10-K
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the fiscal year ended December 31, 2015
¨
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from              to             
Commission file number 001-34657
TEXAS CAPITAL BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
75-2679109
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
2000 McKinney Avenue, Suite 700,
Dallas, Texas, U.S.A.
 
75201
(Address of principal executive officers)
 
(Zip Code)
214/932-6600
(Registrant’s telephone number, including area code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered under Section 12(b) of the Exchange Act:
Common stock, par value $0.01 per share
(Title of class)
6.50% Non-Cumulative Perpetual Preferred Stock Series A, par value $0.01 per share
(Title of class)
Warrants to Purchase Common Stock (expiring January 16, 2019), par value $0.01 per share
(Title of class)
The Nasdaq Stock Market LLC
(Name of Exchange on Which Registered)
Securities registered under Section 12(g) of the Exchange Act: NONE
Indicate by check mark if the issuer is a well-known seasoned issuer pursuant to Section 13 or Section 15(d) of the Securities Act.    Yes  ý        No  ¨
Indicate by check mark if the issuer is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act.    Yes  ¨        No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ý        No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý        ¨  No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer x
 
Accelerated Filer  ¨
 
Non-Accelerated Filer  ¨
  
Non-Accelerated Filer  ¨
 
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨        No  ý
As of June 30, 2015, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the shares of common stock held by non-affiliates, based on the closing price per share of the registrant’s common stock as reported on The Nasdaq Global Select Market, was approximately $2,817,236,000. There were 45,885,829 shares of the registrant’s common stock outstanding on February 16, 2016.
Documents Incorporated by Reference
Portions of the registrant’s Proxy Statement relating to the 2016 Annual Meeting of Stockholders, which will be filed no later than April 7, 2016, are incorporated by reference into Part III of this Form 10-K.


Table of Contents

TABLE OF CONTENTS
 
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
PART IV
Item 15.


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Table of Contents

ITEM 1.
BUSINESS
Background
The disclosures set forth in this item are qualified by Item 1A. Risk Factors and the section captioned “Forward-Looking Statements” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and other cautionary statements set forth elsewhere in this report.
Texas Capital Bancshares, Inc. (“we”, “us” or the “Company”), a Delaware corporation organized in 1996, is the parent of Texas Capital Bank, National Association (the “Bank”). The Company is a registered bank holding company and a financial holding company.
The Bank is headquartered in Dallas, with primary banking offices in Austin, Dallas, Fort Worth, Houston and San Antonio, the five largest metropolitan areas of Texas. All of our business activities are conducted through the Bank. We have focused on organic growth, maintenance of credit quality and recruiting and retaining experienced bankers with strong personal and professional relationships in their communities.
We serve the needs of commercial businesses and successful professionals and entrepreneurs located in Texas as well as operate several lines of business serving a regional or national clientele of commercial borrowers. We are primarily a secured lender, with a majority of our loans being made to businesses headquartered or with operations in Texas. At the same time our national lines of business continue to provide specialized lending products to businesses throughout the United States. We have benefitted from the success of our business model since inception, producing strong loan growth and favorable loss experience amidst a challenging environment for banking nationally.
Growth History
We have grown substantially in both size and profitability since our formation. The table below sets forth data regarding the growth of key areas of our business from 2011 through 2015 (in thousands):
 
 
December 31,
  
2015
 
2014
 
2013
 
2012
 
2011
Loans held for sale
$
86,075

 
$

 
$

 
$

 
$

Loans held for investment, mortgage finance
4,966,276

 
4,102,125

 
2,784,265

 
3,175,272

 
2,080,081

Loans held for investment, net
11,745,674

 
10,154,887

 
8,486,603

 
6,785,837

 
5,572,764

Assets
18,909,139

 
15,905,713

 
11,720,064

 
10,540,844

 
8,137,618

Demand deposits
6,386,911

 
5,011,619

 
3,347,567

 
2,535,375

 
1,751,944

Total deposits
15,084,619

 
12,673,300

 
9,257,379

 
7,440,804

 
5,556,257

Stockholders’ equity
1,623,533

 
1,484,190

 
1,096,350

 
836,242

 
616,331

The following table provides information about the growth of our loans held for investment ("LHI") portfolio by type of loan from 2011 through 2015 (in thousands):
 
 
December 31,
  
2015
 
2014
 
2013
 
2012
 
2011
Commercial
$
6,672,631

 
$
5,869,219

 
$
5,020,565

 
$
4,106,419

 
$
3,275,150

Total real estate
4,990,914

 
4,223,532

 
3,409,427

 
2,630,390

 
2,241,670

Construction
1,851,717

 
1,416,405

 
1,262,905

 
737,637

 
422,026

Real estate term
3,139,197

 
2,807,127

 
2,146,522

 
1,892,753

 
1,819,644

Mortgage finance
4,966,276

 
4,102,125

 
2,784,265

 
3,175,272

 
2,080,081

Equipment leases
113,996

 
99,495

 
93,160

 
69,470

 
61,792

Consumer
25,323

 
19,699

 
15,350

 
19,493

 
24,822


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The Texas Market
The Texas market for banking services is highly competitive. Texas’ largest banking organizations are headquartered outside of Texas and are controlled by out-of-state organizations. We also compete with other providers of financial services, such as savings and loan associations, credit unions, consumer finance companies, securities firms, insurance companies, commercial finance and leasing companies, full service brokerage firms and discount brokerage firms. We believe that many middle market companies and successful professionals and entrepreneurs are interested in banking with a company headquartered in, and with decision-making authority based in, Texas and with established Texas bankers who have the expertise to act as trusted advisors to customers with regard to their banking needs.
Our banking centers in our target markets are served by experienced bankers with lending expertise in the specific industries found in their market areas and established community ties. We believe our Bank can offer customers more responsive and personalized service than our competitors. If we provide effective service to these customers, we believe we will be able to establish long-term relationships and provide multiple products to our customers, thereby enhancing our profitability.
National Lines of Business
While the Texas market continues to be central to the growth and success of our company, we have developed several lines of business, including our mortgage finance, mortgage correspondent aggregation, homebuilder finance, insurance premium finance and lender finance lines of business, that offer specialized loan and deposit products to businesses regionally and throughout the country. We believe this helps us mitigate our geographic concentration risk in Texas.
In the third quarter of 2015, we launched a correspondent lending program, mortgage correspondent aggregation ("MCA"), to complement our mortgage finance warehouse lending program. Through our MCA program we commit to purchase residential mortgage loans from independent correspondent lenders and deliver those loans into the secondary market via whole loan sales to independent third parties or in securitization transactions to government sponsored enterprises such as Fannie Mae, Freddie Mac and Ginnie Mae.
Business Strategy
Drawing on the business and community ties of our management and their banking experience, our strategy is to continue building an independent bank that focuses primarily on middle market business customers and successful professionals and entrepreneurs in each of the five major metropolitan markets of Texas as well as our national lines of business. To achieve this, we seek to implement the following strategies:
Targeting middle market businesses and successful professionals and entrepreneurs;
Growing our loan and deposit base in our existing markets by hiring additional experienced bankers in our different lines of business;
Continuing our emphasis on credit policy to maintain credit quality consistent with long-term objectives;
Leveraging our existing infrastructure to support a larger volume of business;
Maintaining stringent internal approval processes for capital and operating expenditures;
Continuing our extensive use of outsourcing to provide cost-effective operational support and service levels consistent with large-bank operations; and
Extending our reach within our target markets and lines of business through service innovation and service excellence.
Products and Services
We offer a variety of loan, deposit account and other financial products and services to our customers.
Business Customers.    We offer a full range of products and services oriented to the needs of our business customers, including:
commercial loans for general corporate purposes including financing for working capital, internal growth, acquisitions and financing for business insurance premiums;
real estate term and construction loans;
mortgage finance lending;
mortgage correspondent aggregation;
equipment leasing;
treasury management services;
wealth management and trust services; and
letters of credit.

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Individual Customers.    We also provide complete banking services for our individual customers, including:
personal wealth management and trust services;
certificates of deposit;
interest-bearing and non-interest-bearing checking accounts with optional features such as Visa® debit/ATM cards and overdraft protection;
traditional money market and savings accounts;
loans, both secured and unsecured; and
Internet banking.
Lending Activities
We target our lending to middle market businesses and successful professionals and entrepreneurs that meet our credit standards. The credit standards are set by our standing Credit Policy Committee with the assistance of our Bank’s Chief Credit Officer, who is charged with ensuring that credit standards are met by loans in our portfolio. Our Credit Policy Committee is comprised of senior Bank officers including our Bank’s Chief Executive Officer and President, our Texas President/Chief Lending Officer, our Bank's Chief Risk Officer and our Bank’s Chief Credit Officer. We believe we maintain an appropriately diversified loan portfolio. Credit policies and underwriting guidelines are tailored to address the unique risks associated with each industry represented in the portfolio.
Our credit standards for commercial borrowers reference numerous criteria with respect to the borrower, including historical and projected financial information, strength of management, acceptable collateral and associated advance rates, and market conditions and trends in the borrower’s industry. In addition, prospective loans are also analyzed based on current industry concentrations in our loan portfolio to prevent an unacceptable concentration of loans in any particular industry. We believe our credit standards are consistent with achieving business objectives in the markets we serve and will generally mitigate a portion of our risk. We believe that we differentiate our Bank from its competitors by focusing on and aggressively marketing to our core customers and fitting our products to their individual needs.
We generally extend variable rate loans in which the interest rate fluctuates with a specified reference rate such as the United States prime rate or the London Interbank Offered Rate (LIBOR) and frequently provide for a minimum floor rate. Our use of variable rate loans is designed to protect us from risks associated with interest rate fluctuations since the rates of interest earned will automatically reflect such fluctuations.
Deposit Products
We offer a variety of deposit products and services to our core customers upon terms, including interest rates, which are competitive with other banks. Our business deposit products include commercial checking accounts, lockbox accounts, cash concentration accounts and other treasury management services, including on-line data and server access. Our treasury management on-line system offers information services, wire transfer initiation, ACH initiation, account transfer and service integration. Our consumer deposit products include checking accounts, savings accounts, money market accounts and certificates of deposit. We also allow our consumer deposit customers to access their accounts, transfer funds, pay bills and perform other account functions over the Internet and through ATM machines.
Wealth Management and Trust
Our wealth management and trust services include investment management, personal trust and estate services, custodial services, retirement accounts and related services. Our investment management professionals work with our clients to define objectives, goals and strategies for their investment portfolios. We assist the customer with the selection of an investment manager and work with the client to tailor the investment program accordingly. We also offer retirement products such as individual retirement accounts and administrative services for retirement vehicles such as pension and profit sharing plans.
Cayman Islands Branch
We established a branch of our Bank in the Cayman Islands in 2003 which was closed during 2015. Deposits maintained at our Cayman Islands branch originated with our domestic U.S. customer relationships. Deposits at the branch at December 31, 2014 were $312.7 million.
Employees
As of December 31, 2015, we had 1,329 full-time employees. None of our employees is represented by a collective bargaining agreement and we consider our relations with our employees to be good.

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Regulation and Supervision
General.    We and our Bank are subject to extensive federal and state laws and regulations that impose specific requirements on us and provide regulatory oversight of virtually all aspects of our operations. These laws and regulations generally are intended for the protection of depositors, the deposit insurance fund of the Federal Deposit Insurance Corporation (“FDIC”) and the stability of the U.S. banking system as a whole, rather than for the protection of our stockholders and creditors.
The following discussion summarizes certain laws and regulations to which we and our Bank are subject. It does not address all applicable laws and regulations that affect us currently or might affect us in the future. This discussion is qualified in its entirety by reference to the full texts of the laws, regulations and policies described.
The Company’s activities are governed by the Bank Holding Company Act of 1956, as amended (“BHCA”). We are subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) pursuant to the BHCA. We file quarterly reports and other information with the Federal Reserve. We file reports with the Securities and Exchange Commission (“SEC”) and are subject to its regulation with respect to our securities, reporting and certain governance matters, including matters submitted for stockholder approval. Our securities are listed on the Nasdaq Global Select Market, and we are subject to Nasdaq rules for listed companies.
Our Bank is organized as a national banking association under the National Bank Act, and is subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (the “OCC”), the FDIC and the Consumer Financial Protection Bureau (“CFPB”) as well as being subject to regulation by certain other federal and state agencies. The OCC has primary supervisory responsibility for our Bank and performs a continuous program of examinations concerning safety and soundness, the quality of management and directors, information technology and compliance with applicable laws and regulations. Our Bank files quarterly reports of condition and income with the FDIC, which provides insurance for certain of our Bank’s deposits. The CFPB has regulation, supervision and examination authority over our Bank with respect to substantially all federal statutes protecting the interests of consumers of financial services.
Bank Holding Company Regulation.    The BHCA limits our business to banking, managing or controlling banks and other activities that the Federal Reserve has determined to be closely related to banking. We have elected to register with the Federal Reserve as a financial holding company. This authorizes us to engage in any activity that is either (i) financial in nature or incidental to such financial activity, as determined by the Federal Reserve, or (ii) complementary to a financial activity, so long as the activity does not pose a substantial risk to the safety and soundness of our Bank or the financial system generally, as determined by the Federal Reserve. Examples of non-banking activities that are financial in nature include securities underwriting and dealing, insurance underwriting and making merchant banking investments.
We are not at this time exercising this authority at the parent company level. We, through our Bank, engage in traditional banking activities that are deemed financial in nature. In order for us to undertake new activities permitted by the BHCA, we and our Bank must be considered "well capitalized" (as defined below) and well managed, our Bank must have received a rating of at least satisfactory in its most recent examination under the Community Reinvestment Act and we would be required to notify the Federal Reserve within thirty days of engaging in the new activity.
Under Federal Reserve policy, now codified by the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"), we are expected to act as a source of financial and managerial strength to our Bank and commit resources to its support. Such support may be required at times when, absent this Federal Reserve policy, a holding company may not be inclined to provide it. We could in certain circumstances be required to guarantee the capital plan of our Bank if it became undercapitalized.
It is the policy of the Federal Reserve that financial holding companies may pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that financial holding companies may not pay cash dividends in an amount that would undermine the holding company’s ability to serve as a source of strength to its banking subsidiary.
With certain limited exceptions, the BHCA prohibits a person or company or a group of persons deemed to be “acting in concert” from, directly or indirectly, acquiring more than 10% (5% if the acquirer is a bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or otherwise direct the management or policies of our company without prior notice or application to and the approval of the Federal Reserve.
If, in the opinion of the applicable federal bank regulatory authorities, a depository institution or holding company is engaged in or is about to engage in an unsafe or unsound practice (which could include the payment of dividends), such authority may require, generally after notice and hearing, that such institution or holding company cease and desist such practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s or holding company’s capital base to an inadequate level would be such an unsafe or unsound banking practice. Moreover, the Federal Reserve and the FDIC have issued policy statements providing that financial holding companies and insured depository institutions generally should only pay dividends out of current operating earnings.

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Regulation of Our Bank by the OCC. National banks the size of our Bank are subject to continuous regulation, supervision and examination by the OCC. The OCC regulates or monitors all areas of a national bank’s operations, including security devices and procedures, adequacy of capitalization and loss reserves, accounting treatment and impact on capital determinations, loans, investments, borrowings, deposits, liquidity, mergers, issuances of securities, payment of dividends, interest rate risk management, establishment of branches, corporate reorganizations, maintenance of books and records, and adequacy of staff training to carry on safe and sound lending and deposit gathering practices. The OCC requires national banks to maintain specified capital ratios and imposes limitations on their aggregate investment in real estate, bank premises and furniture and fixtures. National banks are required by the OCC to file quarterly reports of their financial condition and results of operations and to obtain an annual audit of their financial statements in compliance with minimum standards and procedures prescribed by the OCC.
Capital Adequacy Requirements.    Federal banking regulators have adopted a system using risk-based capital guidelines to evaluate the capital adequacy of banks and bank holding companies that is based upon the 1988 capital accord of the Bank for International Settlements’ Committee on Banking Supervision (the “Basel Committee”), a committee of central banks and bank regulators from the major industrialized countries that coordinates international standards for bank regulation. Under the guidelines, specific categories of assets and off-balance-sheet activities such as letters of credit are assigned risk weights, based generally on the perceived credit or other risks associated with the asset. Off-balance-sheet activities are assigned a credit conversion factor based on the perceived likelihood that they will become on-balance-sheet assets. These risk weights are multiplied by corresponding asset balances to determine a “risk weighted” asset base which is then measured against various measures of capital to produce capital ratios.
An organization’s capital is classified in one of two tiers, Core Capital, or Tier 1, and Supplementary Capital, or Tier 2. Tier 1 capital includes common stock, retained earnings, qualifying non-cumulative perpetual preferred stock, minority interests in the equity of consolidated subsidiaries, a limited amount of qualifying trust preferred securities and qualifying cumulative perpetual preferred stock at the holding company level, less goodwill and most intangible assets. Tier 2 capital includes perpetual preferred stock and trust preferred securities not meeting the Tier 1 definition, mandatory convertible debt securities, subordinated debt, and allowances for loan and lease losses. Each category is subject to a number of regulatory definitional and qualifying requirements.
The Basel Committee in 2010 released a set of recommendations for strengthening international capital and liquidity regulation of banking organizations, known as Basel III. In July 2013, the Federal Reserve published final rules for the adoption of the Basel III regulatory capital framework (the “Basel III Capital Rules”). The Basel III Capital Rules became effective for us on January 1, 2015, with certain transition provisions phasing in over a period ending on January 1, 2019.
The Basel III Capital Rules, among other things, (i) specified a capital measure called “Common Equity Tier 1” (“CET1”), (ii) specified that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) narrowed the definition of CET1 by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expanded the scope of the deductions/adjustments to the capital measures as compared to prior regulations. Our Series A 6.5% Non-Cumulative Perpetual Preferred Stock constitutes Additional Tier 1 capital and our subordinated notes constitute Tier 2 capital.
The Basel III Capital Rules also changed the Tier 1 risk-based capital requirements and the total risk-based requirements to a minimum of 6.0% and 8.0%, respectively, plus a capital conservation buffer of 2.5% producing targeted ratios of 8.5% and 10.5%, respectively. The leverage ratio requirement under the Basel III Capital Rules is 5.0%. In order to be well capitalized under the rules now in effect, our Bank must maintain a CET1 capital ratio, Tier 1 capital ratio and total capital ratio of greater than or equal to 6.5%, 8.0% and 10.0%, respectively. See “Selected Financial Data - Capital and Liquidity Ratios.
We met the capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis when we commenced filing 2015 reports with the FDIC and OCC. At December 31, 2015 our Bank's CET1 ratio was 7.82% and its total risk-based capital ratio was 10.57% and, as a result, it is currently classified as "well capitalized" for purposes of the OCC's prompt corrective action regulations.
Because we had less than $15 billion in total consolidated assets as of December 31, 2009, we are allowed to continue to classify our trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1 capital. We have elected to exclude the effects of accumulated other comprehensive income items included in stockholders’ equity from the determination of capital ratios under the Basel III Capital Rules.
Regulators may change capital and liquidity requirements, including previous interpretations of practices related to risk weights, which could require an increase to the allocation of capital to assets held by our Bank. Regulators could also require us to make retroactive adjustments to financial statements to reflect such changes. A regulatory capital ratio or category may not constitute an accurate representation of the Bank’s overall financial condition or prospects. Our regulatory capital status is addressed in more detail under the heading “Liquidity and Capital Resources” within Management’s Discussion and Analysis of

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Financial Condition and Results of Operations and in Note 14 - Regulatory Restrictions in the accompanying notes to the consolidated financial statements included elsewhere in this report.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) sets forth five capital categories for insured depository institutions under the prompt corrective action regulations:
Well capitalized-equals or exceeds a 10% total risk-based capital ratio, 8% Tier 1 risk-based capital ratio, and 5% leverage ratio and is not subject to any written agreement, order or directive requiring it to maintain a specific level for any capital measure;
Adequately capitalized-equals or exceeds an 8% total risk-based capital ratio, 6% Tier 1 risk-based capital ratio, and 4% leverage ratio;
Undercapitalized-total risk-based capital ratio of less than 8%, or a Tier 1 risk-based ratio of less than 6%, or a leverage ratio of less than 4%;
Significantly undercapitalized-total risk-based capital ratio of less than 6%, or a Tier 1 risk-based capital ratio of less than 4%, or a leverage ratio of less than 3%; and
Critically undercapitalized-a ratio of tangible equity to total assets equal to or less than 2%.
Federal bank regulatory agencies are required to implement arrangements for “prompt corrective action” for institutions failing to meet minimum requirements to be at least adequately capitalized. FDICIA imposes an increasingly stringent array of restrictions, requirements and prohibitions as an organization’s capital levels deteriorate. An adequately capitalized institution may not accept or roll over brokered deposits without an FDIC waiver. A significantly undercapitalized institution is subject to mandated capital raising activities, restrictions on interest rates paid and transactions with affiliates, removal of management and other restrictions. The OCC has only very limited discretion in dealing with a critically undercapitalized institution and is virtually required to appoint a receiver or conservator (the FDIC) if the capital deficiency is not corrected promptly.
Under the Federal Deposit Insurance Act (“FDIA”), “critically undercapitalized” banks may not, beginning 60 days after becoming critically undercapitalized, make any payment of principal or interest on their subordinated debt (subject to certain limited exceptions). In addition, under Section 18(i) of the FDIA, banks are required to obtain the advance consent of the FDIC to retire any part of their subordinated notes. Under the FDIA, a bank may not pay interest on its subordinated notes if such interest is required to be paid only out of net profits, or distribute any of its capital assets, while it remains in default on any assessment due to the FDIC.
Federal bank regulators may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve and OCC guidelines provide that banking organizations experiencing significant growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Concentration of credit risks arising from non-traditional activities, as well as an institution’s ability to manage these risks, are important factors taken into account by regulatory agencies in assessing an organization’s overall capital adequacy.
The OCC and the Federal Reserve also use a leverage ratio as an additional tool to evaluate the capital adequacy of banking organizations. The leverage ratio is a company’s Tier 1 capital divided by its average total consolidated assets. A minimum leverage ratio of 3.0% is required for banks and bank holding companies that either have the highest supervisory rating or have implemented the appropriate federal regulatory authority’s risk-adjusted measure for market risk. All other banks and bank holding companies are required to maintain a minimum leverage ratio of 4.0%, unless a different minimum is specified by an appropriate regulatory authority. In order to be considered well capitalized the leverage ratio must be at least 5.0%.
Our Bank’s leverage ratio was 8.75% at December 31, 2015 and, as a result, it is currently classified as “well capitalized” for purposes of the OCC’s prompt corrective action regulations.
The risk-based and leverage capital ratios established by federal banking regulators are minimum supervisory ratios generally applicable to banking organizations that meet specified criteria, assuming that they otherwise have received the highest regulatory ratings in their most recent examinations. Banking organizations not meeting these criteria are expected to operate with capital positions in excess of the minimum ratios. Regulators can, from time to time, change their policies or interpretations of banking practices to require changes in risk weights, which may require the Bank to obtain additional capital to support future growth or reduce asset balances in order to meet minimum acceptable capital ratios.

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Liquidity Requirements.    U.S. bank regulators in September 2014 issued a final rule implementing the Basel III liquidity framework for certain U.S. banks - generally those having more than $50 billion of assets or whose primary federal banking regulator determines compliance with the liquidity framework is appropriate based on the organization's size, level of complexity, risk profile, scope of operations, U.S. or non-U.S. affiliations or risk to the financial system. One of the liquidity tests included in the new rule, referred to as the liquidity coverage ratio (“LCR”), is designed to ensure that a banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario.
The other test, referred to as the net stable funding ratio (“NSFR”), is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements are predicted to encourage the covered banking entities to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets, and also to increase the use of long-term debt as a funding source. Regulators may change capital and liquidity requirements, including previous interpretations of practices related to risk weights, which could require an increase to the allocation of capital to assets held by our Bank. Regulators could also require us to make retroactive adjustments to financial statements and reported capital ratios to reflect such changes.
Stress Testing.    Pursuant to the Dodd-Frank Act and regulations published by the Federal Reserve and OCC, institutions with average total consolidated assets greater than $10 billion are required to conduct an annual “stress test” of capital and consolidated earnings and losses under a base case and two severely adverse stress scenarios provided by bank regulatory agencies. We became subject to this requirement in 2014 and have developed dedicated staffing, economic models, policies and procedures to implement stress testing on an annual basis using scenarios released by the agencies each year.
Commencing in 2016 the results of our stress testing must be reported to the agencies in July of each year and public disclosure of our summary stress test results is required to be made in October of each year. The published results of our stress testing are available in the Investor Relations section of our website at www.texascapitalbank.com under the caption “Financial Information.” Results of stress test calculations are anticipated to become an important factor considered by banking regulators in evaluating a range of banking practices. We are incorporating the economic models and information developed through our stress testing program into our risk management and business planning activities.
Gramm-Leach-Bliley Financial Modernization Act of 1999 ("Gramm-Leach-Bliley Act").    The Gramm-Leach-Bliley Act:
allows bank holding companies meeting management, capital and Community Reinvestment Act standards to engage in a substantially broader range of non-banking activities than was permissible prior to enactment, including insurance underwriting and making merchant banking investments in commercial and financial companies;
allows insurers and other financial services companies to acquire banks;
removes various restrictions that applied to bank holding company ownership of securities firms and mutual fund advisory companies; and
establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations.
The Gramm-Leach-Bliley Act also modifies other current financial laws, including laws related to financial privacy. The financial privacy provisions generally prohibit financial institutions, including us, from disclosing non-public personal financial information to non-affiliated third parties unless customers have the opportunity to “opt out” of the disclosure.
Community Reinvestment Act.    The Community Reinvestment Act of 1977 (“CRA”) requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low- and moderate-income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings. In order for a financial holding company to commence new activity permitted by the BHCA, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the CRA.
The USA Patriot Act, the International Money Laundering Abatement and Financial Anti-Terrorism Act and the Bank Secrecy Act.    A major focus of U.S. government policy regarding financial institutions in recent years has been combating money laundering, terrorist financing and other illegal payments. The USA Patriot Act of 2001 and the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 substantially broadened the scope of United States anti-money laundering laws and penalties, specifically related to the Bank Secrecy Act of 1970, and expanded the extra-territorial jurisdiction of the U.S. government in this area. Regulations issued under these laws impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with relevant laws or regulations, could have serious legal, reputational and financial consequences for the institution. Because of the significance of regulatory

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emphasis on these requirements, we will continue to expend significant staffing, technology and financial resources to maintain programs designed to ensure compliance with applicable laws and regulations and an effective audit function for testing our compliance with the Bank Secrecy Act on an ongoing basis.
Safe and Sound Banking Practices; Enforcement.    Banks and bank holding companies are prohibited from engaging in unsafe and unsound banking practices. Bank regulators have broad authority to prohibit and penalize activities of bank holding companies and their subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws, regulations or written directives of or agreements with regulators. Regulators have considerable discretion in identifying what they deem to be unsafe and unsound practices and in pursuing enforcement actions in response to them.
Enforcement actions against us, our Bank and our officers and directors may include the issuance of a written directive, the issuance of a cease-and-desist order that can be judicially enforced, the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties, the imposition of restrictions and sanctions under prompt corrective action provisions, the termination of deposit insurance (in the case of our Bank) and the appointment of a conservator or receiver for our Bank. Civil money penalties can be as high as $1.0 million for each day a violation continues.
Transactions with Affiliates and Insiders.    Our Bank is subject to Section 23A of the Federal Reserve Act which places limits on, among other covered transactions, the amount of loans or extensions of credit to affiliates that may be made by our Bank. Extensions of credit to affiliates must be adequately collateralized by specified amounts and types of collateral. Section 23A also limits the amount of loans or advances by our Bank to third party borrowers which are collateralized by our securities or obligations or those of our subsidiaries. Our Bank also is subject to Section 23B of the Federal Reserve Act, which, among other things, prohibits an institution from engaging in transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with non-affiliates.
We are subject to restrictions on extensions of credit to executive officers, directors, principal stockholders and their related interests. These restrictions are contained in the Federal Reserve Act and Federal Reserve Regulation O and apply to all insured institutions as well as their subsidiaries and holding companies. These restrictions include limits on loans to one borrower and conditions that must be met before such loans can be made. There is also an aggregate limitation on all loans to insiders and their related interests, which cannot exceed the institution’s total unimpaired capital and surplus, unless the FDIC determines that a lesser amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions. Additional restrictions on transactions with affiliates and insiders are discussed in the Dodd-Frank Act section below.
Restrictions on Dividends and Repurchases.    The sole source of funding of our parent company financial obligations has consisted of proceeds of capital markets transactions and cash payments from our Bank for debt service and dividend payments with respect to our Bank's preferred stock issued to the Company. We may in the future seek to rely upon receipt of dividends paid by our Bank to meet our financial obligations. Our Bank is subject to statutory dividend restrictions. Under such restrictions, national banks may not, without the prior approval of the OCC, declare dividends in excess of the sum of the current year’s net profits plus the retained net profits from the prior two years, less any required transfers to surplus. The Basel III Capital Rules further limit the amount of dividends that may be paid by our Bank. In addition, under the FDICIA, our Bank may not pay any dividend if it is undercapitalized or if payment would cause it to become undercapitalized.
Limits on Compensation.    The Federal Reserve, OCC and FDIC in 2010 issued comprehensive final guidance on incentive compensation policies for executive management of banks and bank holding companies. This guidance was intended to ensure that the incentive compensation policies of banking organizations do not undermine their safety and soundness by encouraging excessive risk-taking. The objective of the guidance is to assure that incentive compensation arrangements (i) provide incentives that do not encourage excessive risk-taking, (ii) are compatible with effective internal controls and risk management and (iii) are supported by strong corporate governance, including oversight by the board of directors.
The Dodd-Frank Act.    The Dodd-Frank Act became law in 2010 and has had a broad impact on the financial services industry, imposing significant regulatory and compliance changes. A significant volume of financial services regulations required by the Dodd-Frank Act have not yet been finalized by banking regulators, Congress continues to consider legislation that would make significant changes to the law and courts are addressing significant litigation arising under the Act, making it difficult to predict the ultimate effect of the Dodd-Frank Act on our business. The following discussion provides a brief summary of certain provisions of the Dodd-Frank Act that may have an effect on us.
The Dodd-Frank Act significantly reduces the ability of national banks to rely upon federal preemption of state consumer financial laws. Although the OCC, as the primary regulator of national banks, has the ability to make preemption determinations where certain conditions are met, the broad rollback of federal preemption has the potential to create a patchwork of federal and state compliance obligations and enforcement. This could, in turn, result in significant new regulatory

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requirements applicable to us and certain of our lending activities, with potentially significant changes in our operations and increases in our compliance costs.
The Dodd-Frank Act made permanent the general $250,000 deposit insurance limit for insured deposits. Amendments to the FDIA also revised the assessment base against which an insured depository institution’s deposit insurance premiums paid to the FDIC’s deposit insurance fund (“DIF”) are calculated. The assessment base now consists of average consolidated total assets less average tangible equity. Additionally, the Dodd-Frank Act made changes to the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits, and eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. These changes contributed to an increase in the FDIC deposit insurance premiums paid by us in 2014 and 2015 and may contribute to increasing and less predictable deposit insurance expense in future years.
The Dodd-Frank Act generally enhances the restrictions on transactions with affiliates under Sections 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered credit transactions must be satisfied. Insider transaction limitations are expanded through the strengthening of restrictions on loans to insiders and the expansion of the types of transactions subject to the various limits, including derivatives transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions. Restrictions are also placed on certain asset sales to and from an insider to an institution, including requirements that such sales be on market terms and, in certain circumstances, approved by the institution’s board of directors.
The Dodd-Frank Act increases the risk of “secondary actor liability” for lenders such as our Bank that provide financing or other services to customers offering financial products or services to consumers. The Act can impose liability on a service provider for knowingly or recklessly providing substantial assistance to a customer found to have engaged in unfair, deceptive or abusive practices that injure a consumer. This exposure contributes to increased compliance and other costs in connection with administration of credit extended to entities engaged in activities covered by the Dodd-Frank Act.
The Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent compliance, capital, liquidity and leverage requirements or otherwise adversely affect our business. These developments may also require us to invest significant management attention and resources to evaluate and make changes to our business as necessary to comply with new and changing statutory and regulatory requirements.
The Volcker Rule.    The Dodd-Frank Act amended the BHCA to require the federal financial regulatory agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading in designated types of financial instruments and from investing in and sponsoring certain hedge funds and private equity funds. The final rule became effective in July 2015. It is highly complex, and many aspects of its application remain uncertain. We do not currently anticipate that the Volcker Rule will have a material effect on our operations since we do not engage in the businesses prohibited by the Volcker Rule. Unanticipated effects of the Volcker Rule’s provisions or future interpretations may have an adverse effect on our business or services provided to our Bank by other financial institutions.
Available Information
Under the Securities Exchange Act of 1934, we are required to file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). You may read and copy any document filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. We file electronically with the SEC.
We make available, free of charge through our website, our reports on Forms 10-K, 10-Q and 8-K, and amendments to those reports, as soon as reasonably practicable after such reports are filed with or furnished to the SEC. Additionally, we have adopted and posted on our website a code of ethics that applies to our principal executive officer, principal financial officer and principal accounting officer. The address for our website is www.texascapitalbank.com. Any amendments to, or waivers from, our code of ethics applicable to our executive officers will be posted on our website within four days of such amendment or waiver. We will provide a printed copy of any of the aforementioned documents to any requesting stockholder.
 
ITEM 1A.
RISK FACTORS
Our business is subject to risk. The following discussion, along with management’s discussion and analysis and our financial statements and footnotes, sets forth the most significant risks and uncertainties that we believe could adversely affect our business, financial condition or results of operations. Additional risks and uncertainties that management is not aware of or that management currently deems immaterial may also have a material adverse effect on our business, financial condition or results of operations. There is no assurance that this discussion covers all potential risks that we face. The occurrence of the

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described risks could cause our results to differ materially from those described in our forward-looking statements included elsewhere in this report, and could have a material adverse impact on our business or results of operations.
Risk Factors Associated With Our Business
We must effectively manage our credit risk.    The risk of non-payment of loans is inherent in commercial banking. Increased credit risk may result from many factors, including
Adverse changes in local, U.S. and global economic and industry conditions;
Declines in the value of collateral, including asset values that are directly or indirectly related to external factors such as commodity prices or interest rates;
Concentrations of credit associated with specific loan categories, industries or collateral types; and
Risks specific to individual borrowers.
We rely heavily on information provided by third parties when originating and monitoring loans. If this information is intentionally or negligently misrepresented and we do not detect such misrepresentations, the credit risk associated with the transaction may be increased. Although we attempt to manage our credit risk by carefully monitoring the concentration of our loans within specific loan categories and industries and through prudent loan approval and monitoring practices in all categories of our lending, we cannot assure you that our approval and monitoring procedures will reduce these lending risks. Competitive pressures could erode underwriting standards leading to a decline in general credit quality and increases in credit defaults and non-performing asset levels. If our credit administration personnel, policies and procedures are not able to adequately adapt to changes in economic, competitive or other conditions that affect customers and the quality of the loan portfolio, we may incur increased losses that could adversely affect our financial results and lead to increased regulatory scrutiny, restrictions on our lending activity or financial penalties.
A significant portion of our assets consists of commercial loans. We generally invest a greater proportion of our assets in commercial loans to business customers than other banking institutions of our size, and our business plan calls for continued efforts to increase our assets invested in these loans. At December 31, 2015, approximately 40% of our LHI portfolio was comprised of commercial loans. Commercial loans may involve a higher degree of credit risk than other types of loans due, in part, to their larger average size, the effects of changing economic conditions on the businesses of our commercial loan customers, the dependence of borrowers on operating cash flow to service debt and our reliance upon collateral which may not be readily marketable. Due to the proportion of these commercial loans in our portfolio and because the balances of these loans are, on average, larger than other categories of loans, losses incurred on a relatively small number of commercial loans could have a materially adverse impact on our results of operations and financial condition.
A significant portion of our loans are secured by commercial and residential real estate. At December 31, 2015, approximately 30% of our loan portfolio was comprised of loans with real estate as the primary component of collateral. Our real estate lending activities, and our exposure to fluctuations in real estate collateral values, are significant and expected to increase as our assets increase. The market value of real estate can fluctuate significantly in a relatively short period of time as a result of market conditions in the geographic area in which the real estate is located, in response to factors such as changes in the economic health of industries heavily concentrated in a particular area and in response to changes in market interest rates which influence capitalization rates used to value revenue-generating commercial real estate. If the value of real estate serving as collateral for our loans declines materially, a significant part of our loan portfolio could become under-collateralized and losses incurred upon borrower defaults would increase. Conditions in certain segments of the real estate industry, including homebuilding, lot development and mortgage lending, may have an effect on values of real estate pledged as collateral for our loans. The inability of purchasers of real estate, including residential real estate, to obtain financing may weaken the financial condition of our borrowers who are dependent on the sale or refinancing of property to repay their loans. Changes in the economic health of certain industries can have a significant impact on other sectors or industries which are both directly and indirectly associated with the industry.
Our business is concentrated in Texas; our Energy industry exposure could adversely affect our performance. A substantial majority of our customers are located in Texas. As a result, our financial condition and results of operations may be strongly affected by any prolonged period of economic recession or other adverse business, economic or regulatory conditions affecting Texas businesses and financial institutions. While the Texas economy is more diversified than in the 1980’s, the energy sector continues to play an important role. At December 31, 2015 our outstanding energy loans represented 7% of total loans. Our energy loans consist primarily of reserve-based loans to exploration and production companies with a smaller portion of our loan balances attributable to royalty owners, midstream operators, saltwater disposal and other service companies whose businesses primarily relate to production, not exploration and development of oil and gas.These businesses can be significantly affected by volatility in oil and natural gas prices and material declines in the level of drilling and production activity in Texas and in other areas of the United States. Adverse developments in the energy sector can have significant spillover effects on the Texas economy, including commercial and residential real estate values and the general level of economic activity. We are

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carefully monitoring the impact of the continuing significant decline and volatility in oil and natural gas prices on our loan portfolio, and have reflected these events in the determination of our allowance for loan and lease losses as of December 31, 2015. We experienced an increase in non-performing assets primarily related to energy loans during 2015 and there is no assurance that we will not be materially adversely impacted by the direct and indirect effects of current and future conditions in the energy industry in Texas and nationally.
Our future profitability depends, to a significant extent, upon our middle market business customers. Our future profitability depends, to a significant extent, upon revenue we receive from middle market business customers, and their ability to continue to meet their loan obligations. Adverse economic conditions or other factors affecting this market segment, and our failure to timely identify and react to unexpected economic downturns, may have a greater adverse effect on us than on other financial institutions that have a more diversified customer base. Additionally, our inability to grow our middle market business customer base in a highly competitive market could affect our future profitability.
We must maintain an appropriate allowance for loan losses. Our experience in the banking industry indicates that some portion of our loans will become delinquent, and some may only be partially repaid or may never be repaid at all. We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense each quarter, that is consistent with management’s assessment of the collectability of the loan portfolio in light of the amount of loans committed and outstanding and current economic conditions and market trends. When specific loan losses are identified, the amount of the expected loss is removed, or charged-off, from the allowance. Our methodology for establishing the appropriateness of the allowance for loan losses depends on our subjective application of risk grades as indicators of each borrower’s ability to repay specific loans, together with our assessment of how actual or projected changes in competitor underwriting practices, competition for borrowers and depositors and other conditions in our markets are likely to impact improvement or deterioration in the collectability of our loans as compared to our historical experience.
Our business model makes our Bank more vulnerable to changes in underlying business credit quality than other banks with which we compete. We have a substantially larger percentage of commercial, real estate and other categories of business loans relative to total assets than most other banks in our market and our individual loans are generally larger as a percentage of our total earning assets than other banks. While we have substantially increased our liquidity over the past two years, these funds are invested in low-yielding deposits with federal agencies and other financial institutions. We have a substantially smaller portion of securities and other earning assets categories that can be less vulnerable to changes in local, regional or industry-specific economic trends, causing our potential for credit losses to be more severe than other banks. Our business model has focused on growth in various loan categories that can be more sensitive to changes in the economic trends. We believe our ability to maintain above-peer rates of growth in commercial loans is dependent on maintaining above-peer credit quality metrics. The failure to do so would have a material adverse impact on our growth and profitability.
If our assessment of inherent losses is inaccurate, or economic and market conditions or our borrowers' financial performance experience material unanticipated changes, the allowance may become inadequate, requiring larger provisions for loan losses that can materially decrease our earnings. Certain of our loans individually represent a significant percentage of our total allowance for loan losses. Adverse collection experience in a relatively small number of these loans could require an increase in the provision for loan losses. Federal regulators periodically review our allowance for loan losses and, based on their judgments, which may be different than ours, may require us to change classifications or grades of loans, increase the allowance for loan losses and recognize further loan charge-offs. Any increase in the allowance for loan losses or in the amount of loan charge-offs required by these regulatory agencies could have a negative effect on our results of operations and financial condition.
Our growth plans are dependent on the availability of capital and funding. Our historical ability to raise capital through the sale of capital stock and debt securities may be affected by economic and market conditions or regulatory changes that are beyond our control. Adverse changes in our operating performance or financial condition could make raising additional capital difficult or more expensive or limit our access to customary sources of funding, including inter-bank borrowings, repurchase agreements and borrowings from the Federal Reserve Bank or the Federal Home Loan Bank. Unexpected changes in requirements for regulatory capital resulting from regulatory actions or the results of our Dodd-Frank Act stress testing could require us to raise capital at a time, and at a price, that might be unfavorable, or require that we forego continuing growth or shrink our balance sheet. We cannot offer assurance that capital and funding will be available to us in the future, in needed amounts, upon acceptable terms or at all. Our efforts to raise capital could require the issuance of securities at times and with maturities, conditions and rates that are disadvantageous, and which could have a dilutive impact on our current stockholders. Factors that could adversely affect our ability to raise additional capital include conditions in the capital markets, our financial performance, regulatory actions and general economic conditions. Increases in our cost of capital, including dilution and increased interest or dividend requirements, could have a direct adverse impact on our operating performance and our ability to achieve our growth objectives. Trust preferred securities are no longer viable as a source of new long-term debt capital as a result of regulatory changes. The treatment of our existing trust preferred securities as capital may be subject to further regulatory change prior to their maturity, which could require the Company to seek additional capital.

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We must effectively manage our liquidity risk. Our Bank requires available funds (liquidity) to meet its deposit, debt and other obligations as they come due, borrower requests to draw on committed credit facilities as well as unexpected demands for cash payments. While we are not subject to Basel III liquidity regulations, the adequacy of our liquidity is a matter of regulatory interest given the significant portion of our balance sheet represented by loans as opposed to securities and other more marketable investments. Our Bank’s principal source of funding consists of customer deposits. A substantial majority of our Bank’s liabilities consist of demand, savings, interest checking and money market deposits, which are payable on demand or upon several days’ notice. By comparison, a substantial portion of our assets are loans, most of which, excluding our mortgage finance loans and mortgage loans held for sale, cannot be collected or sold in so short a time frame, creating the potential for an imbalance in the availability of liquid assets to satisfy depositors and loan funding requirements.
We hold smaller balances of marketable securities than many of our competitors, limiting our ability to increase our liquidity by completing market sales of these assets. An inability to raise funds through deposits, borrowings, the sale of securities and loans and other sources, including our access to capital market transactions, could have a substantial negative effect on our Bank’s liquidity. We actively manage our available sources of funds to meet our expected needs under normal and financially stressed conditions, but there is no assurance that our Bank will be able to make new loans, meet ongoing funding commitments to borrowers and replace maturing deposits and advances as necessary under all possible circumstances. Our Bank’s ability to obtain funding could be impaired by factors beyond its control, such as disruptions in financial markets, negative expectations regarding the financial services industry generally or in our markets or negative perceptions of our Bank.
Our mortgage finance business has experienced, and will likely continue to experience, highly variable usage of our funding capacity resulting from seasonal demands for credit, surges in consumer demand driven by changes in interest rates and month-end “spikes” of residential mortgage closings. These spikes could also result in our Bank having capital ratios that are below internally targeted levels or even levels that could cause our Bank to not be well-capitalized and could affect liquidity levels. At the same time managing this risk by declining to respond fully to the needs of our customers could severely impact our business. We have responded to these variable funding demands by, among other things, increasing the extent of participations sold in our mortgage loan interests and by opening an expanded borrowing relationship with the Federal Home Loan Bank in the fourth quarter of 2014. Our mortgage finance customers have in recent periods provided significant low-cost deposit balances associated with the borrower escrow accounts created at the time certain mortgage loans are funded, which have benefitted our liquidity and net interest margin. In a rising rate environment or in response to competitive pressures, we may have to pay interest on some or all of these accounts as regulations allow. Individual escrow account balances also experience significant variability during the year as principal and interest payments, as well as ad valorem taxes and insurance premiums are paid periodically. While the short average holding period of our mortgage interests of approximately 20 days will allow us, if necessitated by a funding shortfall, to rapidly decrease the size of the portfolio and its associated funding requirements, any such action might significantly damage business relationships important to that business.
Our Bank sources a significant volume of its demand deposits from financial services companies, mortgage finance customers and other commercial sources, resulting in a larger percentage of larger deposits and a smaller number of sources of deposits than would be typical of other banks in our markets, creating concentrations of deposits that carry a greater risk of unexpected material withdrawals. In recent periods over half of our total deposits have been attributable to customers whose balances exceed the $250,000 FDIC insurance limit. Many of these customers actively monitor our financial condition and results of operations and could withdraw their deposits quickly upon the occurrence of a material adverse development affecting our Bank or their businesses. In response to this risk we have substantially increased our liquidity over the past two years, but there is no assurance that we will maintain or have access to sufficient liquidity to fully mitigate this risk.
One potential source of liquidity for our Bank consists of “brokered deposits” arranged by brokers acting as intermediaries, typically larger money-center financial institutions. We receive deposits provided by certain of our customers in connection with our delivery of other financial services to them or their customers which are subject to the regulatory classification of “brokered deposits” even though we consider these to be relationship deposits and they are not subject to the typical risks or market pricing associated with conventional brokered deposits.
If we do not maintain our regulatory capital above the level required to be well capitalized we would be required to obtain FDIC consent for us to continue to accept deposits classified as brokered deposits, and there can be no assurance that the FDIC would consent under any circumstances. We could be required to suspend or eliminate deposit gathering from any source classified as “brokered” deposits. The FDIC can change the definition of or extend the classification to deposits not currently classified as brokered deposits. These non-traditional deposits are subject to greater operational and reputational risk of unexpected withdrawal than traditional demand and time deposits, particularly those provided by consumers. A significant decrease in our balances of relationship brokered deposits could have a material adverse effect upon our financial condition and results of operations. See Management’s Discussion and Analysis of Financial Condition and Results of Operations below for further discussion of our liquidity.
We must effectively manage our interest rate risk. Our profitability is dependent to a large extent on our net interest income, which is the difference between the interest income paid to us on our loans and investments and the interest we pay to third

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parties such as our depositors, lenders and debtholders. Changes in interest rates can impact our profits and the fair values of certain of our assets and liabilities. Models that we use to forecast and plan for the impact of rising and falling interest rates may be incorrect or fail to consider the impact of competition and other conditions affecting our loans and deposits.
The banking industry has experienced a prolonged period of unusually low interest rates, which have had an adverse effect on our earnings by reducing yields on loans and other earning assets. A continued low rate environment will place downward pressure on our net interest income and there is substantial uncertainty regarding the extent to which interest rates may be allowed to increase in 2016 and future periods and what the future effects of any such increases will be. Increases in market interest rates may reduce our customers' desire to borrow money from us or adversely affect their ability to repay their outstanding loans by increasing their debt service obligations through the periodic reset of adjustable interest rate loans. If our borrowers’ ability to pay their loans is impaired by increasing interest payment obligations, our level of non-performing assets would increase, producing an adverse effect on operating results. Asset values especially commercial real estate as collateral, securities or other fixed rate earning assets, can decline significantly with relatively minor changes in interest rates.
Increases in interest rates and economic conditions affecting consumer demand for housing can have a material impact on the volume of mortgage originations and refinancings, adversely affecting the profitability of our mortgage finance business. Interest rate risk can also result from mismatches between the dollar amounts of repricing or maturing assets and liabilities and from mismatches in the timing and rates at which our assets and liabilities reprice. We actively monitor and manage the balances of our maturing and repricing assets and liabilities to reduce the adverse impact of changes in interest rates, but there can be no assurance that we will be able to avoid material adverse effects on our net interest margin in all market conditions.
Federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed in 2011 by the Dodd-Frank Act. This change has had limited impact to date due to the excess of commercial liquidity and the low interest rate environment. Rising interest rates may result in our interest expense increasing, with a commensurate effect on our net interest income, particularly if we must pay interest on demand deposits to attract or retain customer deposits. There can be no assurance that we will not be materially adversely affected in the future by increases in interest rates.
We must effectively execute our business strategy in order to continue our asset and earnings growth. Our core strategy is to develop our business principally through organic growth. Our prospects for continued growth must be considered in light of the risks, expenses and difficulties frequently encountered by companies seeking to realize significant growth. In order to execute our growth strategy successfully, we must, among other things:
continue to identify and expand into suitable markets and lines of business, in Texas, regionally and nationally;
develop new products and services and execute our full range of products and services more efficiently and effectively;
attract and retain qualified bankers in each of our targeted markets to build our customer base;
respond to market opportunities promptly and nimbly while balancing the demands of risk management and compliance with regulatory requirements;
expand our loan portfolio in an intensely competitive environment while maintaining credit quality;
attract sufficient deposits and capital to fund our anticipated loan growth and satisfy regulatory requirements;
control expenses; and
acquire and maintain sufficient qualified staffing and information technology and operational infrastructure to support growth and compliance with increasing and changing regulatory requirements.
Failure to effectively execute our business strategy could have a material adverse effect on our business, future prospects, financial condition or results of operations.
We must be effective in developing and executing new lines of business and new products and services while managing associated risks. Our business strategy requires that we develop and grow new lines of business and offer new products and services within existing lines of business in order to compete successfully and realize our growth objectives for both loans and deposits to fund them. Substantial costs, risks and uncertainties are associated with these efforts, particularly in instances where the markets are not fully developed. Developing and marketing new activities requires that we invest significant time and resources before revenues and profits can be realized. Timetables for the development and launch of new activities may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, receipt of necessary licenses or permits, competitive alternatives and shifting market preferences, may also adversely impact the successful execution of new activities. New activities necessarily entail additional risks and may present additional risks to the effectiveness of our system of internal controls. All service offerings, including current offerings and new activities, may become more risky due to changes in economic, competitive and market conditions beyond our control. Our regulators could determine that our risk management practices are not adequate and take action to restrain our growth. Failure to successfully manage these risks, generally and to the satisfaction of our regulators, in the development and implementation of new lines of

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business or new products or services could have a material adverse effect on our business, results of operations and financial condition.
We must continue to attract, retain and develop key personnel. Our success depends to a significant extent upon our ability to attract, develop and retain experienced bankers in each of our markets as well as managers with the operational skills to build and maintain the infrastructure and controls required to support continuing loan and deposit growth. Competition for the best people in our industry can be intense, and there is no assurance that we will continue to have the same level of success in this effort that has supported our historical results. Factors that affect our ability to attract, develop and retain key employees include our compensation and benefits programs, our profitability, our ability to establish appropriate succession plans for key talent, our reputation for rewarding and promoting qualified employees and market competition for employees with certain skills, including information systems development and security. The cost of employee compensation is a significant portion of our operating expenses and can materially impact our results of operations. The unanticipated loss of the services of a small number of key personnel could have an adverse effect on our business. Although we have entered into employment agreements with certain key employees, we cannot assure you that we will be successful in retaining them.
We must effectively manage our information systems risk. We rely heavily on our communications and information systems to conduct our business. The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. Our ability to compete successfully depends in part upon our ability to use technology to provide products and services that will satisfy customer demands. Many of our competitors invest substantially greater resources in technological capabilities than we do. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers, which may negatively affect our business, results of operations or financial condition.
Our communications and information systems remain vulnerable to unexpected disruptions, failures and cyber attacks. The frequency and intensity of such attacks in our industry is escalating. Any failure or interruption of these systems could impair our ability to serve our customers and to operate our business and could damage our reputation, result in a loss of business, subject us to additional regulatory scrutiny or enforcement or expose us to civil litigation and possible financial liability. While we have developed extensive recovery plans, we cannot assure that those plans will be effective to prevent adverse effects upon us and our customers resulting from system failures.
We collect and store sensitive data, including personally identifiable information of our customers and employees. Computer break-ins of our systems or our customers’ systems, thefts of data and other breaches and criminal activity may result in significant costs to respond, liability for customer losses if we are at fault, damage to our customer relationships, regulatory scrutiny and enforcement and loss of future business opportunities due to reputational damage. Although we, with the help of third-party service providers, will continue to implement security technology and establish operational procedures to protect sensitive data, there can be no assurance that these measures will be effective. We advise and provide training to our customers regarding protection of their systems, but there is no assurance that our advice and training will be appropriately acted upon by our customers or effective to prevent losses. In some cases we may elect to contribute to the cost of responding to cybercrime against our customers, even when we are not at fault, in order to maintain valuable customer relationships. Successful cyber-attacks on our Bank or customers may affect the reputation of our Bank, and failure to meet customer expectations could have a material impact on our ability to attract and retain deposits as a primary source of funding.
Our operations rely extensively on a broad range of external vendors. We rely on certain external vendors to provide products and services necessary to maintain our day-to-day operations, particularly in the areas of operations, treasury management systems, information technology and security, exposing us to the risk that these vendors will not perform as required by our agreements. An external vendor’s failure to perform in accordance with our agreement could be disruptive to our operations, which could have a material adverse impact on our business, financial condition and results of operations, as well as cause reputation damage if our customers are affected by the failure. External vendors who must have access to our information systems in order to provide their services have been identified as significant sources of information technology security risk. While we have implemented an active program of oversight to address this risk, there can be no assurance that we will not experience material security breaches associated with our vendors.
We are subject to extensive government regulation and supervision. We, as a bank holding company and financial holding company, and our Bank as a national bank, are subject to extensive federal and state regulation and supervision that impacts our business on a daily basis. See the discussion above at Business - Regulation and Supervision. These regulations affect our lending practices, permissible products and services and their terms and conditions, customer relationships, capital structure, investment practices, accounting, financial reporting, operations and our ability to grow, among other things. These regulations also impose obligations to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identities of our customers.
Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Recent material changes in regulation and

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requirements imposed on financial institutions, such as the Dodd-Frank Act and the Basel III Accord, result in additional costs, impose more stringent capital, liquidity and leverage requirements, limit the types of financial services and products we may offer and increase the ability of non-bank financial services providers to offer competing financial services and products, among other things. Such changes could result in new regulatory obligations which could prove difficult, expensive or competitively impractical to comply with if not equally imposed upon non-bank financial services providers with whom we compete. The Dodd-Frank Act has not yet been fully implemented and there are many additional regulations that have not been proposed, or if proposed, have not been adopted. The full impact of the Dodd-Frank Act on our business strategies is unknown at this time and cannot be predicted.
We receive inquiries from our regulators from time to time regarding, among other things, lending practices, reserve methodology, compliance with ever-changing regulations and interpretations, our management of interest rate, liquidity, capital and operational risk , regulatory and financial accounting practices and policies and related matters, which can divert management’s time and attention from focusing on our business. We became subject to additional regulatory requirements commencing in 2013 as a result of our assets exceeding $10 billion as described above at Business - Regulation and Supervision. We have significantly increased the amount of management time and expense devoted to developing the infrastructure to support our expanding compliance obligations which can pose significant regulatory enforcement, financial and reputational risks if not appropriately addressed.
We are actively engaged in responding to stress testing requirements contained in the Dodd-Frank Act to evaluate the adequacy of our capital and liquidity planning. Uncertainties regarding how the financial models of our business created pursuant to this requirement will respond to the regulatory scenarios issued annually, and how our regulators will evaluate our report of the results obtained, subject us to increased regulatory risk in 2016 and future years as the standards for DFAST and regulatory use of our reported data continue to evolve. Any change to our practices or policies requested or required by our regulators, or any changes in interpretation of regulatory policy applicable to our businesses, may have a material adverse effect on our business, results of operations or financial condition. We increased our capital and liquidity and expanded our regulatory compliance staffing and systems during 2014 and 2015 in order to assure that we continue to satisfy regulatory expectations for high-growth institutions, which reduced our net interest margin and earnings in 2014 and 2015.  There is no assurance that our financial performance in future years will not be similarly burdened.
We expend substantial effort and incur costs to continually improve our systems, controls, accounting, operations, information security, compliance, audit effectiveness, analytical capabilities, staffing and training in order to satisfy regulatory requirements. We cannot offer assurance that these efforts will be accepted by our regulators as satisfying the legal and regulatory requirements applicable to us. Failure to comply with relevant laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.
The FDIC has imposed higher general and special assessments on deposits or assets based on general industry conditions and as a result of changes in specific programs, as well as qualitative adjustments for individual institutions based on their risk characteristics which cannot be predicted with any certainty. There is no restriction on the amount by which the FDIC may increase deposit and asset assessments in the future. Increases in FDIC assessments, fees and taxes have adversely affected our earnings and may continue to do so in the future.
Reports from the Public Company Accounting Oversight Board’s (“PCAOB”) inspections of public accounting firms continue to outline findings and recommendations which could require our auditors to perform additional work as part of their financial statement audits, increasing our external audit and internal audit costs to respond to these added requirements as well as subjecting to the risk of adverse findings by the PCAOB relating to the work performed. As a result, we have experienced, and may continue to experience, greater internal and external compliance and audit costs to comply with these changes that could adversely affect our results of operations.
Our business faces unpredictable economic and business conditions. Our business is directly impacted by general economic and business conditions in Texas, the United States and abroad. The credit quality of our loan portfolio necessarily reflects, among other things, the general economic conditions in the areas in which we conduct our business. Our continued financial success can be affected by other factors that are beyond our control, including:
national, regional and local economic conditions;
the value of the U.S. Dollar in relation to the currencies of other advanced and emerging market countries;
the performance of both domestic and international equity and debt markets and valuation of securities represented and traded on recognized domestic and international exchanges;
fluctuations in the value of commodities including but not limited to petroleum and natural gas;
general economic consequences of international conditions, such as weakness in European sovereign debt and foreign currencies and the impact of that weakness on the US and global economies;

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legislative and regulatory changes impacting our industry;
the financial health of our customers and economic conditions affecting them and the value of our collateral, including effects from continued low prices of energy and other commodities;
the incidence of fraud, illegal payments, security breaches and other illegal acts among or impacting our Bank and our customers;
structural changes in the markets for origination, sale and servicing of residential mortgages;
changes in governmental economic and regulatory policies generally, including the extent and timing of intervention in credit markets by the Federal Reserve Board or withdrawal from that intervention;
changes in the availability of liquidity at a systemic level; and
material inflation or deflation.
Substantial deterioration in any of the foregoing conditions can have a material adverse effect on our prospects and our results of operations and financial condition. There is no assurance that we will be able to sustain our historical rate of growth or our profitability. Our Bank's customer base is primarily commercial in nature, and our Bank does not have a significant retail branch network or retail consumer deposit base. In periods of economic downturn, business and commercial deposits may be more volatile than traditional retail consumer deposits. As a result, our financial condition and results of operations could be adversely affected to a greater degree by these uncertainties than our competitors who have a larger retail customer base.
We compete with many banks and other financial service providers. Competition among providers of financial services in our markets, in Texas, regionally and nationally, is intense. We compete with other financial and bank holding companies, state and national commercial banks, savings and loan associations, consumer finance companies, credit unions, securities brokerages, insurance companies, mortgage banking companies, money market mutual funds, asset-based non-bank lenders, government sponsored or subsidized lenders and other financial services providers. Many of these competitors have substantially greater financial resources, lending limits and technological resources and larger branch networks than we do, and are able to offer a broader range of products and services than we can, including systems and services that could protect customers from cyber threats. Many competitors offer lower interest rates and more liberal loan terms that appeal to borrowers but adversely affect net interest margin and assurance of repayment. We are increasingly faced with competition in many of our products and services by non-bank providers who may have competitive advantages of size, access to potential customers and fewer regulatory requirements. Failure to compete effectively for deposit, loan and other banking customers in our markets could cause us to lose market share, slow or reverse our growth rate or suffer adverse effects on our financial condition and results of operations.
Our recent entry into the MCA business subjects us to additional risks. Volatility in the mortgage industry has caused uncertainty related to the pricing of the mortgage loans that we seek to purchase, as well as uncertainty in the pricing of those loans when they are sold or securitized. This volatility may cause the actual returns on mortgage sales or securitization transactions to be less than anticipated, which could adversely affect our overall loan volumes. Additionally, non-bank competitors may have a pricing advantage as they are not subject to the same capital limitations on mortgage loans and mortgage servicing rights ("MSRs") as our Bank.
Our MCA business subjects us to additional interest rate risk, which may be an adverse effect on our business. The persistent low interest rate environment and expectation of future higher rates has resulted in an increase in the value of MSRs, causing other market participants and competitors who are planning to hold MSRs for a longer term to be more aggressive in their pricing of the underlying loan purchases than a participant like our Bank that does not plan to hold MSRs on a long-term basis. While we believe market and competitive conditions will improve, a prolonged low interest rate environment could affect the economics of our MCA business over a longer period of time. While lower interest rates may positively affect the volume of mortgage activity, continued unfavorable pricing for the loans purchased and lower profit on the subsequent sale of the loans could persist.
We have entered into loan purchase commitments and forward sales commitments in connection with the MCA business. While we believe that our hedging strategies will be successful in mitigating our exposure to interest rate risk associated with the purchase of mortgage loans held for sale, no hedging strategy can completely protect us. Poorly designed strategies, improperly executed transactions, or inaccurate assumptions regarding future interest rates or market conditions could have a material adverse effect on our financial condition and results of operations.
We may be required to repurchase mortgage loans or reimburse investors as a result of breaches in contractual representations and warranties under the agreements pursuant to which we purchase mortgage loans that are held for sale. While our agreements with the originators and sellers of mortgage loans provide us with legal recourse against them that may allow us to recover some or all of our losses, these companies are frequently not financially capable of paying large amounts of damages and as a result we can offer no assurance that we will not bear all of the risk of loss.

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We may incur other costs and losses as a result of actual or alleged violations of regulations related to the origination and purchase of residential mortgage loans. The origination of residential mortgage loans is governed by a variety of federal and state laws and regulations, which are frequently changing. We sell residential mortgage loans that we have purchased or that we have originated to various parties, including GSEs such as Fannie Mae, Freddie Mac and Ginnie Mae and other financial institutions that purchase mortgage loans for investment or private label securitization. We may also pool FHA-insured and VA-guaranteed mortgage loans which back securities issued by Ginnie Mae. Our accrued mortgage repurchase liability represents management’s best estimate of the probable loss that we may expect to incur for the representations and warranties in the contractual provisions of our sales of mortgage loans, but there is no assurance that our losses will not materially exceed such amounts.
Our accounting estimates and risk management processes rely on management judgment, which may be supported by analytical and forecasting models. The processes we use to estimate probable credit losses for purposes of establishing the allowance for loan losses and to measure the fair value of financial instruments, certain of our liquidity and capital planning tools, as well as the processes we use to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, all depend upon management’s judgment. Management’s judgment and the data relied upon by management may be based on assumptions that prove to be inaccurate, particularly in times of market stress or other unforeseen circumstances. As a bank with total assets exceeding $10 billion we have become subject to the stress testing requirements of the Dodd-Frank Act and our forecasting and modeling requirements have increased and become more complex. Even if the relevant factual assumptions determined by management are accurate, our decisions may prove to be inadequate or inaccurate because of other flaws in the design or use of analytical tools by management. Any such failures in our processes for producing accounting estimates and managing risks could have a material adverse effect on our business, financial condition and results of operations.
Our controls and procedures may fail or be circumvented. Management regularly reviews and updates our internal controls over financial reporting, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.
We must effectively manage our counterparty risk. Financial services institutions are interrelated as a result of trading, clearing, counterparty and other relationships. Our Bank has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose our Bank to credit risk in the event of a default by a counterparty or client. In addition, our Bank’s credit risk may be increased when the collateral it is entitled to cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of its credit or derivative exposure. Any such losses could have a material adverse effect on our business, financial condition and results of operations.
Our business is susceptible to fraud. Our business exposes us to fraud risk from our loan and deposit customers, the parties they do business with, as well as from our employees, contractors and vendors. We rely on financial and other data from new and existing customers which could turn out to be fraudulent when accepting such customers, executing their financial transactions and making and purchasing loans and other financial assets. In times of increased economic stress we are at increased risk of fraud losses. We believe we have underwriting and operational controls in place to prevent or detect such fraud, but we cannot provide assurance that these controls will be effective in detecting fraud or that we will not experience fraud losses or incur costs or other damage related to such fraud, at levels that adversely affect our financial results or reputation. Our lending customers may also experience fraud in their businesses which could adversely affect their ability to repay their loans or make use of our services. Our exposure and the exposure of our customers to fraud may increase our financial risk and reputation risk as it may result in unexpected loan losses that exceed those that have been provided for in our allowance for loan losses.
We must maintain adequate regulatory capital to support our business objectives. Under regulatory capital adequacy guidelines and other regulatory requirements, we must satisfy capital requirements based upon quantitative measures of assets, liabilities and certain off-balance sheet items. Our satisfaction of these requirements is subject to qualitative judgments by regulators that may differ materially from management’s and that are subject to being determined retroactively for prior periods. Our ability to maintain our status as a financial holding company and to continue to operate our Bank as we have in recent periods is dependent upon a number of factors, including our Bank qualifying as “well capitalized” and “well managed” under applicable prompt corrective action regulations and upon our company qualifying on an ongoing basis as “well capitalized” and “well managed” under applicable Federal Reserve regulations.
Failure to meet regulatory capital standards could have a material adverse effect on our business, including damaging the confidence of customers in us, adversely impacting our reputation and competitive position and retention of key people. Any of these developments could limit our access to:

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Brokered deposits;
The Federal Reserve discount window;
Advances from the Federal Home Loan Bank;
Capital markets transactions; and
Development of new financial services.
Failure to meet regulatory capital standards may also result in higher FDIC assessments. If we fall below guidelines for being deemed “adequately capitalized” the OCC or Federal Reserve could impose restrictions on our activities and a broad range of regulatory requirements in order to effect “prompt corrective action.” The capital requirements applicable to us are in a process of continuous evaluation and revision in connection with Basel III and the requirements of the Dodd-Frank Act. We cannot predict the final form, or the effects, of these regulations on our business, but among the possible effects are requirements that we slow our rate of growth or obtain additional capital which could reduce our earnings or dilute our existing stockholders.
We are dependent on funds obtained from capital transactions or from our Bank to fund our obligations. We are a financial holding company engaged in the business of managing, controlling and operating our Bank. We conduct no material business or other activity at the parent company level other than activities incidental to holding equity and debt investments in our Bank. As a result, we rely on the proceeds of capital transactions, payments of interest and principal on loans made to our Bank and dividends on preferred stock issued by our Bank to pay our operating expenses, to satisfy our obligations to debtholders and to pay dividends on our preferred stock. Our Bank’s ability to pay dividends may be limited. The profitability of our Bank is subject to fluctuation based upon, among other things, the cost and availability of funds, changes in interest rates and economic conditions in general. Our Bank’s ability to pay dividends to us is subject to regulatory limitations that can, under certain adverse circumstances, prohibit the payment of dividends to us. Our right to participate in any distribution from the sale or liquidation of our Bank is subject to the prior claims of our Bank’s creditors.
If we are unable to access funds from capital transactions, or dividends or interest on loan payments from our Bank, we may be unable to satisfy our obligations to creditors or debtholders or pay dividends on our preferred stock. Changes in our Bank’s operating results or capital requirements could require us to convert subordinated notes or preferred stock of our bank held by us into common equity, reducing our cash flow available to meet our obligations.
We are subject to environmental liability risk associated with lending activities. A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. There is a risk that hazardous or toxic substances could be found on these properties, and that we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property's value by limiting our ability to use or sell it. Although we have policies and procedures requiring environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations. Future laws or regulations or more stringent interpretations or enforcement policies with respect to existing laws and regulations may increase our exposure to environmental liability.
Severe weather, earthquakes, other natural disasters, pandemics, acts of war or terrorism and other external events could significantly impact our business. Severe weather, earthquakes, other natural disasters, pandemics, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. Hurricanes have caused extensive flooding and destruction along the coastal areas of Texas, including communities where we conduct business. Although management has established disaster recovery policies and procedures, the occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations.
We are subject to claims and litigation in the ordinary course of our business, including claims that may not be covered by our insurers. Customers and other parties we engage with assert claims and take legal action against us on a regular basis and we regularly take legal action to collect unpaid borrower obligations, realize on collateral and assert our rights in commercial and other contexts. These actions frequently result in counter-claims against us. Litigation arises in a variety of contexts, including lending activities, employment practices, commercial agreements, fiduciary responsibility related to our wealth management services, intellectual property rights and other general business matters.
Claims and legal actions may result in significant legal costs to defend us or assert our rights and reputational damage that adversely affects existing and future customer relationships. If claims and legal actions are not resolved in a manner favorable to us we may suffer significant financial liability or adverse effects upon our reputation, which could have a material adverse effect on our business, financial condition and results of operations. See Legal Proceedings below for additional disclosures regarding legal proceedings.

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We purchase insurance coverage to mitigate a wide range of operating risks, including general liability, errors and omissions, professional liability, business interruption, cyber-crime and property loss, for events that may be materially detrimental to our Bank or customers. There is no assurance that our insurance will be adequate to protect us against material losses in excess of our coverage limits or that insurers will perform their obligations under our policies without attempting to limit or exclude coverage. We could be required to pursue legal actions against insurers to obtain payment of amounts we are owed, and there is no assurance that such actions, if pursued, would be successful.
Risks Relating to Our Securities
Our stock price can be volatile. Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:
actual or anticipated variations in quarterly and annual results of operations;
changes in recommendations by securities analysts;
changes in composition and perceptions of the investors who own our stock and other securities;
changes in ratings from national rating agencies on publicly or privately owned debt securities;
operating and stock price performance of other companies that investors deem comparable to us;
news reports relating to trends, concerns and other issues in the financial services industry, including regulatory actions against other financial institutions;
actual or expected economic conditions that are perceived to affect our company such as changes in commodity prices, real estate values or interest rates;
perceptions in the marketplace regarding us and/or our competitors;
new technology used, or services offered, by competitors;
significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors;
changes in government regulations and interpretation of those regulations, changes in our practices requested or required by regulators and changes in regulatory enforcement focus; and
geopolitical conditions such as acts or threats of terrorism or military conflicts.
General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of operating results as evidenced by the recent volatility and disruption of capital and credit markets.
The trading volume in our common stock is less than that of other larger financial services companies. Although our common stock is traded on the Nasdaq Global Select Market, the trading volume in our common stock is less than that of other larger financial services companies. Given the lower trading volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause our stock price to fall. In addition, a substantial majority of common stock outstanding is held by institutional shareholders, and trading activity involving large positions may increase volatility of the stock price. Concentration of ownership by institutional investors and inability to execute trades covering large numbers of shares can increase volatility of stock price. Changes in general economic outlook or perspectives on our business or prospects by our institutional investors, whether factual or speculative, can have a major impact on our stock price.
Our preferred stock is thinly traded. There is only a limited trading volume in our preferred stock due to the small size of the issue and its largely institutional holder base. Significant sales of our preferred stock, or the expectation of these sales, could cause the price of the preferred stock to fall substantially.
An investment in our securities is not an insured deposit. Our common stock, preferred stock and indebtedness are not bank deposits and, therefore, are not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of securities of any company. As a result, if you acquire our common stock, preferred stock or indebtedness, you may lose some or all of your investment.
The holders of our indebtedness and preferred stock have rights that are senior to those of our common stockholders. As of December 31, 2015, we had $111.0 million in subordinated notes held by our holding company and $113.4 million in junior subordinated notes outstanding that are held by statutory trusts which issued trust preferred securities to investors. At December 31, 2015 our Bank had $175.0 million in subordinated notes outstanding. Payments of the principal and interest on our trust preferred securities are conditionally guaranteed by us to the extent not paid by each trust, provided the trust has funds available for such obligations.

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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 any sale or liquidation of our Bank receive payment before any amounts would be payable to holders of our common stock, preferred stock or subordinated notes.
At December 31, 2015, we had issued and outstanding 6 million shares of our 6.50% Non-Cumulative Perpetual Preferred Stock, Series, A, having an aggregate liquidation preference of $150.0 million. Our preferred stock is senior to our shares of common stock in right of payment of dividends and other distributions. We must be current on dividends payable to holders of preferred stock before any dividends can be paid on our common stock. In the event of our bankruptcy, dissolution or liquidation, the holders of our preferred stock must be satisfied before any distributions can be made to our common stockholders.
We do not currently pay dividends on our common stock. We have not paid dividends on our common stock and we do not expect to do so for the foreseeable future. Our ability to pay dividends is limited by regulatory restrictions and the need to maintain sufficient consolidated capital. The ability of our Bank to pay dividends to us is limited by its obligation to maintain sufficient capital and by other regulatory restrictions as discussed above at We are dependent on funds obtained from capital transactions or from our Bank to fund our obligations.
Restrictions on Ownership. The ability of a third party to acquire us is limited under applicable U.S. banking laws and regulations. The BHCA requires any bank holding company (as defined therein) to obtain the approval of the Federal Reserve prior to acquiring, directly or indirectly, more than 5% of our outstanding Common Stock. Any “company” (as defined in the BHCA) other than a bank holding company would be required to obtain Federal Reserve approval before acquiring “control” of us. “Control” generally means (i) the ownership or control of 25% or more of a class of voting securities, (ii) the ability to elect a majority of the directors or (iii) the ability otherwise to exercise a controlling influence over management and policies. A holder of 25% or more of our outstanding Common Stock, other than an individual, is subject to regulation and supervision as a bank holding company under the BHCA. In addition, under the Change in Bank Control Act of 1978, as amended, and the Federal Reserve’s regulations thereunder, any person, either individually or acting through or in concert with one or more persons, is required to provide notice to the Federal Reserve prior to acquiring, directly or indirectly, 10% or more of our outstanding common stock.
Anti-takeover provisions of our certificate of incorporation, bylaws and Delaware law may make it more difficult for you to receive a change in control premium. Certain provisions of our certificate of incorporation and bylaws could make a merger, tender offer or proxy contest more difficult, even if such events were perceived by many of our stockholders as beneficial to their interests. These provisions include advance notice for nominations of directors and stockholders' proposals, and authority to issue “blank check” preferred stock with such designations, rights and preferences as may be determined from time to time by our board of directors. In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law which, in general, prevents an interested stockholder, defined generally as a person owning 15% or more of a corporation's outstanding voting stock, from engaging in a business combination with our company for three years following the date that person became an interested stockholder unless certain specified conditions are satisfied.
Limitations on payment of subordinated notes. Under the FDIA, “critically undercapitalized” banks may not, beginning 60 days after becoming critically undercapitalized, make any payment of principal or interest on their subordinated debt (subject to certain limited exceptions). In addition, under Section 18(i) of the FDIA, our Bank is required to obtain the advance consent of the FDIC to retire any part of its subordinated notes. Under the FDIA, a bank may not pay interest on its subordinated notes if such interest is required to be paid only out of net profits, or distribute any of its capital assets, while it remains in default on any assessment due to the FDIC.
Our Bank’s subordinated indebtedness is unsecured and subordinate and junior in right of payment to the Bank’s obligations to its depositors, its obligations under banker’s acceptances and letters of credit, its obligations to any Federal Reserve Bank, certain obligations to the FDIC, and its obligations to its other creditors, whether now outstanding or hereafter incurred, except any obligations which expressly rank on a parity with or junior to the notes, including subordinated notes payable to the Company.
ITEM 1B.
UNRESOLVED STAFF COMMENTS

None.

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ITEM 2.
PROPERTIES
As of December 31, 2015, we conducted business at twelve full service banking locations and one operations center. Our operations center houses our loan and deposit operations and the customer service call center. We lease the space in which our banking centers and the operations call center are located. These leases expire between July 2016 and February 2025, not including any renewal options that may be available.
The following table sets forth the location of our executive offices, operations center and each of our banking centers. 
Type of Location
Address
Executive offices, banking location
2000 McKinney Avenue
 
Banking Center — Suite 190
Executive Offices — Suite 700
 
Dallas, Texas 75201
 
 
Operations center, banking location
2350 Lakeside Drive
Banking Center — Suite 105
 
Operations Center — Suite 800
 
Richardson, Texas 75082
 
 
Banking location
14131 Midway Road
 
Suite 100
 
Addison, Texas 75001
 
 
Banking location
5910 North Central Expressway
 
Suite 150
 
Dallas, Texas 75206
 
 
Banking location
5800 Granite Parkway
 
Suite 150
 
Plano, Texas 75024
 
 
Executive offices, banking location
300 Throckmorton
 
Banking center — Suite 100
Executive offices — Suite 200
 
Fort Worth, Texas 76102
 
 
Executive offices, banking location
98 San Jacinto Boulevard
Banking center — Suite 150
Executive offices — Suite 200
 
Austin, Texas 78701
 
 
Banking location
Westlake Hills
 
3818 Bee Caves Road
 
Austin, Texas 78746
 
 
Executive offices, banking location
745 East Mulberry Street
 
Banking center — Suite 150
Executive offices — Suite 350
 
San Antonio, Texas 78212
 
 
Banking location
7373 Broadway
 
Suite 100
 
San Antonio, Texas 78209
 
 
Executive offices, banking location
One Riverway
 
Banking center — Suite 150
Executive offices — Suite 2100
 
Houston, Texas 77056
 
 
Banking location
Westway II
 
4424 West Sam Houston Parkway N.
 
Suite 170
  
Houston, TX 77041
 
 
Executive offices
Kempwood
 
2930 West Sam Houston Parkway North
 
Executive offices — Suite 300
 
Houston, Texas 77056

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ITEM 3.
LEGAL PROCEEDINGS
The Company is subject to various claims and legal actions that may arise in the course of conducting its business. Management does not expect the disposition of any of these matters to have a material adverse impact on the Company’s financial statements or results of operations. 
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on The Nasdaq Global Select Market under the symbol “TCBI”. On February 16, 2016, there were approximately 208 holders of record of our common stock.
No cash dividends have ever been paid by us on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future. Our principal source of funds to pay cash dividends on our common stock would be cash dividends from our Bank. The payment of dividends by our Bank is subject to certain restrictions imposed by federal banking laws, regulations and authorities.
The following table presents the range of high and low bid prices reported on The Nasdaq Global Select Market for each of the four quarters of 2014 and 2015.
 
Price Per Share
Quarter Ended
High
 
Low
March 31, 2014
$
67.08

 
$
56.45

June 30, 2014
66.62

 
50.76

September 30, 2014
60.74

 
49.90

December 31, 2014
62.07

 
51.58

 
 
 
 
March 31, 2015
54.81

 
40.40

June 30, 2015
63.70

 
47.55

September 30, 2015
63.25

 
48.01

December 31, 2015
61.83

 
46.25



25


Table of Contents

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, 2015, 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, 2010. The performance graph represents past performance and should not be considered to be an indication of future performance.
 
 
12/31/2010
 
12/31/2011
 
12/31/2012
 
12/31/2013
 
12/31/2014
 
12/31/2015
Texas Capital
 
 
 
 
 
 
 
 
 
 
 
Bancshares, Inc.
$
100.00

 
$
143.44

 
$
210.03

 
$
291.47

 
$
254.59

 
$
231.58

Russell 2000
 
 
 
 
 
 
 
 
 
 
 
Index (RTY)
100.00

 
94.84

 
108.76

 
148.62

 
154.03

 
145.49

Nasdaq Bank
 
 
 
 
 
 
 
 
 
 
 
Index (CBNK)
100.00

 
87.87

 
101.94

 
140.62

 
144.88

 
154.61



Source: Bloomberg

26


Table of Contents

ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the selected financial data presented below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this Form 10-K. 
 
At or For the Year Ended December 31,
  
2015
 
2014
 
2013
 
2012
 
2011
 
(In thousands, except per share, average share and percentage data)
Consolidated Operating Data(1)
 
 
 
 
 
 
 
 
 
Interest income
$
602,958

 
$
514,547

 
$
444,625

 
$
398,457

 
$
321,600

Interest expense
46,428

 
37,582

 
25,112

 
21,578

 
18,663

Net interest income
556,530

 
476,965

 
419,513

 
376,879

 
302,937

Provision for credit losses
53,250

 
22,000

 
19,000

 
11,500

 
28,500

Net interest income after provision for credit losses
503,280

 
454,965

 
400,513

 
365,379

 
274,437

Non-interest income
47,738

 
42,511

 
44,024

 
43,040

 
32,232

Non-interest expense
326,523

 
285,114

 
256,729

 
219,881

 
188,327

Income before income taxes
224,495

 
212,362

 
187,808

 
188,538

 
118,342

Income tax expense
79,641

 
76,010

 
66,757

 
67,866

 
42,366

Net income
144,854

 
136,352

 
121,051

 
120,672

 
75,976

Preferred stock dividends
9,750

 
9,750

 
7,394

 

 

Net income available to common stockholders
$
135,104

 
$
126,602

 
$
113,657

 
$
120,672

 
$
75,976

Consolidated Balance Sheet Data(1)
 
 
 
 
 
 
 
 
 
Total assets
$
18,909,139

 
$
15,905,713

 
$
11,720,064

 
$
10,540,844

 
$
8,137,618

Loans held for sale
86,075

 

 

 

 

Loans held for investment
11,745,674

 
10,154,887

 
8,486,603

 
6,785,837

 
5,572,764

Loans held for investment, mortgage finance loans
4,966,276

 
4,102,125

 
2,784,265

 
3,175,272

 
2,080,081

Liquidity assets
2,708,352

 
444,673

 
144,050

 
72,689

 
129,631

Securities available-for-sale
29,992

 
41,719

 
63,214

 
100,195

 
143,710

Demand deposits
6,386,911

 
5,011,619

 
3,347,567

 
2,535,375

 
1,751,944

Total deposits
15,084,619

 
12,673,300

 
9,257,379

 
7,440,804

 
5,556,257

Federal funds purchased and repurchase agreements
143,051

 
92,676

 
170,604

 
297,115

 
436,050

Other borrowings
1,500,000

 
1,100,005

 
855,026

 
1,650,046

 
1,332,066

Subordinated notes
286,000

 
286,000

 
111,000

 
111,000

 

Trust preferred subordinated debentures
113,406

 
113,406

 
113,406

 
113,406

 
113,406

Stockholders’ equity
1,623,533

 
1,484,190

 
1,096,350

 
836,242

 
616,331








27


Table of Contents

 
At or For the Year Ended December 31,
  
2015
 
2014
 
2013
 
2012
 
2011
 
(In thousands, except per share, average share and percentage data)
Other Financial Data
 
 
 
 
 
 
 
 
 
Income per share
 
 
 
 
 
 
 
 
 
Basic
$
2.95

 
$
2.93

 
$
2.78

 
$
3.09

 
$
2.03

Diluted
2.91

 
2.88

 
2.72

 
3.00

 
1.98

Tangible book value per share
31.69

 
28.72

 
22.54

 
20.04

 
15.82

Book value per share
32.12

 
29.17

 
23.06

 
20.53

 
16.36

Weighted average shares
 
 
 
 
 
 
 
 
 
Basic
45,808,440

 
43,236,344

 
40,864,225

 
39,046,340

 
37,334,743

Diluted
46,437,872

 
44,003,256

 
41,779,881

 
40,165,847

 
38,333,077

Selected Financial Ratios
 
 
 
 
 
 
 
 
 
Performance Ratios
 
 
 
 
 
 
 
 
 
Net interest margin
3.14
%
 
3.78
%
 
4.22
%
 
4.41
%
 
4.68
%
Return on average assets
0.79
%
 
1.05
%
 
1.17
%
 
1.35
%
 
1.12
%
Return on average equity
9.65
%
 
11.31
%
 
12.82
%
 
16.93
%
 
13.39
%
Efficiency ratio
54.04
%
 
54.88
%
 
55.39
%
 
52.35
%
 
56.15
%
Non-interest expense to average earning assets
1.84
%
 
2.26
%
 
2.58
%
 
2.57
%
 
2.90
%
Asset Quality Ratios
 
 
 
 
 
 
 
 
 
Net charge-offs (recoveries) to average LHI
0.07
%
 
0.05
%
 
0.05
%
 
0.07
%
 
0.47
%
Net charge-offs (recoveries) to average LHI excluding mortgage finance loans
0.10
%
 
0.07
%
 
0.07
%
 
0.10
%
 
0.58
%
Allowance for loan losses to LHI
0.84
%
 
0.71
%
 
0.78
%
 
0.75
%
 
0.92
%
Allowance for loan losses to LHI excluding mortgage finance loans
1.20
%
 
0.99
%
 
1.03
%
 
1.10
%
 
1.26
%
Allowance for loan losses to non-accrual loans
.8x

 
2.3x

 
2.7x

 
1.3x

 
1.3x

Non-accrual loans to LHI
1.08
%
 
0.30
%
 
0.29
%
 
0.56
%
 
0.71
%
Non-accrual loans to LHI excluding mortgage finance loans
1.53
%
 
0.43
%
 
0.38
%
 
0.82
%
 
0.98
%
Total NPAs to LHI plus OREO
1.08
%
 
0.31
%
 
0.33
%
 
0.72
%
 
1.17
%
Total NPAs to LHI excluding mortgage finance loans plus OREO
1.53
%
 
0.43
%
 
0.44
%
 
1.06
%
 
1.61
%
Capital and Liquidity Ratios(2)
 
 
 
 
 
 
 
 
 
CET1
7.47
%
 
7.89
%
 
N/A

 
N/A

 
N/A

Total capital ratio
11.05
%
 
11.83
%
 
10.73
%
 
9.97
%
 
9.25
%
Tier 1 capital ratio
8.81
%
 
9.46
%
 
9.15
%
 
8.27
%
 
8.38
%
Tier 1 leverage ratio
8.92
%
 
10.76
%
 
10.87
%
 
9.41
%
 
8.78
%
Average equity/average assets
8.51
%
 
9.75
%
 
9.68
%
 
7.95
%
 
8.33
%
Tangible common equity/total tangible assets
7.69
%
 
8.26
%
 
7.87
%
 
7.73
%
 
7.29
%
Average net loans/average deposits
101.71
%
 
111.57
%
 
116.25
%
 
129.97
%
 
115.68
%

(1)
The consolidated operating data and consolidated balance sheet data presented above for the five most recent fiscal years have been derived from our audited consolidated financial statements. The historical results are not necessarily indicative of the results to be expected in any future period.
(2)
The Basel III Capital Rules specifying the CET1 ratio became effective on January 1, 2015.

28


Table of Contents

ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Certain statements and financial analysis contained in this report that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of federal securities laws. Forward-looking statements may also be contained in our future filings with SEC, in press releases and in oral and written statements made by us or with our approval that are not statements of historical fact. These forward-looking statements are based on our beliefs, assumptions and expectations of our future performance taking into account all information currently available to us. 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, economic conditions, including the continued impact on our customers from declines and volatility in oil and gas prices, expectations regarding rates of default or loan losses, volatility in the mortgage industry, our business strategies and our expectations about future financial performance, future growth and earnings, the appropriateness of our allowance for loan losses and provision for loan losses, the impact of increased regulatory requirements 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 or interest rates, increased default rates and loan losses or adverse changes in the industry concentrations of our loan portfolio.
Changes in the U.S. economy in general or the Texas economy specifically resulting in deterioration of credit quality or reduced demand for credit or other financial services we offer, including declines and volatility in oil and gas prices.
Changing economic conditions or other developments adversely affecting our commercial, entrepreneurial and professional customers.
Changes in the value of commercial and residential real estate securing our loans or in the demand for credit to support the purchase and ownership of such assets.
The failure to correctly assess and model the assumptions supporting our allowance for loan losses, causing it to become inadequate in the event of decreases in loan quality and increases in charge-offs.
Adverse changes in economic or market conditions, or our operating performance, which 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.
The failure to effectively balance our funding sources with cash demands by depositors and borrowers.
The failure to effectively manage our interest rate risk resulting from unexpectedly large or sudden changes in interest rates or rate or maturity imbalances in our assets and liabilities.
The failure to successfully expand into new markets, develop and launch new lines of business or new products and services within the expected timeframes and budgets or to successfully manage the risks related to the development and implementation of these new businesses, products or services.
The failure to attract and retain key personnel or the loss of key individuals or groups of employees.
The failure to manage our information systems risk or to prevent cyber attacks against us or our third party vendors.
Legislative and regulatory changes imposing further restrictions and costs on our business, a failure to remain well capitalized or well managed or regulatory enforcement actions against us.
Adverse changes in economic or business conditions that impact the financial markets or our customers.
Increased or more effective competition from banks and other financial service providers in our markets.
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 resulting from retaining MSRs.

29


Table of Contents

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.
An increase in the incidence or severity of fraud, illegal payments, security breaches and other illegal acts impacting our Bank and our customers.
Structural changes in the markets for origination, sale and servicing of residential mortgages.
Unavailability of funds obtained from capital transactions or from our Bank to fund our obligations.
Failures of counterparties or third party vendors to perform their obligations.
Environmental liability associated with properties related to our lending activities.
Severe weather, natural disasters, acts of war or terrorism and other external events.
Incurrence of material costs and liabilities associated with legal and regulatory proceedings and related matters with respect to the financial services industry, including those directly involving us or our Bank.
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.
Overview of Our Business Operations
We commenced our banking operations in December 1998. An important aspect of our growth strategy has been our ability to service and manage effectively 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.
In the third quarter of 2015, we launched a correspondent lending program, MCA, to complement our warehouse lending program. Through our MCA program we commit to purchase residential mortgage loans from independent correspondent lenders and deliver those loans into the secondary market via whole loan sales to independent third parties or in securitization transactions to GSEs such as Fannie Mae, Freddie Mac and Ginnie Mae. We retain the MSRs in some cases with the expectation that they will be sold from time to time. 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. At the commitment date, we enter into a corresponding forward sale commitment with a third party, typically a GSE, to deliver the loans to the GSE within a specified timeframe. The estimated gain/loss for the entire transaction (from initial purchase commitment to final delivery of loans) is recorded as an asset or liability. Fair value is derived from observable current market prices, when available, and includes the fair value of the MSRs. At December 31, 2015, we had $86.1 million in loans held for sale related to MCA.
The following discussion and analysis presents the significant factors affecting our financial condition as of December 31, 2015 and 2014 and results of operations for each of the three years related to the periods ended December 31, 2015, 2014 and 2013. This discussion should be read in conjunction with our consolidated financial statements and notes to the financial statements appearing later in this report.
Year ended December 31, 2015 compared to year ended December 31, 2014
We reported net income of $144.9 million and net income available to common stockholders of $135.1 million, or $2.91 per diluted common share, for the year ended December 31, 2015, compared to net income of $136.4 million and net income available to common stockholders of $126.6 million, or $2.88 per diluted common share, for the same period in 2014. Return on average equity ("ROE") was 9.65% and return on average assets ("ROA") was 0.79% for the year ended December 31, 2015, compared to 11.31% and 1.05%, respectively, for the same period in 2014. The decrease in ROE and essentially flat earnings per share for 2015 compared to 2014 reflect the dilutive effect of the fourth quarter 2014 offering of 2.5 million common shares for net proceeds of $149.6 million. The ROA decrease resulted from a combination of reduced yields on loans and a $2.3 billion increase in average liquidity assets for the year ended December 31, 2015 compared to the same period of 2014.

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Table of Contents

Net income increased $8.5 million for the year ended December 31, 2015 compared to 2014. The $8.5 million increase was primarily the result of a $79.6 million increase in net interest income and a $5.2 million increase in non-interest income, offset by a $31.3 million increase in the provision for credit losses, a $41.4 million increase in non-interest expense and a $3.6 million decrease in income tax expense.
Year ended December 31, 2014 compared to year ended December 31, 2013
We reported net income of $136.4 million and net income available to common stockholders of $126.6 million, or $2.88 per diluted common share, for the year ended December 31, 2014, compared to net income of $121.1 million and net income available to common stockholders of $113.7 million, or $2.72 per diluted common share, for the same period in 2013. Return on average equity ("ROE") was 11.31% and return on average assets ("ROA") was 1.05% for the year ended December 31, 2014, compared to 12.82% and 1.17%, respectively, for the same period in 2013. During 2014, we completed a $175.0 million subordinated debt offering and two equity offerings totaling 4.4 million common shares, which increased common equity by $256.2 million. These transactions had the effect of reducing ROE during 2014. The ROA decrease resulted from the subordinated debt offering and from a combination of reduced yields on loans and an increase in average liquidity assets for the year ended December 31, 2014 compared to the same period of 2013.
Net income increased $15.3 million for the year ended December 31, 2014 compared to 2013. The $15.3 million increase was primarily the result of a $57.5 million increase in net interest income, offset by a $3.0 million increase in the provision for credit losses, a $1.5 million decrease in non-interest income, a $28.4 million increase in non-interest expense and a $9.3 million increase in income tax expense.
Net Interest Income
Net interest income was $556.5 million for the year ended December 31, 2015 compared to $477.0 million for the same period of 2014. The increase in net interest income was primarily due to an increase of $5.1 billion in average earning assets as compared to the same period of 2014. The increase in average earning assets included a $2.9 billion increase in average net loans and a $2.3 billion increase in liquidity assets. For the year ended December 31, 2015, average net loans, liquidity assets and securities represented 84%, 15% and less than 1%, respectively, of average earning assets compared to 96%, 4% and 1%, respectively, in 2014.
Average interest-bearing liabilities for the year ended December 31, 2015 increased $2.6 billion from the year ended December 31, 2014, which included a $1.6 billion increase in interest-bearing deposits and a $1.0 billion increase in other borrowings. For the same periods, the average balance of demand deposits increased to $6.4 billion from $4.2 billion. The average cost of total deposits and borrowed funds remained flat at 0.17% for the year ended December 31, 2015, compared to the same period in the prior year. The average cost of interest-bearing liabilities decreased from 0.50% for the year ended December 31, 2014 to 0.46% for the same period of 2015.
Net interest income was $477.0 million for the year ended December 31, 2014 compared to $419.5 million for the same period of 2013. The increase in net interest income was primarily due to an increase of $2.7 billion in average earning assets as compared to the same period of 2013. The increase in average earning assets included a $2.4 billion increase in average net loans and a $300.6 million increase in liquidity assets. For the year ended December 31, 2014, average net loans, liquidity assets and securities represented 96%, 4% and less than 1%, respectively, of average earning assets compared to 98%, 1% and 1%, respectively, in 2013.
Average interest-bearing liabilities for the year ended December 31, 2014 increased $1.2 billion from the year ended December 31, 2013, which included a $1.3 billion increase in interest-bearing deposits and a $160.6 million increase in long-term debt as a result of the Bank's issuance of subordinated notes in January 2014, offset by a $273.4 million decrease in other borrowings. For the same periods, the average balance of demand deposits increased to $4.2 billion from $3.0 billion. The average cost of total deposits and borrowed funds remained flat at 0.17% for the year ended December 31, 2014, compared to the same period in the prior year. The total cost of interest-bearing liabilities included $8.7 million attributable to the $175.0 million in long-term subordinated debt issued in January 2014. Including the increase in long-term subordinated debt during 2014, the average cost of interest-bearing liabilities increased from 0.40% for the year ended December 31, 2013 to 0.50% for the same period of 2014.
Volume/Rate Analysis
The following table presents the changes (in thousands) in taxable-equivalent net interest income and identifies the changes due to differences in the average volume of earning assets and interest-bearing liabilities and the changes due to differences in the average interest rate on those assets and liabilities.

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Table of Contents

 
Years Ended December 31,
 
2015/2014
 
2014/2013
 
Net
Change
 
Change Due To(1)
 
Net
Change
 
Change Due To(1)
 
Volume
 
Yield/Rate(2)
 
Volume
 
Yield/Rate(2)
Interest income:
 
 
 
 
 
 
 
 
 
 
 
Securities
$
(672
)
 
$
(622
)
 
$
(50
)
 
$
(1,430
)
 
$
(1,330
)
 
$
(100
)
Loans held for sale
243

 
243

 

 

 

 

Loans held for investment, mortgage finance loans
25,616

 
33,288

 
(7,672
)
 
6,197

 
22,763

 
(16,566
)
Loans held for investment
57,264

 
83,268

 
(26,004
)
 
64,095

 
84,854

 
(20,759
)
Federal funds sold
475

 
459

 
16

 
142

 
35

 
107

Deposits in other banks
5,387

 
5,217

 
170

 
675

 
700

 
(25
)
Total
88,313

 
121,853

 
(33,540
)
 
69,679

 
107,022

 
(37,343
)
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
Transaction deposits
1,677

 
702

 
975

 
274

 
38

 
236

Savings deposits
4,399

 
2,852

 
1,547

 
3,808

 
3,312

 
496

Time deposits
1,005

 
363

 
642

 

 
82

 
(82
)
Deposits in foreign branches
(648
)
 
(616
)
 
(32
)
 
33

 
55

 
(22
)
Other borrowings
1,789

 
1,966

 
(177
)
 
(473
)
 
(510
)
 
37

Long-term debt
624

 
858

 
(234
)
 
8,828

 
10,602

 
(1,774
)
Total
8,846

 
6,125

 
2,721

 
12,470

 
13,579

 
(1,109
)
Net interest income
$
79,467

 
$
115,728

 
$
(36,261
)
 
$
57,209

 
$
93,443

 
$
(36,234
)
(1)
Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.
(2)
Taxable equivalent rates used where applicable assuming a 35% tax rate.
Net interest margin, which is defined as the ratio of net interest income to average earning assets, decreased from 3.78% for 2014 to 3.14% for 2015. This 64 basis point decrease was due to the growth in loans with lower yields and the $2.3 billion increase in average balances of liquidity assets, which include Federal funds sold and deposits held principally at the Federal Reserve Bank of Dallas. Funding costs, including demand deposits and borrowed funds, remained at .17% for 2015 compared to .17% for 2014. The spread on total earning assets, net of the cost of deposits and borrowed funds, was 3.23% for 2015 compared to 3.91% for 2014. The decrease resulted from the reduction in yields on total loans, as well as the increased proportion of liquidity assets to total earning assets. Total funding costs, including all deposits, long-term debt and stockholders' equity decreased to .25% for 2015 compared to .29% for 2014. Average long-term debt increased by $14.4 million from 2014 and the average interest rate on long-term debt for 2015 was 4.84% compared to 4.85% for 2014.
Net interest margin decreased from 4.22% for 2013 to 3.78% for 2014. This 44 basis point decrease was due to the growth in loans with lower yields, the impact of the January 2014 subordinated note offering and the $300.6 million increase in average balances of liquidity assets, which includes Federal funds sold and deposits in other banks. Funding costs, including demand deposits and borrowed funds, remained at .17% for 2014 compared to .17% for 2013. The spread on total earning assets, net of the cost of deposits and borrowed funds, was 3.91% for 2014 compared to 4.30% for 2013. The decrease resulted from the reduction in yields on total loans, primarily due to the increased proportion of mortgage finance loans to total loans. Total funding costs, including all deposits, long-term debt and stockholders' equity increased to .29% for 2014 compared to .24% for 2013. Average long-term debt increased by $160.6 million from 2013 and the average interest rate on long-term debt for 2014 was 4.85% compared to 4.40% for 2013.

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Table of Contents

Consolidated Daily Average Balances, Average Yields and Rates
 
Year ended December 31,
  
2015
 
2014
 
2013
  
Average
Balance
 
Revenue /
Expense(1)
 
Yield /
Rate(2)
 
Average
Balance
 
Revenue /
Expense(1)
 
Yield /
Rate(2)
 
Average
Balance
 
Revenue /
Expense(1)
 
Yield /
Rate(2)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities—taxable
$
33,616

 
$
1,197

 
3.56
%
 
$
43,029

 
$
1,590

 
3.70
%
 
$
59,031

 
$
2,325

 
3.94
%
Securities—non-taxable
1,544

 
87

 
5.63
%
 
6,171

 
366

 
5.93
%
 
18,147

 
1,061

 
5.85
%
Federal funds sold
269,610

 
682

 
0.25
%
 
83,816

 
207

 
0.25
%
 
54,547

 
65

 
0.12
%
Deposits in other banks
2,438,742

 
6,293

 
0.26
%
 
360,857

 
906

 
0.25
%
 
89,503

 
231

 
0.26
%
Loans held for sale
6,359

 
243

 
3.82
%
 

 

 
%
 

 

 
%
Loans held for investment, mortgage finance
3,992,548

 
119,677

 
3.00
%
 
2,948,938

 
94,061

 
3.19
%
 
2,342,149

 
87,864

 
3.75
%
Loans held for investment
11,113,520

 
474,809

 
4.27
%
 
9,265,435

 
417,545

 
4.51
%
 
7,471,676

 
353,450

 
4.73
%
Less reserve for loan losses
114,965

 

 

 
91,363

 

 

 
78,282

 

 

Loans, net
14,991,103

 
594,486

 
3.97
%
 
12,123,010

 
511,606

 
4.22
%
 
9,735,543

 
441,314

 
4.53
%
Total earning assets
17,740,974

 
602,988

 
3.40
%
 
12,616,883

 
514,675

 
4.08
%
 
9,956,771

 
444,996

 
4.47
%
Cash and other assets
486,129

 
 
 
 
 
399,728

 
 
 
 
 
391,633

 
 
 
 
Total assets
$
18,227,103

 
 
 
 
 
$
13,016,611

 
 
 
 
 
$
10,348,404

 
 
 
 
Liabilities and stockholders’ equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Transaction deposits
$
1,680,220

 
$
2,615

 
0.16
%
 
$
960,812

 
$
938

 
0.10
%
 
$
908,415

 
$
664

 
0.07
%
Savings deposits
5,920,046

 
18,738

 
0.32
%
 
4,938,039

 
14,339

 
0.29
%
 
3,756,560

 
10,531

 
0.28
%
Time deposits
510,378

 
2,634

 
0.52
%
 
417,317

 
1,629

 
0.39
%
 
397,329

 
1,629

 
0.41
%
Deposits in foreign branches
181,657

 
591

 
0.33
%
 
361,203

 
1,239

 
0.34
%
 
345,506

 
1,206

 
0.35
%
Total interest-bearing deposits
8,292,301

 
24,578

 
0.30
%
 
6,677,371

 
18,145

 
0.27
%
 
5,407,810

 
14,030

 
0.26
%
Other borrowings
1,382,013

 
2,535

 
0.18
%
 
379,877

 
746

 
0.20
%
 
653,318

 
1,219

 
0.19
%
Subordinated notes
286,000

 
16,764

 
5.86
%
 
271,617

 
16,202

 
5.97
%
 
111,000

 
7,327

 
6.60
%
Trust preferred subordinated debentures
113,406

 
2,551

 
2.25
%
 
113,406

 
2,489

 
2.19
%
 
113,406

 
2,536

 
2.24
%
Total interest-bearing liabilities
10,073,720

 
46,428

 
0.46
%
 
7,442,271

 
37,582

 
0.50
%
 
6,285,534

 
25,112

 
0.40
%
Demand deposits
6,447,147

 
 
 
 
 
4,188,173

 
 
 
 
 
2,967,063

 
 
 
 
Other liabilities
155,960

 
 
 
 
 
116,566

 
 
 
 
 
94,592

 
 
 
 
Stockholders’ equity
1,550,276

 
 
 
 
 
1,269,601

 
 
 
 
 
1,001,215

 
 
 
 
Total liabilities and stockholders’ equity
$
18,227,103

 
 
 
 
 
$
13,016,611

 
 
 
 
 
$
10,348,404

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
$
556,560

 
 
 
 
 
$
477,093

 
 
 
 
 
$
419,884

 
 
Net interest margin
 
 
 
 
3.14
%
 
 
 
 
 
3.78
%
 
 
 
 
 
4.22
%
Net interest spread
 
 
 
 
2.94
%
 
 
 
 
 
3.58
%
 
 
 
 
 
4.07
%
Loan spread(3)
 
 
 
 
3.80
%
 
 
 
 
 
4.05
%
 
 
 
 
 
4.36
%
(1)
The loan averages include non-accrual loans which are stated net of unearned income. Loan interest income includes loan fees totaling $55.8 million, $50.0 million and $37.8 million for the years ended December 31, 2015, 2014 and 2013, respectively.
(2)
Taxable equivalent rates used where applicable assuming a 35% tax rate.
(3)
Yield on loans, net of reserves, less funding cost including all deposits and borrowed funds.


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Table of Contents

Non-interest Income 
 
Year ended December 31,
  
2015
 
2014
 
2013
 
(in thousands)
Service charges on deposit accounts
$
8,323

 
$
7,253

 
$
6,783

Trust fee income
5,022

 
4,937

 
5,023

Bank owned life insurance (BOLI) income
2,011

 
2,067

 
1,917

Brokered loan fees
18,661

 
13,981

 
16,980

Swap fees
4,275

 
2,992

 
5,520

Other
9,446

 
11,281

 
7,801

Total non-interest income
$
47,738

 
$
42,511

 
$
44,024

Non-interest income increased by $5.2 million during the year ended December 31, 2015 to $47.7 million, compared to $42.5 million for the same period in 2014. This increase was primarily due to a $4.7 million increase in brokered loan fees as a result of an increase in mortgage finance volumes. Swap fee income increased $1.3 million during 2015 compared to the same period of 2014. Swap fees are fees related to customer swap transactions, are received from the institution that is our counterparty on the transaction and fluctuate from time to time based on the number and volume of transactions closed during the year. Service charges increased $1.0 million during 2015 compared to the same period of 2014 as a result of an increase in deposit balances year-over-year. Offsetting these increases was a $1.8 million decrease in other non-interest income. Other non-interest income includes such items as letter of credit fees, gain on sale of loans held for sale, servicing fees related to the MCA program and other general operating income, none of which account for 1% or more of total interest income and non-interest income.
Non-interest income decreased by $1.5 million during the year ended December 31, 2014 to $42.5 million, compared to $44.0 million during the same period in 2013. This decrease was primarily due to a $3.0 million decrease in brokered loan fees as a result of lower per loan fees in our mortgage finance business. Swap fee income decreased $2.5 million during 2014 compared to the same period of 2013. These fees fluctuate from time to time based on the number and volume of transactions closed during the quarter. Swap fees are fees related to customer swap transactions and are received from the institution that is our counterparty on the transaction. Offsetting these decreases was a $3.5 million increase in other non-interest income. Other non-interest income includes such items as letter of credit fees and other general operating income, none of which account for 1% or more of total interest income and non-interest income.
While management expects continued growth in certain components of non-interest income, the future rate of growth could be affected by increased competition from nationwide and regional financial institutions and general economic conditions. In order to achieve continued growth in non-interest income, we may need to introduce new products, enter into new lines of business or expand existing lines of business. Any new product introduction or new market entry could place additional demands on capital and managerial resources and introduce new risks to our business.
Non-interest Expense 
 
 
Year ended December 31,
  
 
2015
 
2014
 
2013
 
 
(in thousands)
Salaries and employee benefits
 
$
192,610

 
$
169,051

 
$
157,752

Net occupancy expense
 
23,182

 
20,866

 
16,821

Marketing
 
16,491

 
15,989

 
16,203

Legal and professional
 
22,150

 
21,182

 
18,104

Communications and technology
 
21,425

 
18,667

 
13,762

FDIC insurance assessment
 
17,231

 
10,919

 
8,057

Litigation settlement expense
 

 

 
(908
)
Other(1)
 
33,434

 
28,440

 
26,938

Total non-interest expense
 
$
326,523

 
$
285,114

 
$
256,729

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

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Table of Contents

Non-interest expense for the year ended December 31, 2015 increased $41.4 million compared to the same period of 2014 primarily related to increases in salaries and employee benefits, net occupancy expense, legal and professional expense, communications and data processing, FDIC insurance assessment and other non-interest expense.
Salaries and employee benefits expense increased $23.6 million to $192.6 million during the year ended December 31, 2015. This increase resulted primarily from general business growth and continued build-out.
Net occupancy expense for the year ended December 31, 2015 increased $2.3 million as a result of general business growth and continued build-out needed to support our growth.
Legal and professional expense increased $968,000, or 5%, for the year ended December 31, 2015 compared to the same period in 2014. Our legal and professional expense will continue to fluctuate from year to year and could increase in the future due to additional growth and as we respond to continued regulatory changes and strategic initiatives.
Communications and technology expense increased $2.8 million to $21.4 million during the year ended December 31, 2015 as a result of general business and customer growth and continued build-out needed to support that growth, including investment in IT security.
FDIC insurance assessment expense increased $6.3 million from $10.9 million in 2014 to $17.2 million primarily as a result of the increase in total assets from December 31, 2014 to December 31, 2015.
Non-interest expense for the year ended December 31, 2014 increased $28.4 million compared to the same period of 2013 primarily related to increases in salaries and employee benefits, net occupancy expense, legal and professional expense, communications and data processing and FDIC insurance assessment, offset by a decrease in allowance and other carrying costs for OREO.
Salaries and employee benefits expense increased $11.3 million to $169.1 million during the year ended December 31, 2014. This increase resulted primarily from general business growth.
Net occupancy expense for the year ended December 31, 2014 increased $4.0 million as a result of general business growth and continued build-out needed to support our growth.
Legal and professional expense increased $3.1 million, or 17%, for the year ended December 31, 2014 compared to the same period in 2013. Our legal and professional expense will continue to fluctuate from year to year and could increase in the future with growth and as we respond to continued regulatory changes and strategic initiatives.
Communications and technology expense increased $4.9 million to $18.7 million during the year ended December 31, 2014 as a result of general business and customer growth and continued build-out needed to support that growth.
FDIC insurance assessment expense increased $2.8 million from $8.1 million in 2013 to $10.9 million primarily as a result of the difference in rates applied to banks with over $10 billion in assets.
For the year ended December 31, 2014, allowance and other carrying costs for OREO decreased $1.7 million to $85,000, which is consistent with the decrease in our OREO balances during 2014.
Analysis of Financial Condition
Loans Held for Investment
Our total loans held for investment have grown at an annual rate of 17%, 26% and 13% in 2015, 2014 and 2013, respectively, reflecting the continued build-up of our lending operations. Our business plan focuses primarily on lending to middle market businesses and successful professionals and entrepreneurs, and as such, commercial, real estate and construction loans have comprised a majority of our loan portfolio, representing 70% of total loans held for investment at December 31, 2015. Consumer loans generally have represented 1% or less of the portfolio from December 31, 2011 to December 31, 2015. Mortgage finance loans relate to our mortgage warehouse lending operations in which we invest in mortgage loan ownership interests that are typically sold within 10 to 20 days. Mortgage finance loan volumes fluctuate based on the level of market demand for the product and the number of days between purchase and sale of the loans, as well as overall market interest rates and tend to peak at the end of each month.
We originate a substantial majority of all loans held for investment (excluding mortgage finance loans). We also participate in syndicated loan relationships, both as a participant and as an agent. As of December 31, 2015, we had $1.8 billion in syndicated loans, $410.3 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, 2015, $66.5 million of our syndicated loans were on non-accrual.

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Table of Contents

The following table summarizes our loans held for investment on a gross basis by major category as of the dates indicated (in thousands): 
 
December 31,
  
2015
 
2014
 
2013
 
2012
 
2011
Commercial
$
6,672,631

 
$
5,869,219

 
$
5,020,565

 
$
4,106,419

 
$
3,275,150

Mortgage finance
4,966,276

 
4,102,125

 
2,784,265

 
3,175,272

 
2,080,081

Construction
1,851,717

 
1,416,405

 
1,262,905

 
737,637

 
422,026

Real estate
3,139,197

 
2,807,127

 
2,146,522

 
1,892,753

 
1,819,644

Consumer
25,323

 
19,699

 
15,350

 
19,493

 
24,822

Equipment leases
113,996

 
99,495

 
93,160

 
69,470

 
61,792

Total loans held for investment
$
16,769,140

 
$
14,314,070

 
$
11,322,767

 
$
10,001,044

 
$
7,683,515

For additional information on the types of loans we originate, see Note 3 - Loans Held for Investment and Allowance for Loan Losses in the accompanying notes to the consolidated financial statements included elsewhere in this report.
Portfolio Geographic and Industry Concentrations
As of December 31, 2015, a majority of our loans held for investment, excluding our mortgage finance loans and other national lines of business, were to businesses with headquarters and operations in Texas. This geographic concentration subjects the loan portfolio to the general economic conditions within this area. We also make loans to these customers that are secured by assets located outside of Texas. The risks created by this concentration have been considered by management in the determination of the adequacy of the allowance for loan losses. Management believes the allowance for loan losses is appropriate to cover estimated losses inherent in the loan portfolio at each balance sheet date.
The table below summarizes the industry concentrations of our funded loans held for investment on a gross basis at December 31, 2015.
(in thousands except percentage data)
Amount
 
Percent of
Total Loans Held for Investment
Services
$
6,053,929

 
36.1
%
Mortgage finance loans
4,966,276

 
29.6
%
Contracting—construction and real estate development
1,698,011

 
10.1
%
Investors and investment management companies
1,363,084

 
8.1
%
Petrochemical and mining
1,186,723

 
7.1
%
Manufacturing
554,702

 
3.3
%
Wholesale
318,382

 
1.9
%
Personal/household
216,144

 
1.3
%
Retail
214,603

 
1.3
%
Contracting—trades
138,924

 
0.8
%
Government
44,166

 
0.3
%
Agriculture
14,196

 
0.1
%
Total loans held for investment
$
16,769,140

 
100.0
%

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Table of Contents

Excluding our mortgage finance business, our largest concentration in any single industry is in services. Loans extended to borrowers within the services industries include loans to finance working capital and equipment, as well as loans to finance investment and owner-occupied real estate. Significant trade categories represented within the services industries include, but are not limited to, real estate services, financial services, leasing companies, transportation, communication, and hospitality services. Borrowers represented within the real estate services category are largely owners and managers of both residential and non-residential commercial real estate properties.
Loans extended to borrowers within the contracting industry are comprised largely of loans to land developers and to both heavy construction and general commercial contractors. Many of these loans are secured by real estate properties, the development of which is or may be financed by our Bank. Loans extended to borrowers within the petrochemical and mining industries are predominantly loans to finance the exploration and production of petroleum and natural gas. These loans are generally secured by proven petroleum and natural gas reserves and any such reserves which are developed as a result of the exploration.
This category also includes secured loans to companies in the energy services business, generally those engaged in supporting production, not exploration, drilling or development of reserves. We also have a small number of loans where our collateral consists of partnership interests and the partnerships are primarily in the petrochemical and mining industry. Personal/household loans include loans to certain successful professionals and entrepreneurs for commercial purposes, in addition to consumer loans.
We make loans that are appropriately collateralized under our credit standards. Approximately 97% of our funded loans held for investment are secured by collateral. Over 84% of the real estate collateral is located in Texas. The table below sets forth information regarding the distribution of our funded loans held for investment on a gross basis among various types of collateral at December 31, 2015 (in thousands except percentage data):
 
Amount
 
Percent of
Total Loans
Collateral type:
 
 
 
Business assets
$
4,820,254

 
28.7
%
Real property
4,990,914

 
29.8
%
Mortgage finance loans
4,966,276

 
29.6
%
Energy
799,758

 
4.8
%
Unsecured
446,715

 
2.7
%
Other assets
496,273

 
3.0
%
Highly liquid assets
174,315

 
1.0
%
Rolling stock
50,538

 
0.3
%
U. S. Government guaranty
24,097

 
0.1
%
Total loans held for investment
$
16,769,140

 
100.0
%

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Table of Contents

As noted in the table above, approximately 30% of our loans held for investment as of December 31, 2015 are secured by real estate. The table below summarizes our real estate loan portfolio as segregated by the type of property securing the credit. Property type concentrations are stated as a percentage of year-end total real estate loans as of December 31, 2015 (in thousands except percentage data):
 
Amount
 
Percent of
Total
Real Estate
Loans
Property type:
 
 
 
Market risk
 
 
 
Commercial buildings
$
813,798

 
16.3
%
1-4 Family dwellings (other than condominium)
733,775

 
14.7
%
Industrial buildings
608,292

 
12.2
%
Apartment buildings
569,835

 
11.4
%
Residential lots
406,669

 
8.1
%
Shopping center/mall buildings
349,629

 
7.0
%
Hotel/motel buildings
235,177

 
4.7
%
Medical buildings
206,286

 
4.1
%
Unimproved land
91,085

 
1.8
%
Other
122,005

 
2.5
%
Other than market risk
 
 

Commercial buildings
252,094

 
5.1
%
Industrial buildings
126,350

 
2.5
%
1-4 Family dwellings (other than condominium)
123,220

 
2.5
%
Other
352,699

 
7.1
%
Total real estate loans
$
4,990,914

 
100.0
%
The table below summarizes our market risk real estate portfolio at December 31, 2015 as segregated by the geographic region in which the property is located (in thousands except percentage data): 
 
Amount
 
Percent of
Total
Geographic region: