabilities on the consolidated balance sheets.
We have an Employee Stock Purchase Plan (“ESPP”). Employees are eligible for the ESPP when they meet certain requirements concerning period of credited service and minimum hours worked. Eligible employees may contribute a between 1% and 10% of eligible compensation up to the Section 423 of the Internal Revenue Code limit of $25,000. Employee contributions to the ESPP were temporarily suspended throughout 2020. On January 1, 2021, the suspension was removed and employee contributions commenced. In 2006, stockholders approved the ESPP, which allocated 400,000 shares for purchase. As of December 31, 2020, 2019 and 2018, 155,933, 155,933 and 2017, 155,933, 143,348 and 132,285 shares had been purchased on behalf of employees under the ESPP.
We have stock-based compensation plans under which equity-based compensation grants are made by the board of directors, or its designated committee. Grants are subject to vesting requirements. Under the plans, we may grant, among other things, non-qualified stock options, incentive stock options, restricted stock, restricted stock units (“RSUs”), stock appreciation rights (“SARs”), cash-settled performance units or any combination thereof to employees and non-employee directors. A total of 2,550,000 shares are authorized for grant under the plans. Total shares remaining available for grant under the plans at December 31, 20192020 were 1,772,070.1,203,294.
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, 2020 | | December 31, 2019 | | December 31, 2018 |
| SARs | | Weighted Average Exercise Price | | SARs | | Weighted Average Exercise Price | | SARs | | Weighted Average Exercise Price |
SARs outstanding at beginning of year | 21,200 | | | $ | 33.95 | | | 41,350 | | | $ | 29.13 | | | 74,363 | | | $ | 30.12 | |
| | | | | | | | | | | |
SARs exercised | (8,800) | | | 20.52 | | | (20,150) | | | 24.07 | | | (33,013) | | | 31.35 | |
| | | | | | | | | | | |
SARs outstanding at year-end | 12,400 | | | $ | 43.48 | | | 21,200 | | | $ | 33.95 | | | 41,350 | | | $ | 29.13 | |
SARs vested and exercisable at year-end | 12,400 | | | $ | 43.48 | | | 21,200 | | | $ | 33.95 | | | 39,750 | | | $ | 27.81 | |
Weighted average remaining contractual life of SARs vested (in years) | | | 2.26 | | | | 2.14 | | | | 2.33 |
Weighted average remaining contractual life of SARs outstanding (in years) | | | 2.26 | | | | 2.14 | | | | 2.44 |
Compensation expense | $ | 0 | | | | | $ | 6,000 | | | | | $ | 121,000 | | | |
Unrecognized compensation expense | $ | 0 | | | | | $ | 0 | | | | | $ | 6,000 | | | |
Weighted average period over which unrecognized compensation expense is expected to be recognized (in years) | | | 0.00 | | | | 0.00 | | | | 0.17 |
| | | | | | | | | | | |
Fair value of shares vested during the year | $ | 0 | | | | | $ | 37,000 | | | | | $ | 211,000 | | | |
Intrinsic value of SARs exercised | $ | 294,000 | | | | | $ | 724,000 | | | | | $ | 1,919,000 | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
| |
|
|
90
A summary of our RSU activity and related information is as follows. Grants of RSUs include time-based vesting conditions that generally vest ratably over a period of three to five years. Additionally, from time to time, grants of RSUs with both time-based and performance-based vesting conditions are made that generally vest at the end of a three or four year period. |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | December 31, 2018 | | December 31, 2017 |
| RSUs | | Weighted Average Grant Date Fair Value | | RSUs | | Weighted Average Grant Date Fair Value | | RSUs | | Weighted Average Grant Date Fair Value |
RSUs outstanding at beginning of year | 349,533 |
| | $ | 69.11 |
| | 423,732 |
| | $ | 60.01 |
| | 425,055 |
| | $ | 51.28 |
|
RSUs granted | 386,913 |
| | 59.28 |
| | 95,891 |
| | 88.07 |
| | 121,243 |
| | 80.40 |
|
RSUs vested | (140,666 | ) | | 59.97 |
| | (121,507 | ) | | 54.97 |
| | (102,057 | ) | | 48.93 |
|
RSUs forfeited | (37,468 | ) | | 62.73 |
| | (48,583 | ) | | 63.60 |
| | (20,509 | ) | | 54.75 |
|
RSUs outstanding at year-end | 558,312 |
| | $ | 64.95 |
| | 349,533 |
| | $ | 69.11 |
| | 423,732 |
| | $ | 60.01 |
|
Compensation expense | $ | 11,733,000 |
| |
| | $ | 8,803,000 |
| |
| | $ | 7,790,000 |
| |
|
Unrecognized compensation expense | $ | 25,305,000 |
| |
| | $ | 16,538,000 |
| |
| | $ | 18,730,000 |
| |
|
Weighted average period over which unrecognized compensation expense is expected to be recognized (in years) |
| | 3.09 |
| |
| | 2.90 |
| |
| | 3.15 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
| 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 | 558,312 | | | $ | 64.95 | | | 349,533 | | | $ | 69.11 | | | 423,732 | | | $ | 60.01 | |
RSUs granted | 631,092 | | | 39.37 | | | 386,913 | | | 59.28 | | | 95,891 | | | 88.07 | |
RSUs vested | (171,494) | | | 65.17 | | | (140,666) | | | 59.97 | | | (121,507) | | | 54.97 | |
RSUs forfeited | (62,316) | | | 56.92 | | | (37,468) | | | 62.73 | | | (48,583) | | | 63.60 | |
RSUs outstanding at year-end | 955,594 | | | $ | 48.76 | | | 558,312 | | | $ | 64.95 | | | 349,533 | | | $ | 69.11 | |
Compensation expense | $ | 15,655,000 | | | | | $ | 11,733,000 | | | | | $ | 8,803,000 | | | |
Unrecognized compensation expense | $ | 29,146,000 | | | | | $ | 25,305,000 | | | | | $ | 16,538,000 | | | |
Weighted average period over which unrecognized compensation expense is expected to be recognized (in years) | | | 2.83 | | | | 3.09 | | | | 2.90 |
New non-employee directors receive grants of restricted common stock as to which restrictions lapse ratably over a period of three years. Compensation expense for these grants was $26,000, $36,000 $62,000 and $61,000$62,000 for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively.
Total compensation cost for all share-based arrangements was $15.7 million, $11.8 million $9.0 million and $8.1$9.0 million for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively.
Cash-settled units totaling 163,85659,285 were outstanding at December 31, 2019,2020, 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. No2018. NaN grants were made in 2020 or 2019. Since these units have a cash payout feature, they are accounted for under the liability method with related expense based on the stock price at period end. Compensation cost for the cash-settled units was $1.8 million, $5.8 million $8.0 million and $13.9$8.0 million for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively.
(16)(15) Income Taxes
Income tax expense/(benefit) consists of the following: | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
(in thousands) | 2020 | | 2019 | | 2018 |
Current: | | | | | |
Federal | $ | 32,701 | | | $ | 69,427 | | | $ | 82,556 | |
State | 920 | | | 4,072 | | | 3,808 | |
Total | 33,621 | | | 73,499 | | | 86,364 | |
Deferred: | | | | | |
Federal | (7,964) | | | 10,796 | | | (6,400) | |
State | 0 | | | 0 | | | 0 | |
Total | (7,964) | | | 10,796 | | | (6,400) | |
Total expense: | | | | | |
Federal | 24,737 | | | 80,223 | | | 76,156 | |
State | 920 | | | 4,072 | | | 3,808 | |
Total | $ | 25,657 | | | $ | 84,295 | | | $ | 79,964 | |
|
| | | | | | | | | | | |
| 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 toat the U.S. federal statutory tax rate to our income tax expense and effective 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 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2020 | | 2019 | | 2018 |
| Amount | | Rate | | Amount | | Rate | | Amount | | Rate |
U.S. statutory rate | $ | 19,309 | | | 21 | % | | $ | 85,504 | | | 21 | % | | $ | 79,965 | | | 21 | % |
State taxes | 726 | | | 1 | % | | 3,217 | | | 1 | % | | 3,008 | | | 1 | % |
Tax-exempt income | (3,356) | | | (4) | % | | (5,127) | | | (1) | % | | (4,855) | | | (1) | % |
Tax credits | (1,216) | | | (1) | % | | (2,052) | | | (1) | % | | (2,421) | | | (1) | % |
Disallowed FDIC | 3,920 | | | 4 | % | | 2,468 | | | 1 | % | | 2,418 | | | 1 | % |
Disallowed compensation | 3,098 | | | 3 | % | | 628 | | | 0 | % | | 400 | | | 0 | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Other | 3,176 | | | 4 | % | | (343) | | | 0 | % | | 1,449 | | | 0 | % |
Effective tax rate | $ | 25,657 | | | 28 | % | | $ | 84,295 | | | 21 | % | | $ | 79,964 | | | 21 | % |
Our 2020 effective tax rate was significantly impacted by the lower level of income before income taxes experienced in 2020. 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).
At December 31, 2020, 2019 and 2018, we had unrecognized tax benefits of $1.1 million, $1.3 million and $1.6 million, respectively.
We are no longer subject to U.S. federal income tax examinations for years before 20162017 or state and local income tax examinations for years before 2015.
2016.
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. In connection with our adoption of CECL, a $2.0 million increase to the deferred tax asset associated with our allowance for credit losses was recorded on January 1, 2020. 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 |
|
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2020 | | 2019 |
Deferred tax assets: | | | |
Allowance for credit losses | $ | 59,279 | | | $ | 44,383 | |
Operating lease liabilities | 17,983 | | | 20,894 | |
Loan origination fees | 11,181 | | | 10,638 | |
Stock compensation | 3,913 | | | 3,605 | |
| | | |
| | | |
Non-accrual interest | 1,245 | | | 2,351 | |
Non-qualified deferred compensation | 5,795 | | | 4,027 | |
| | | |
| | | |
| | | |
Other | 3,136 | | | 2,544 | |
Total deferred tax assets | 102,532 | | | 88,442 | |
Deferred tax liabilities: | | | |
Loan origination costs | (2,997) | | | (2,686) | |
Leases | (8,603) | | | (7,912) | |
Operating lease ROU assets | (16,617) | | | (19,644) | |
MSRs | (22,566) | | | (13,818) | |
Depreciation | (14,968) | | | (17,602) | |
Unrealized gain on securities | (4,193) | | | (2,379) | |
Other | (3,381) | | | (3,337) | |
Total deferred tax liabilities | (73,325) | | | (67,378) | |
Net deferred tax asset | $ | 29,207 | | | $ | 21,064 | |
(17)(16) 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 levelsSee Note 1 - Operations and Summary of inputs that may be used to measureSignificant Accounting Policies for information regarding the fair value as provided below.hierarchy and a description of the methods and significant assumptions used by the Company is estimating its fair value disclosures for financial statements.
| |
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, 2020 | | | | | |
Available-for-sale debt securities:(1) | | | | | |
U.S. government agency securities | $ | 0 | | | $ | 123,589 | | | $ | 0 | |
Residential mortgage-backed securities | 0 | | | 2,828,956 | | | 0 | |
| | | | | |
Tax-exempt asset-backed securities | 0 | | | 0 | | | 199,176 | |
CRT Securities | 0 | | | 0 | | | 11,417 | |
Equity securities(1)(2) | 26,593 | | | 7,239 | | | 0 | |
Loans held for sale(3) | 0 | | | 232,147 | | | 6,933 | |
Loans held for investment(4) | 0 | | | 0 | | | 21,209 | |
| | | | | |
Derivative assets(5) | 0 | | | 102,720 | | | 0 | |
Derivative liabilities(5) | 0 | | | 99,255 | | | 0 | |
Non-qualified deferred compensation plan liabilities(6) | 26,593 | | | 0 | | | 0 | |
December 31, 2019 | | | | | |
Available-for-sale debt securities:(1) | | | | | |
Residential mortgage-backed securities | $ | 0 | | | $ | 5,266 | | | $ | 0 | |
| | | | | |
Tax-exempt asset-backed securities | 0 | | | 0 | | | 197,027 | |
CRT Securities | 0 | | | 0 | | | 11,964 | |
Equity securities(1)(2) | 18,484 | | | 7,130 | | | 0 | |
Loans held for sale(3) | 0 | | | 2,564,281 | | | 7,043 | |
Loans held for investment(4) | 0 | | | 0 | | | 109,585 | |
Derivative assets(5) | 0 | | | 48,684 | | | 0 | |
Derivative liabilities(5) | 0 | | | 51,310 | | | 0 | |
Non-qualified deferred compensation plan liabilities(6) | 18,484 | | | 0 | | | 0 | |
|
| | | | | | | | | | | |
| 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. | |
(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. |
(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 certain collateral-dependent loans held for investment for which a specific allocation of the allowance for credit losses is based upon the fair value of the loan’s underlying collateral. These loans held for investment are measured on a nonrecurring basis, generally annually or more often as warranted by market and economic conditions.
(5)Derivative assets and liabilities are measured at fair value on a recurring basis, generally quarterly.
(6)Non-qualified deferred compensation plan liabilities represent the fair value of the obligation to the employee, which generally corresponds 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, 2020 | | | | | | | | | | | |
Available-for-sale debt securities:(1) | | | | | | | | | | | |
Tax-exempt asset-backed securities | $ | 197,027 | | | $ | 8,470 | | | $ | (6,755) | | | $ | 0 | | | $ | 434 | | | $ | 199,176 | |
CRT Securities | $ | 11,964 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (547) | | | $ | 11,417 | |
Loans held for sale(2) | $ | 7,043 | | | $ | 1,472 | | | $ | (2,077) | | | $ | 248 | | | $ | 247 | | | $ | 6,933 | |
Year ended December 31, 2019 | | | | | | | | | | | |
Available-for-sale debt securities:(1) | | | | | | | | | | | |
Tax-exempt asset-backed securities | $ | 95,804 | | | $ | 92,010 | | | $ | (4,302) | | | $ | 0 | | | $ | 13,515 | | | $ | 197,027 | |
CRT Securities | $ | 0 | | | $ | 15,044 | | | $ | 0 | | | $ | (331) | | | $ | (2,749) | | | $ | 11,964 | |
Loans held for sale(2) | $ | 16,415 | | | $ | 321 | | | $ | (10,690) | | | $ | 190 | | | $ | 807 | | | $ | 7,043 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 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 and relate to assets that remain outstanding at period end. Realized gains/(losses) are recorded in other non-interest income. | |
(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. |
(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, 2019,2020, the discount rates utilized ranged from 2.44% to 2.53% and the weighted-average life ranged from 5.51 years to 5.54 years. On a combined amortized cost weighted-average basis a discount rate of 2.99%2.49% and a weighted-average life of 7.05.53 years were utilized to determine the fair value of these securities compared to 4.21% and 9.2 years, respectively, at December 31, 2018.2020. At December 31, 2019, the combined weighted-average discount rate and weighted-average life utilized were 2.99% and 7.00 years, respectively.
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, 2019,2020, the discount rates utilized ranged from 2.75% to 7.59% and the weighted-average life ranged from 5.97 years to 10.54 years. On a combined amortized cost weighted-average basis a discount rate of 4.54%4.36% and a weighted-average life of 9.37.49 years were utilized to determine the fair value of these securities.securities at December 31, 2020. At December 31, 2019, the combined weighted-average discount rate and weighted-average life utilized were 4.54% and 9.33 years, respectively.
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, 2019,2020, the fair value of these loans was calculated using a weighted-average discounted price of 94.1%97.2%, compared to 92.9%94.1% at December 31, 2018.2019.
Loans held for investment
Certain impairedcollateral-dependent loans held for investment are reported at fair value through awhen, based upon an individual evaluation, the specific valuation allowance allocation of the allowance for loancredit losses that is deducted from the loan's amortized cost is based upon the fair value of the loan's underlying collateral. The $21.2 million fair value of loans held for investment at December 31, 2020 reported above includes loans held for investment with a carrying value of $25.3 million that were reduced by specific allowance allocations totaling $4.1 million based on collateral valuations utilizing Level 3 inputs. 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
(in thousands) | Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
Financial assets: | | | | | | | |
Level 1 inputs: | | | | | | | |
Cash and cash equivalents | $ | 9,206,380 | | | $ | 9,206,380 | | | $ | 4,425,583 | | | $ | 4,425,583 | |
Investment securities | 26,593 | | | 26,593 | | | 18,484 | | | 18,484 | |
Level 2 inputs: | | | | | | | |
Investment securities | 2,959,784 | | | 2,959,784 | | | 12,396 | | | 12,396 | |
Loans held for sale | 232,147 | | | 232,147 | | | 2,570,091 | | | 2,570,091 | |
Derivative assets | 102,720 | | | 102,720 | | | 48,684 | | | 48,684 | |
Level 3 inputs: | | | | | | | |
Investment securities | 210,593 | | | 210,593 | | | 208,991 | | | 208,991 | |
Loans held for sale | 6,933 | | | 6,933 | | | 7,043 | | | 7,043 | |
Loans held for investment, net | 24,176,245 | | | 24,233,185 | | | 24,451,215 | | | 24,478,586 | |
Financial liabilities: | | | | | | | |
Level 2 inputs: | | | | | | | |
Federal funds purchased | 107,600 | | | 107,600 | | | 132,270 | | | 132,270 | |
Customer repurchase agreements | 4,151 | | | 4,151 | | | 9,496 | | | 9,496 | |
Other borrowings | 3,000,000 | | | 3,000,000 | | | 2,400,000 | | | 2,400,000 | |
Subordinated notes | 282,490 | | | 291,704 | | | 282,129 | | | 292,302 | |
Trust preferred subordinated debentures | 113,406 | | | 113,406 | | | 113,406 | | | 113,406 | |
Derivative liabilities | 99,255 | | | 99,255 | | | 51,310 | | | 51,310 | |
Level 3 inputs: | | | | | | | |
Deposits | 30,996,589 | | | 30,997,980 | | | 26,478,593 | | | 26,486,090 | |
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)(17) Derivative Financial Instruments
The notional amounts and estimated fair values of derivative positions outstanding are presented in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| | | 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 | $ | 1,922,956 | | | $ | 71 | | $ | 96,246 | | | $ | 1,548,234 | | | $ | 182 | | $ | 46,518 | |
Commercial loan/lease interest rate caps | 565,634 | | | 34 | | 0 | | | 639,163 | | | 32 | | 0 | |
Foreign currency forward contracts | 6,667 | | | 214 | | 78 | | | 2,219 | | | 169 | | 0 | |
Customer counterparties: | | | | | | | | | |
Commercial loan/lease interest rate swaps | 1,922,956 | | | 96,246 | | 71 | | | 1,548,234 | | | 46,518 | | 182 | |
Commercial loan/lease interest rate caps | 565,634 | | | 0 | | 34 | | | 639,163 | | | 0 | | 32 | |
Foreign currency forward contracts | 6,667 | | | 78 | | 214 | | | 2,219 | | | 0 | | 169 | |
Economic hedging derivatives to hedge: | | | | | | | | | |
Residential MSRs: | | | | | | | | | |
Interest rate swap futures | 320,000 | | | 474 | | 0 | | | 0 | | | 0 | | 0 | |
Forward sale commitments | 155,000 | | | 551 | | 0 | | | 0 | | | 0 | | 0 | |
Loans held for sale: | | | | | | | | | |
Loan purchase commitments | 332,145 | | | 5,123 | | 8 | | | 214,012 | | | 1,965 | | 4 | |
Forward sale commitments | 485,326 | | | 0 | | 2,675 | | | 2,654,653 | | | 0 | | 4,587 | |
Gross derivatives | | | 102,791 | | 99,326 | | | | | 48,866 | | 51,492 | |
Offsetting derivative assets/liabilities | | | (71) | | (71) | | | | | (182) | | (182) | |
Net derivatives included in the consolidated balance sheets | | | $ | 102,720 | | $ | 99,255 | | | | | $ | 48,684 | | $ | 51,310 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| 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 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 Weighted-Average Interest Rate | | December 31, 2019 Weighted-Average Interest Rate |
| Received | | Paid | | Received | | Paid |
Non-hedging interest rate swaps | 3.14 | % | | 1.38 | % | | 3.94 | % | | 3.26 | % |
The weighted-average strike rate for outstanding interest rate caps was 3.41% at December 31, 2020 and 3.29% at December 31, 2019 and 3.20% at December 31, 2018.2019.
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 $102.7 million at December 31, 20192020 and approximately $18.7$48.7 million at December 31, 2018.2019. 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, 2020, we had $108.3 million in cash collateral pledged for these derivatives, of which $104.4 million was included in interest-bearing deposits in other banks and $3.9 million was included in accrued interest receivable and other assets. 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 129 risk participation agreements where we are a participant bank with a notional amount of $146.7$119.5 million at December 31, 2019,2020, compared to 1312 risk participation agreements having a notional amount of $149.1$146.7 million at December 31, 2018.2019. The maximum estimated exposure to these agreements, assuming 100% default by all obligors, was approximately $6.0 million at December 31, 2020 and $3.6 million at December 31, 2019 and $1.5 million at December 31, 2018.2019. The fair value of these exposures was insignificant to the consolidated financial statements at both December 31, 20192020 and December 31, 2018.2019. 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 1216 risk participation agreements where we are the lead bank having a notional amount of $145.9$165.9 million at December 31, 2019,2020, compared to 912 agreements having a notional amount of $114.8$145.9 million at December 31, 2018.2019.
(19)(18) Related Party Transactions
During 20192020 and 2018,2019, 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$11.6 million in deposits from related parties, including directors, stockholders and their affiliates at December 31, 20192020 and $13.5$13.0 million at December 31, 2018.2019.
(19) 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 |
|
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2020 | | 2019 |
Assets | | | |
Cash and cash equivalents | $ | 57,472 | | | $ | 71,462 | |
Loans held for investment (net of unearned income) | 7,500 | | | 10,500 | |
Investment in subsidiaries | 2,930,843 | | | 2,847,393 | |
Other assets | 89,551 | | | 88,639 | |
Total assets | $ | 3,085,366 | | | $ | 3,017,994 | |
Liabilities and Stockholders’ Equity | | | |
Other liabilities | $ | 1,320 | | | $ | 1,768 | |
| | | |
Subordinated notes | 108,816 | | | 108,715 | |
Trust preferred subordinated debentures | 113,406 | | | 113,406 | |
Total liabilities | 223,542 | | | 223,889 | |
Preferred stock | 150,000 | | | 150,000 | |
Common stock | 504 | | | 503 | |
Additional paid-in capital | 1,002,050 | | | 988,357 | |
Retained earnings | 1,693,504 | | | 1,646,303 | |
Treasury stock | (8) | | | (8) | |
Accumulated other comprehensive income | 15,774 | | | 8,950 | |
Total stockholders’ equity | 2,861,824 | | | 2,794,105 | |
Total liabilities and stockholders’ equity | $ | 3,085,366 | | | $ | 3,017,994 | |
Statement of EarningsIncome
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
(in thousands) | 2020 | | 2019 | | 2018 |
Interest on loans | $ | 3,402 | | | $ | 3,401 | | | $ | 3,398 | |
Dividend income | 10,400 | | | 10,400 | | | 10,400 | |
Other income | 96 | | | 151 | | | 142 | |
Total income | 13,898 | | | 13,952 | | | 13,940 | |
Other non-interest income | 3 | | | 17 | | | 7 | |
Interest expense | 10,515 | | | 12,342 | | | 12,031 | |
Salaries and employee benefits | 725 | | | 607 | | | 588 | |
Legal and professional | 3,238 | | | 3,093 | | | 2,020 | |
Other non-interest expense | 4,553 | | | 1,889 | | | 2,013 | |
Total expense | 19,031 | | | 17,931 | | | 16,652 | |
Income (loss) before income taxes and equity in undistributed income of subsidiary | (5,130) | | | (3,962) | | | (2,705) | |
Income tax expense (benefit) | (1,135) | | | (861) | | | (587) | |
Income (loss) before equity in undistributed income of subsidiary | (3,995) | | | (3,101) | | | (2,118) | |
Equity in undistributed income of subsidiary | 68,100 | | | 312,932 | | | 293,321 | |
Net income | 64,105 | | | 309,831 | | | 291,203 | |
Preferred stock dividends | 9,750 | | | 9,750 | | | 9,750 | |
Net income available to common stockholders | $ | 54,355 | | | $ | 300,081 | | | $ | 281,453 | |
|
| | | | | | | | | | | |
| 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) | 2020 | | 2019 | | 2018 |
Operating Activities | | | | | |
Net income | $ | 64,105 | | | $ | 309,831 | | | $ | 291,203 | |
Adjustments to reconcile net income to net cash used in operating activities: | | | | | |
Equity in undistributed income of subsidiary | (68,100) | | | (312,932) | | | (293,321) | |
Amortization | 101 | | | 101 | | | 101 | |
Increase in other assets | (912) | | | (1,187) | | | (1,152) | |
| | | | | |
Increase (decrease) in other liabilities | (448) | | | 297 | | | 227 | |
Net cash used in operating activities | (5,254) | | | (3,890) | | | (2,942) | |
Investing Activities | | | | | |
Net (increase)/decrease in loans held for investment | 3,000 | | | (3,000) | | | 0 | |
Investments in and advances to subsidiaries | 0 | | | 0 | | | (40,000) | |
Net cash provided by/(used in) investing activities | 3,000 | | | (3,000) | | | (40,000) | |
Financing Activities | | | | | |
Proceeds from sale of stock related to stock-based awards | (1,986) | | | (1,459) | | | (2,382) | |
| | | | | |
| | | | | |
Preferred dividends paid | (9,750) | | | (9,750) | | | (9,750) | |
| | | | | |
| | | | | |
| | | | | |
Net cash used in financing activities | (11,736) | | | (11,209) | | | (12,132) | |
Net decrease in cash and cash equivalents | (13,990) | | | (18,099) | | | (55,074) | |
Cash and cash equivalents at beginning of year | 71,462 | | | 89,561 | | | 144,635 | |
Cash and cash equivalents at end of year | $ | 57,472 | | | $ | 71,462 | | | $ | 89,561 | |
|
| | | | | | | | | | | |
| 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)(20) Quarterly Financial Data (unaudited)
The tables below summarize our quarterly financial information:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2020 Selected Quarterly Financial Data |
(in thousands, except per share data) | Fourth | | Third | | Second | | First |
Interest income | $ | 255,163 | | | $ | 243,731 | | | $ | 252,010 | | | $ | 306,008 | |
Interest expense | 32,153 | | | 36,162 | | | 42,082 | | | 77,689 | |
Net interest income | 223,010 | | | 207,569 | | | 209,928 | | | 228,319 | |
Provision for credit losses | 32,000 | | | 30,000 | | | 100,000 | | | 96,000 | |
Net interest income after provision for credit losses | 191,010 | | | 177,569 | | | 109,928 | | | 132,319 | |
Non-interest income | 42,886 | | | 60,348 | | | 70,502 | | | 11,780 | |
Non-interest expense | 150,886 | | | 165,741 | | | 222,352 | | | 165,417 | |
Income/(loss) before income taxes | 83,010 | | | 72,176 | | | (41,922) | | | (21,318) | |
Income tax expense/(benefit) | 22,834 | | | 15,060 | | | (7,606) | | | (4,631) | |
Net income/(loss) | 60,176 | | | 57,116 | | | (34,316) | | | (16,687) | |
Preferred stock dividends | 2,437 | | | 2,438 | | | 2,437 | | | 2,438 | |
Net income/(loss) available to common stockholders | $ | 57,739 | | | $ | 54,678 | | | $ | (36,753) | | | $ | (19,125) | |
Basic earnings/(loss) per share: | $ | 1.14 | | | $ | 1.08 | | | $ | (0.73) | | | $ | (0.38) | |
Diluted earnings/(loss) per share: | $ | 1.14 | | | $ | 1.08 | | | $ | (0.73) | | | $ | (0.38) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | 168,187 | | | 149,429 | | | 141,718 | | | 141,516 | |
Income before income taxes | 80,959 | | | 112,040 | | | 99,199 | | | 104,112 | |
Income tax expense | 16,539 | | | 23,958 | | | 21,387 | | | 22,411 | |
Net income | 64,420 | | | 88,082 | | | 77,812 | | | 81,701 | |
Preferred stock dividends | 2,437 | | | 2,438 | | | 2,437 | | | 2,438 | |
Net income available to common stockholders | $ | 61,983 | | | $ | 85,644 | | | $ | 75,375 | | | $ | 79,263 | |
Basic earnings per share: | $ | 1.23 | | | $ | 1.70 | | | $ | 1.50 | | | $ | 1.58 | |
Diluted earnings per share: | $ | 1.23 | | | $ | 1.70 | | | $ | 1.50 | | | $ | 1.58 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(21) New Accounting Standards
|
| | | | | | | | | | | | | | | |
| 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 |
|
ASU 2019-12 "Income Taxes (Topic 740)" ("ASU 2019-12") simplifies the accounting for income taxes by removing certain exceptions and improves the consistent application of GAAP by clarifying and amending other existing guidance. ASU 2019-012 will be effective for us on January 1, 2021 and is not expected to have any material impact on our consolidated financial statements.ASU 2020-01 "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)" ("ASU 2020-01") clarifies the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. ASU 2020-01 will be effective for us on January 1, 2021 and is not expected to have any material impact on our consolidated financial statements.
ASU 2020-02 "Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842)" ("ASU 2020-02") incorporates SEC SAB 119 (updated from SAB 102) into the Accounting Standards Codification (the "Codification") by aligning SEC recommended policies and procedures with ASC 326. ASU 2020-02 was effective on January 1, 2020 and has not had a significant impact on our documentation requirements.
|
| | | | | | | | | | | | | | | |
| 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 |
|
99
| |
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES |
ASU 2020-03 "Codification Improvements to Financial Instruments" ("ASU 2020-03") revised a wide variety of topics in the Codification with the intent to make the Codification easier to understand and apply by eliminating inconsistencies and providing clarifications. ASU 2020-03 was effective immediately upon its release in March 2020 and did not have a material impact on our consolidated financial statements.
ASU 2020-04, "Reference Rate Reform (Topic 848)" ("ASU 2020-04") provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. We anticipate this ASU will simplify any modifications we execute between the selected start date (yet to be determined) and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than extinguishment of the old contract resulting in writing off unamortized fees/costs. We are evaluating the impacts of this ASU and have not yet determined whether this ASU will have material effects on our business operations and consolidated financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
| |
ITEM 9A. | CONTROLS AND PROCEDURES |
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.reporting.
Management’s Report on Internal Control over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles.
As of December 31, 2019,2020, 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, 2019.2020.
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 attestationaudit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019.2020. The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019,2020, is included in this Item under the heading “Report of Independent Registered Public Accounting Firm.”
101
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
To the ShareholdersStockholders 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, 2019,2020, 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, 2019,2020, 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, 20192020 and 2018,2019, the related consolidated statements of income and other comprehensive income, shareholders’stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019,2020, and the related notes and our report dated February 12, 20209, 2021 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
9, 2021
ITEM 9B. OTHER INFORMATION
| |
ITEM 9B. | OTHER INFORMATION |
None.
| |
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The informationITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by this item relatingis set forth in our definitive proxy materials regarding our annual meeting of stockholders 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 compliancebe held April 20, 2021, which proxy materials will be included in an amendment to this Annual Report on Form 10-K/A filed within 120 days afterwith the end of our 2019 fiscal year.SEC no later than March 11, 2021.
| |
ITEM 11. | EXECUTIVE COMPENSATION |
The informationITEM 11. EXECUTIVE COMPENSATION
Information required by this item relatingis set forth in our definitive proxy materials regarding our annual meeting of stockholders to compensation of our directors and executive officersbe held April 20, 2021, which proxy materials will be included in an amendment to this Annual Report on Form 10-K/A filed within 120 days afterwith the end of our 2019 fiscal year.SEC no later than March 11, 2021.
| |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The informationITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information required by this item relatingis set forth in our definitive proxy materials regarding our annual meeting of stockholders to security ownership of certain beneficial owners and management and securities authorized for issuance under equity compensation plansbe held April 20, 2021, which proxy materials will be included in an amendment to this Annual Report on Form 10-K/A filed within 120 days afterwith the end of our 2019 fiscal year.SEC no later than March 11, 2021.
| |
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The informationITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information required by this item relatingis set forth in our definitive proxy materials regarding our annual meeting of stockholders to security ownership of certain relationships and related transactions and director independencebe held April 20, 2021, which proxy materials will be included in an amendment to this Annual Report on Form 10-K/A filed within 120 days afterwith the end of our 2019 fiscal year.SEC no later than March 11, 2021.
| |
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The informationITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this item relatingis set forth in our definitive proxy materials regarding our annual meeting of stockholders to principal accountant fees and servicesbe held April 20, 2021, which proxy materials will be included in an amendment to this Annual Report on Form 10-K/A filed within 120 days afterwith the end of our 2019 fiscal year.SEC no later than March 11, 2021.
| |
ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
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
|
| | | | |
2.1 | |
3.12.2 | |
3.1 | |
3.2 | |
3.3 | |
3.4 | |
3.5 | |
3.6 | |
3.7 | |
3.8 | |
4.1 | |
4.2 | |
4.3 | |
4.4 | |
4.5 | |
4.6 | |
4.7 | |
4.8 | |
4.9 | |
4.14.10 | |
4.11 | |
|
| | | | |
4.14 | |
4.15 | |
4.16 | |
4.17 | |
4.18 | |
4.19 | |
4.20 | |
4.21 | |
4.22 | |
4.23 | |
10.1 | |
10.2 | |
10.3 | |
10.4 | |
10.310.5 | |
10.410.6 | |
10.510.7 | |
| | | | | |
10.610.8 | |
10.710.9 | |
10.8 | |
10.910.10 | |
10.11 | |
10.1010.12 | |
10.1110.13 | |
10.1210.14 | |
|
| | | | |
10.1310.15 |
|
10.1410.16 |
|
10.1510.17 |
|
10.1610.18 |
|
10.1710.19 |
|
10.1810.20 | |
10.21 | |
|
| | | | |
21 | |
23.1 | |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
101.INS | XBRL Instance Document* |
101.SCH | XBRL Taxonomy Extension Schema Document* |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document* |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document* |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document* |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document* |
| |
+ | * Filed herewith ** Furnished herewith + Management contract or compensatory plan arrangement |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | | | | | | | | | | | | | | |
Date: | February 12, 20209, 2021 | | TEXAS CAPITAL BANCSHARES, INC. |
| | | |
| | | By: | | /S/ ROB C. KEITH CARGILLHOLMES |
| | | | | Rob C. Keith Cargill Holmes President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | |
Date: | February 9, 2021 | | /S/ LARRY L. HELM |
| | | Larry L. Helm Chairman of the Board and Director |
| | | |
Date: | February 9, 2021 | | /S/ JULIE L. ANDERSON |
| | | Julie L. Anderson Chief Financial Officer (principal financial officer) |
| | | |
Date: | February 9, 2021 | | /S/ ELLEN DETRICH |
| | | Ellen Detrich Controller and Chief Accounting Officer (principal accounting officer) |
| | | |
Date: | February 9, 2021 | | /S/ JONATHAN E. BALIFF |
| | | Jonathan E. Baliff Director |
| | | |
Date: | February 9, 2021 | | /S/ JAMES H. BROWNING |
| | | James H. Browning Director |
| | | |
Date: | February 9, 2021 | | /S/ DAVID S. HUNTLEY |
| | | David S. Huntley Director |
| | | |
Date: | February 9, 2021 | | /S/ CHARLES S. HYLE |
| | | Charles S. Hyle Director |
| | | |
Date: | February 9, 2021 | | /S/ ELYSIA H. RAGUSA |
| | | Elysia H. Ragusa Director |
| | | |
Date: | February 9, 2021 | | /S/ STEVEN P. ROSENBERG |
| | | Steven P. Rosenberg Director |
| | | |
Date: | February 9, 2021 | | /S/ ROBERT W. STALLINGS |
| | | Robert W. Stallings Director |
| | | |
Date: | February 9, 2021 | | /S/ DALE W. TREMBLAY |
| | | Dale W. Tremblay Director |
| | | |
| | | |
Date: | February 12, 2020 | | /S/ LARRY L. HELM |
| | | Larry L. Helm
Chairman of the Board and Director
|
| | | |
Date: | February 12, 2020 | | /S/ JULIE ANDERSON |
| | | Julie Anderson
Chief Financial Officer
(principal financial officer)
|
| | | |
Date: | February 12, 2020 | | /S/ ELLEN DETRICH |
| | | Ellen Detrich
Controller
(principal accounting officer)
|
| | | |
Date: | February 12, 2020 | | /S/ JONATHAN E. BALIFF |
| | | Jonathan E. Baliff Director |
| | | |
Date: | February 12, 2020 | | /S/ JAMES H. BROWNING |
| | | James H. Browning
Director
|
| | | |
Date: | February 12, 2020 | | /S/ DAVID S. HUNTLEY |
| | | David S. Huntley Director |
| | | |
Date: | February 12, 2020 | | /S/ CHARLES S. HYLE |
| | | Charles S. Hyle
Director
|
| | | |
Date: | February 12, 2020 | | /S/ ELYSIA H. RAGUSA |
| | | Elysia H. Ragusa Director |
| | | |
Date: | February 12, 2020 | | /S/ STEVEN P. ROSENBERG |
| | | Steven P. Rosenberg Director |
| | | |
Date: | February 12, 2020 | | /S/ ROBERT W. STALLINGS |
| | | Robert W. Stallings Director |
| | | |
Date: | February 12, 2020 | | /S/ DALE W. TREMBLAY |
| | | Dale W. Tremblay
Director
|
| | | |
Date: | February 12, 2020 | | /S/ IAN J. TURPIN |
| | | Ian J. Turpin
Director
|
| | | |
Date: | February 12, 2020 | | /S/ PATRICIA A. WATSON |
| | | Patricia A. Watson Director |