Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x

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

For the quarterly period ended June 30, 2012

 

¨

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)

 

 

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  x    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  x    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “large accelerated filer” and “accelerated filer” Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

 

x

  

Accelerated Filer

  ¨

Non-Accelerated Filer

 

¨  (Do not check if a smaller reporting company)

  

Small 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  x

APPLICABLE ONLY TO CORPORATE ISSUERS:

On July 25, 2012, the number of shares set forth below was outstanding with respect to each of the issuer’s classes of common stock:

 

Common Stock, par value $0.01 per share

     38,120,519   

 

 

 


Table of Contents

Texas Capital Bancshares, Inc.

Form 10-Q

Quarter Ended June 30, 2012

Index

 

Part I. Financial Information

  

    Item 1.

  

Financial Statements

  
  

Consolidated Statements of Income and Other Comprehensive Income - Unaudited

     3   
  

Consolidated Balance Sheets - Unaudited

     4   
  

Consolidated Statements of Stockholders’ Equity - Unaudited

     5   
  

Consolidated Statements of Cash Flows - Unaudited

     6   
  

Notes to Consolidated Financial Statements - Unaudited

     7   
  

Financial Summaries - Unaudited

     30   

    Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     32   

    Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     45   

    Item 4.

  

Controls and Procedures

     48   

Part II. Other Information

  

    Item 1.

  

Legal Proceedings

     48   

    Item 1A.

  

Risk Factors

     48   

    Item 5.

  

Exhibits

     49   

Signatures

        50   

 

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Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME – UNAUDITED

(In thousands except per share data)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2012     2011     2012     2011  

Interest income

        

Loans

   $ 94,291     $ 73,509     $ 186,065     $ 141,549  

Securities

     1,203       1,680       2,510       3,526  

Federal funds sold

     4       5       5       33  

Deposits in other banks

     48       65       97       262  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     95,546       75,259       188,677       145,370  

Interest expense

        

Deposits

     3,482       3,417       6,954       8,288  

Federal funds purchased

     240       94       521       201  

Repurchase agreements

     4       2       7       4  

Other borrowings

     492       14       927       14  

Trust preferred subordinated debentures

     688       638       1,399       1,271  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     4,906       4,165       9,808       9,778  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     90,640       71,094       178,869       135,592  

Provision for credit losses

     1,000       8,000       4,000       15,500  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     89,640       63,094       174,869       120,092  

Non-interest income

        

Service charges on deposit accounts

     1,624       1,608       3,228       3,391  

Trust fee income

     1,232       1,066       2,346       2,020  

Bank owned life insurance (BOLI) income

     588       539       1,109       1,062  

Brokered loan fees

     4,128       2,558       7,779       5,078  

Equipment rental income

     172       676       333       1,459  

Other

     2,718       1,504       4,857       2,625  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     10,462       7,951       19,652       15,635  

Non-interest expense

        

Salaries and employee benefits

     30,230       24,109       59,249       48,281  

Net occupancy expense

     3,679       3,443       7,283       6,753  

Leased equipment depreciation

     143       447       282       1,003  

Marketing

     3,174       2,733       5,997       4,856  

Legal and professional

     3,330       4,264       7,321       6,987  

Communications and technology

     2,720       2,584       5,203       4,931  

FDIC insurance assessment

     1,596       1,972       3,165       4,483  

Allowance and other carrying costs for OREO

     3,812       1,023       7,154       5,053  

Other

     5,289       4,688       10,595       9,315  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     53,973       45,263       106,249       91,662  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     46,129       25,782       88,272       44,065  

Income tax expense

     16,506       9,074       31,568       15,418  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     29,623       16,708       56,704       28,647  

Income (loss) from discontinued operations (after-tax)

     (1     (54     3       (114
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 29,622     $ 16,654     $ 56,707     $ 28,533  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

        

Income from continuing operations

   $ 0.78     $ 0.45     $ 1.50     $ 0.77  

Net income

   $ 0.78     $ 0.45     $ 1.50     $ 0.77  

Diluted earnings per common share

        

Income from continuing operations

   $ 0.76     $ 0.44     $ 1.45     $ 0.75  

Net income

   $ 0.76     $ 0.43     $ 1.45     $ 0.74  

Other comprehensive income

        

Unrealized gain (loss) on available-for-sale securities arising during period, before tax

   $ (625   $ 43     $ (912   $ (205

Income tax benefit (expense) related to unrealized gain (loss) on available-for-sale securities

     (219     15       (319     (72
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive gain/(loss) net of tax

     (406     28       (593     (133
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 29,216     $ 16,682     $ 56,114     $ 28,400  
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands except per share data)

 

     June 30,
2012
    December 31,
2011
 
     (Unaudited)        

Assets

    

Cash and due from banks

   $ 93,377     $ 79,248  

Interest-bearing deposits

     49,254       31,310  

Federal funds sold

     20       —     

Securities, available-for-sale

     114,964       143,710  

Loans held for sale

     2,408,032       2,080,081  

Loans held for sale from discontinued operations

     388       393  

Loans held for investment (net of unearned income)

     6,234,692       5,572,371  

Less: Allowance for loan losses

     72,404       70,295  
  

 

 

   

 

 

 

Loans held for investment, net

     6,162,288       5,502,076  

Premises and equipment, net

     12,037       11,457  

Accrued interest receivable and other assets

     284,207       268,863  

Goodwill and intangible assets, net

     20,181       20,480  
  

 

 

   

 

 

 

Total assets

   $ 9,144,748     $ 8,137,618  
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits:

    

Non-interest bearing

   $  2,019,473     $ 1,751,944  

Interest bearing

     4,230,806       3,324,040  

Interest bearing in foreign branches

     410,011       480,273  
  

 

 

   

 

 

 

Total deposits

     6,660,290       5,556,257  

Accrued interest payable

     887       599  

Other liabilities

     80,421       82,909  

Federal funds purchased

     271,835       412,249  

Repurchase agreements

     22,148       23,801  

Other borrowings

     1,315,056       1,332,066  

Trust preferred subordinated debentures

     113,406       113,406  
  

 

 

   

 

 

 

Total liabilities

     8,464,043       7,521,287  

Stockholders’ equity:

    

Preferred stock, $.01 par value, $1,000 liquidation value:

    

Authorized shares – 10,000,000

    

Common stock, $.01 par value:

    

Authorized shares – 100,000,000

    

Issued shares – 38,114,429 and 37,666,708 at June 30, 2012 and December 31, 2011

     381       376  

Additional paid-in capital

     357,713       349,458  

Retained earnings

     318,490       261,783  

Treasury stock (shares at cost: 417 at June 30, 2012 and December 31, 2011)

     (8     (8

Accumulated other comprehensive income, net of taxes

     4,129       4,722  
  

 

 

   

 

 

 

Total stockholders’ equity

     680,705       616,331  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 9,144,748     $ 8,137,618  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands except share data)

 

     Preferred Stock      Common Stock      Additional
Paid-in
Capital
     Retained
Earnings
     Treasury Stock     Accumulated
Other
Comprehensive
Income, Net of
Taxes
    Total  
     Shares      Amount      Shares      Amount            Shares     Amount      

Balance at December 31, 2010

     —         $ —           36,957,104      $ 369      $ 336,796      $ 185,807        (417   $ (8   $ 5,355     $ 528,319  

Comprehensive income:

                          

Net income (unaudited)

     —           —           —           —           —           28,533        —          —          —          28,533  

Change in unrealized gain on available-for-sale securities, net of taxes of $72 (unaudited)

     —           —           —           —           —           —           —          —          (133     (133
                          

 

 

 

Total comprehensive income (unaudited)

                             28,400  

Tax expense related to exercise of stock-based awards (unaudited)

     —           —           —           —           1,616        —           —          —          —          1,616  

Stock-based compensation expense recognized in earnings (unaudited)

     —           —           —           —           4,185        —           —          —          —          4,185  

Issuance of stock related to stock-based awards (unaudited)

     —           —           373,039        4        1,400        —           —          —          —          1,404  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011 (unaudited)

     —         $ —           37,330,143      $ 373      $ 343,997      $ 214,340        (417   $ (8   $ 5,222     $ 563,924  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     —         $ —           37,666,708      $ 376      $ 349,458      $ 261,783        (417   $ (8   $ 4,722     $ 616,331  

Comprehensive income:

                          

Net income (unaudited)

     —           —           —           —           —           56,707        —          —          —          56,707  

Change in unrealized gain on available-for-sale securities, net of taxes of $319 (unaudited)

     —           —           —           —           —           —           —          —          (593     (593
                          

 

 

 

Total comprehensive income (unaudited)

                             56,114  

Tax expense related to exercise of stock-based awards (unaudited)

     —           —           —           —           3,261        —           —          —          —          3,261  

Stock-based compensation expense recognized in earnings (unaudited)

     —           —           —           —           3,553        —           —          —          —          3,553  

Issuance of stock related to stock-based awards (unaudited)

     —           —           447,721        5        1,441        —           —          —          —          1,446  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012 (unaudited)

     —         $ —           38,114,429      $ 381      $ 357,713      $ 318,490        (417   $ (8   $ 4,129     $ 680,705  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements

 

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Table of Contents

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED

(In thousands)

 

     Six months ended June 30,  
     2012     2011  

Operating activities

    

Net income from continuing operations

   $ 56,704     $ 28,647  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Provision for credit losses

     4,000       15,500  

Depreciation and amortization

     2,378       2,822  

Amortization and accretion on securities

     24       46  

Bank owned life insurance (BOLI) income

     (1,109     (1,062

Stock-based compensation expense

     3,553       4,185  

Tax benefit from stock option exercises

     3,261       1,616  

Excess tax benefits from stock-based compensation arrangements

     (4,971     (4,618

Originations of loans held for sale

     (22,189,120     (10,105,686

Proceeds from sales of loans held for sale

     21,861,172       10,177,565  

Gain on sale of assets

     (785     (200

Changes in operating assets and liabilities:

    

Accrued interest receivable and other assets

     (17,904     (2,437

Accrued interest payable and other liabilities

     (1,882     (2,307
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities of continuing operations

     (284,679     114,071  

Net cash provided by (used in) operating activities of discontinued operations

     8       (20
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (284,671     114,051  

Investing activities

    

Purchases of available-for-sale securities

     (6     —     

Maturities and calls of available-for-sale securities

     13,425       2,690  

Principal payments received on available-for-sale securities

     14,392       24,661  

Net increase in loans held for investment

     (664,215     (472,225

Purchase of premises and equipment, net

     (2,377     (2,196

Proceeds from sale of foreclosed assets

     4,172       17,599  

Cash paid for acquisition

     —          (11,482
  

 

 

   

 

 

 

Net cash used in investing activities of continuing operations

     (634,609     (440,953

Financing activities

    

Net increase (decrease) in deposits

     1,104,033       (33,675

Proceeds from issuance of stock related to stock-based awards

     1,446       1,404  

Net increase (decrease) in other borrowings

     (18,663     343,827  

Excess tax benefits from stock-based compensation arrangements

     4,971       4,618  

Net decrease in federal funds purchased

     (140,414     (79,812
  

 

 

   

 

 

 

Net cash provided by financing activities of continuing operations

     951,373       236,362  
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     32,093       (90,540

Cash and cash equivalents at beginning of period

     110,558       179,866  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 142,651       89,326  
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash paid during the period for interest

   $ 9,520     $ 10,784  

Cash paid during the period for income taxes

     34,072       9,854  

Non-cash transactions:

    

Transfers from loans/leases to OREO and other repossessed assets

     3,410       6,593  

See accompanying notes to consolidated financial statements.

 

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Table of Contents

TEXAS CAPITAL BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED

(1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Business

Texas Capital Bancshares, Inc. (“the Company”), a Delaware financial holding company, was incorporated in November 1996 and commenced doing business in March 1998, but did not commence banking operations until December 1998. The consolidated financial statements of the Company include the accounts of Texas Capital Bancshares, Inc. and its wholly owned subsidiary, Texas Capital Bank, National Association (“the Bank”). The Bank currently provides commercial banking services to its customers largely in Texas and concentrates on middle market commercial businesses and successful professionals and entrepreneurs.

Basis of Presentation

The accounting and reporting policies of Texas Capital Bancshares, Inc. conform to accounting principles generally accepted in the United States and to generally accepted practices within the banking industry. Our consolidated financial statements include the accounts of Texas Capital Bancshares, Inc. and its subsidiary, the Bank. Certain prior period balances have been reclassified to conform to the current period presentation.

The consolidated interim financial statements have been prepared without audit. Certain information and footnote disclosures presented in accordance with accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, the interim financial statements include all normal and recurring adjustments and the disclosures made are adequate to make interim financial information not misleading. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2011, included in our Annual Report on Form 10-K filed with the SEC on February 23, 2012 (the “2011 Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for possible loan losses, the fair value of stock-based compensation awards, the fair values of financial instruments and the status of contingencies are particularly susceptible to significant change in the near term.

Cash and Cash Equivalents

Cash equivalents include amounts due from banks and federal funds sold.

Securities

Securities are classified as trading, available-for-sale or held-to-maturity. Management classifies securities at the time of purchase and re-assesses such designation at each balance sheet date; however, transfers between categories from this re-assessment are rare.

Trading Account

Securities acquired for resale in anticipation of short-term market movements are classified as trading, with realized and unrealized gains and losses recognized in income. To date, we have not had any activity in our trading account.

 

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Table of Contents

Held-to-Maturity and Available-for-Sale

Debt securities are classified as held-to-maturity when we have the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt securities not classified as held-to-maturity or trading and marketable equity securities not classified as trading are classified as available-for-sale.

Available-for-sale securities are stated at fair value, with the unrealized gains and losses reported in a separate component of accumulated other comprehensive income, net of tax. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization and accretion is included in interest income from securities. Realized gains and losses and declines in value judged to be other-than-temporary are included in gain (loss) on sale of securities. The cost of securities sold is based on the specific identification method.

All securities are available-for-sale as of June 30, 2012 and December 31, 2011.

Loans

Loans Held for Investment

Loans held for investment (which include equipment leases accounted for as financing leases) are stated at the amount of unpaid principal reduced by deferred income (net of costs). Interest on loans is recognized using the simple-interest method on the daily balances of the principal amounts outstanding. Loan origination fees, net of direct loan origination costs, and commitment fees, are deferred and amortized as an adjustment to yield over the life of the loan, or over the commitment period, as applicable.

A loan held for investment is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due (both principal and interest) according to the terms of the loan agreement. Reserves on impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

The accrual of interest on loans is discontinued when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining book balance of the asset is deemed to be collectible. If collectability is questionable, then cash payments are applied to principal. A loan is placed back on accrual status when both principal and interest are current and it is probable that we will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.

Loans Held for Sale

We purchase participations in mortgage loans primarily for sale in the secondary market through our mortgage warehouse lending division. These are participations purchased from non-bank mortgage originators who are seeking additional funding through participation interests to facilitate their ability to originate loans in their own name. The mortgage originator has no obligation to offer and we have no obligation to purchase these participation interests. The originator closes mortgage loans consistent with underwriting standards established by approved investors and once the loan closes, the originator delivers the loan to a third party investor. We typically purchase up to a 99% participation interest with the originator financing the remaining percentage. These loans are held by us for an interim period, usually less than 30 days and more typically 10-20 days. Accordingly, these loans are classified as held for sale and are carried at the lower of cost or fair value, determined on an aggregate basis.

If loan participations are not sold in accordance with the terms of the agreements, loans could be transferred to our loans held for investment portfolio at the lower of cost or market. Mortgage warehouse lending loans transferred to our loans held for investment portfolio could require future allocations of the allowance for loan losses or be subject to charge off in the event the loans become impaired.

 

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Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses charged against income. The allowance for loan losses includes specific reserves for impaired loans and an estimate of losses inherent in the loan portfolio at the balance sheet date, but not yet identified with specific loans. Loans deemed to be uncollectible are charged against the allowance when management believes that the collectability of the principal is unlikely and subsequent recoveries, if any, are credited to the allowance. Management’s periodic evaluation of the adequacy of the allowance is based on an assessment of the current loan portfolio, including known inherent risks, adverse situations that may affect the borrowers’ ability to repay, the estimated value of any underlying collateral and current economic conditions.

Repossessed Assets

Repossessed assets, which are included in other assets on the balance sheet, consist of collateral that has been repossessed. Collateral that has been repossessed is recorded at fair value less selling costs through a charge to the allowance for loan losses, if necessary. Write-downs are provided for subsequent declines in value and are recorded in allowance and other carrying costs expense included in allowance and other carrying costs for OREO in non-interest expense.

Other Real Estate Owned

Other Real Estate Owned (“OREO”), which is included in other assets on the balance sheet, consists of real estate that has been foreclosed. Real estate that has been foreclosed is recorded at the fair value of the real estate, less selling costs, through a charge to the allowance for loan losses, if necessary. Subsequent write-downs required for declines in value are recorded through a valuation allowance, or taken directly to the asset, charged to other non-interest expense.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from three to ten years. Gains or losses on disposals of premises and equipment are included in results of operations.

Marketing and Software

Marketing costs are expensed as incurred. Ongoing maintenance and enhancements of websites are expensed as incurred. Costs incurred in connection with development or purchase of internal use software are capitalized and amortized over a period not to exceed five years. Internal use software costs are included in other assets in the consolidated financial statements.

Goodwill and Other Intangible Assets

Intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. Our intangible assets relate primarily to loan customer relationships. Intangible assets with definite useful lives are amortized on an accelerated basis over their estimated life. Intangible assets are tested for impairment annually or whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

Segment Reporting

We have determined that all of our lending divisions and subsidiaries meet the aggregation criteria of ASC 280, Segment Reporting, since all offer similar products and services, operate with similar processes, and have similar customers.

Stock-based Compensation

We account for all stock-based compensation transactions in accordance with ASC 718, Compensation – Stock Compensation (“ASC 718”), which requires that stock compensation transactions be recognized as compensation expense in the statement of operations based on their fair values on the measurement date, which

 

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is the date of the grant. We transitioned to fair value based accounting for stock-based compensation using a modified version of prospective application (“modified prospective application”). Under modified prospective application, as it is applicable to us, ASC 718 applies to new awards and to awards modified, repurchased or cancelled after January 1, 2006. Additionally, compensation expense for the portion of awards for which the requisite period has not been rendered (generally referring to nonvested awards) that are outstanding as of January 1, 2006 are being recognized as the remaining requisite service is rendered during and after the period of adoption of ASC 718.

The compensation expense for the earlier awards is based on the same method and on the same grant date fair values previously determined for the pro forma disclosures required for all companies that did not previously adopt the fair value accounting method for stock-based compensation.

Accumulated Other Comprehensive Income

Unrealized gains or losses on our available-for-sale securities (after applicable income tax expense or benefit) are included in accumulated other comprehensive income, net. Accumulated comprehensive income, net for the six months ended June 30, 2012 and 2011 is reported in the accompanying consolidated statements of changes in stockholders’ equity.

Income Taxes

The Company and its subsidiary file a consolidated federal income tax return. We utilize the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based upon the difference between the values of the assets and liabilities as reflected in the financial statements and their related tax basis using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. As changes in tax law or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation reserve is provided against deferred tax assets unless it is more likely than not that such deferred tax assets will be realized.

Basic and Diluted Earnings Per Common Share

Basic earnings per common share is based on net income available to common stockholders divided by the weighted-average number of common shares outstanding during the period excluding non-vested stock. Diluted earnings per common share include the dilutive effect of stock options and non-vested stock awards granted using the treasury stock method. A reconciliation of the weighted-average shares used in calculating basic earnings per common share and the weighted average common shares used in calculating diluted earnings per common share for the reported periods is provided in Note 2 – Earnings Per Common Share.

Fair Values of Financial Instruments

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements.

 

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(2) EARNINGS PER COMMON SHARE

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

 

     Three months ended June 30,     Six months ended June 30,  
      2012     2011     2012      2011  

Numerator:

         

Net income from continuing operations

   $ 29,623     $ 16,708     $ 56,704      $ 28,647  

Income (loss) from discontinued operations

     (1     (54     3        (114
  

 

 

   

 

 

   

 

 

    

 

 

 

Net income

   $ 29,622     $ 16,654     $ 56,707      $ 28,533  
  

 

 

   

 

 

   

 

 

    

 

 

 

Denominator:

         

Denominator for basic earnings per share - weighted average shares

     38,012,677       37,281,262       37,903,976        37,186,826  

Effect of employee stock-based awards(1)

     674,343       741,569       697,924        850,831  

Effect of warrants to purchase common stock

     454,524       310,057       437,132        301,585  
  

 

 

   

 

 

   

 

 

    

 

 

 

Denominator for dilutive earnings per share - adjusted weighted average shares and assumed conversions

     39,141,544       38,332,888       39,039,032        38,339,242  
  

 

 

   

 

 

   

 

 

    

 

 

 

Basic earnings per common share from continuing operations

   $ 0.78     $ 0.45     $ 1.50      $ 0.77  
  

 

 

   

 

 

   

 

 

    

 

 

 

Basic earnings per common share

   $ 0.78     $ 0.45     $ 1.50      $ 0.77  
  

 

 

   

 

 

   

 

 

    

 

 

 

Diluted earnings per share from continuing operations

   $ 0.76     $ 0.44     $ 1.45      $ 0.75  
  

 

 

   

 

 

   

 

 

    

 

 

 

Diluted earnings per common share

   $ 0.76     $ 0.43     $ 1.45      $ 0.74  
  

 

 

   

 

 

   

 

 

    

 

 

 

 

(1)

Stock options, SARs and RSUs outstanding of 10,000 at June 30, 2012 and 50,500 at June 30, 2011 have not been included in diluted earnings per share because to do so would have been anti-dilutive for the periods presented.

(3) SECURITIES

Securities are identified as either held-to-maturity or available-for-sale based upon various factors, including asset/liability management strategies, liquidity and profitability objectives, and regulatory requirements. Held-to-maturity securities are carried at cost, adjusted for amortization of premiums or accretion of discounts. Available-for-sale securities are securities that may be sold prior to maturity based upon asset/liability management decisions. Securities identified as available-for-sale are carried at fair value. Unrealized gains or losses on available-for-sale securities are recorded as accumulated other comprehensive income in stockholders’ equity, net of taxes. Amortization of premiums or accretion of discounts on mortgage-backed securities is periodically adjusted for estimated prepayments. Realized gains and losses and declines in value judged to be other-than-temporary are included in gain (loss) on sale of securities. The cost of securities sold is based on the specific identification method.

At June 30, 2012, our net unrealized gain on the available-for-sale securities portfolio value was $6.4 million, which represented 5.85% of the amortized cost. At December 31, 2011, the unrealized gain was $7.3 million, or 5.32% of the amortized cost. As indicated by the difference in the gain as a percent of the amortized cost, the reduction in the total unrealized gain was due solely to the reduction in the balances of the securities held.

 

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

 

      June 30, 2012  
      Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 

Available-for-Sale Securities:

           

Residential mortgage-backed securities

   $ 69,958      $ 5,089      $ —         $ 75,047  

Corporate securities

     5,000        200        —           5,200  

Municipals

     26,141        904        —           27,045  

Equity securities(1)

     7,513        159        —           7,672  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 108,612      $ 6,352      $ —         $ 114,964  
  

 

 

    

 

 

    

 

 

    

 

 

 
      December 31, 2011  
      Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 

Available-for-Sale Securities:

           

Residential mortgage-backed securities

   $ 84,363      $ 5,720      $ —         $ 90,083  

Corporate securities

     5,000        225        —           5,225  

Municipals

     29,577        1,165        —           30,742  

Equity securities(1)

     7,506        154        —           7,660  

Other

     10,000        —           —           10,000  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 136,446      $ 7,264      $ —         $ 143,710  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Equity securities consist of Community Reinvestment Act funds.

 

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

 

      June 30, 2012  
      Less Than
One Year
    After One
Through
Five Years
    After Five
Through
Ten Years
    After Ten
Years
    Total  

Available-for-sale:

          

Residential mortgage-backed securities:(1)

          

Amortized cost

   $ 191     $ 9,023     $ 23,753     $ 36,991     $ 69,958  

Estimated fair value

     200       9,705       25,552       39,590       75,047  

Weighted average yield(3)

     4.06     5.08     4.65     3.74     4.22

Corporate securities:

          

Amortized cost

     —          5,000       —          —          5,000  

Estimated fair value

     —          5,200       —          —          5,200  

Weighted average yield(3)

     —          7.38     —          —          7.38

Municipals:(2)

          

Amortized cost

     3,689       18,915       3,537       —          26,141  

Estimated fair value

     3,738       19,613       3,694       —          27,045  

Weighted average yield(3)

     5.80     5.57     5.94     —          5.65

Equity securities:

          

Amortized cost

     7,513       —          —          —          7,513  

Estimated fair value

     7,672       —          —          —          7,672  
          

 

 

 

Total available-for-sale securities:

          

Amortized cost

           $ 108,612  
          

 

 

 

Estimated fair value

           $ 114,964  
          

 

 

 
      December 31, 2011  
      Less Than
One Year
    After One
Through
Five Years
    After Five
Through
Ten Years
    After Ten
Years
    Total  

Available-for-sale:

          

Residential mortgage-backed securities:(1)

          

Amortized cost

   $ 13     $ 10,420     $ 31,502     $ 42,428     $ 84,363  

Estimated fair value

     13       11,095       33,745       45,230       90,083  

Weighted average yield(3)

     6.50     4.85     4.71     3.79     4.26

Corporate securities:

          

Amortized cost

     —          5,000       —          —          5,000  

Estimated fair value

     —          5,225       —          —          5,225  

Weighted average yield(3)

     —          7.38     —          —          7.38

Municipals:(2)

          

Amortized cost

     4,184       18,980       6,413       —          29,577  

Estimated fair value

     4,213       19,784       6,745       —          30,742  

Weighted average yield(3)

     5.36     5.51     5.86     —          5.57

Equity securities:

          

Amortized cost

     7,506       —          —          —          7,506  

Estimated fair value

     7,660       —          —          —          7,660  

Other:(3)

          

Amortized cost

     10,000       —          —          —          10,000  

Estimated fair value

     10,000       —          —          —          10,000  

Weighted average yield(3)

     0.10     —          —          —          0.10

Total available-for-sale securities:

          
          

 

 

 

Amortized cost

           $ 136,446  
          

 

 

 

Estimated fair value

           $ 143,710  
          

 

 

 

 

(1)

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

 

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(2)

Yields have been adjusted to a tax equivalent basis assuming a 35% federal tax rate.

(3)

Yields are calculated based on amortized cost.

Securities with carrying values of approximately $51.5 million were pledged to secure certain borrowings and deposits at June 30, 2012. Of the pledged securities at June 30, 2012, approximately $22.5 million were pledged for certain deposits, and approximately $29.0 million were pledged for repurchase agreements.

At June 30, 2012 and December 31, 2011, we did not have any investment securities in an unrealized loss position.

(4) LOANS AND ALLOWANCE FOR LOAN LOSSES

At June 30, 2012 and December 31, 2011, loans were as follows (in thousands):

 

      June 30,
2012
    December 31,
2011
 

Commercial

   $ 3,806,332     $ 3,275,150  

Construction

     589,552       422,026  

Real estate

     1,785,300       1,819,251  

Consumer

     20,791       24,822  

Leases

     68,983       61,792  
  

 

 

   

 

 

 

Gross loans held for investment

     6,270,958       5,603,041  

Deferred income (net of direct origination costs)

     (36,266     (30,670

Allowance for loan losses

     (72,404     (70,295
  

 

 

   

 

 

 

Total loans held for investment, net

     6,162,288       5,502,076  

Loans held for sale

     2,408,032       2,080,081  
  

 

 

   

 

 

 

Total

   $ 8,570,320     $ 7,582,157  
  

 

 

   

 

 

 

Commercial Loans and Leases. Our commercial loan portfolio is comprised of lines of credit for working capital and term loans and leases to finance equipment and other business assets. Our energy production loans are generally collateralized with proven reserves based on appropriate valuation standards. Our commercial loans and leases are underwritten after carefully evaluating and understanding the borrower’s ability to operate profitably. Our underwriting standards are designed to promote relationship banking rather than making loans on a transaction basis. Our lines of credit typically are limited to a percentage of the value of the assets securing the line. Lines of credit and term loans typically are reviewed annually and are supported by accounts receivable, inventory, equipment and other assets of our clients’ businesses.

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

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

 

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Loans Held for Sale. Our loans held for sale consist of participations purchased in single-family residential mortgages funded through our warehouse lending group. These loans are typically on our balance sheet for 10 to 20 days. We have agreements with mortgage lenders and participate in individual loans they originate. All loans are underwritten consistent with established programs for permanent financing with financially sound investors. Substantially all loans are conforming loans.

As of June 30, 2012, a substantial majority of the principal amount of the loans held for investment in our portfolio was to businesses and individuals in Texas. This geographic concentration subjects the loan portfolio to the general economic conditions within this area. The risks created by this concentration have been considered by management in the determination of the adequacy of the allowance for loan losses. Management believes the allowance for loan losses is appropriate to cover estimated losses on loans at each balance sheet date.

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

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

The reserve allocation percentages assigned to each credit grade have been developed based primarily on an analysis of our historical loss rates. The allocations are adjusted for certain qualitative factors for such things as general economic conditions, changes in credit policies and lending standards. Historical loss rates are adjusted to account for current environmental conditions which we believe are likely to cause loss rates to be higher or lower than past experience. Each quarter we produce an adjustment range for environmental factors unique to us and our market. Changes in the trend and severity of problem loans can cause the estimation of losses to differ from past experience. In addition, the reserve considers the results of reviews performed by independent third party reviewers as reflected in their confirmations of assigned credit grades within the portfolio. The portion of the allowance that is not derived by the allowance allocation percentages compensates for the uncertainty and complexity in estimating loan and lease losses including factors and conditions that may not be fully reflected in the determination and application of the allowance allocation percentages. We evaluate many factors and conditions in determining the unallocated portion of the allowance, including the economic and business conditions affecting key lending areas, credit quality trends and general growth in the portfolio. The allowance is considered appropriate, given management’s assessment of potential losses within the portfolio as of the evaluation date, the significant growth in the loan and lease portfolio, current economic conditions in the Company’s market areas and other factors.

 

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The methodology used in the periodic review of reserve adequacy, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality. The changes are reflected in the general reserve and in specific reserves as the collectability of larger classified loans is evaluated with new information. As our portfolio has matured, historical loss ratios have been closely monitored and our reserve adequacy relies primarily on our loss history. Currently, the review of reserve adequacy is performed by executive management and presented to our board of directors for their review, consideration and ratification on a quarterly basis.

The following tables summarize the credit risk profile of our loan portfolio by internally assigned grades and nonaccrual status as of June 30, 2012 and December 31, 2011 (in thousands):

 

June 30, 2012

                                         
     Commercial      Construction      Real Estate      Consumer      Leases      Total  

Grade:

                 

Pass

   $ 3,715,923      $ 560,239      $ 1,693,899      $ 20,522      $ 63,774      $ 6,054,357  

Special mention

     38,628        4,772        33,122        —           1,366        77,888  

Substandard-accruing

     32,533        4,582        41,574        —           3,591        82,280  

Non-accrual

     19,248        19,959        16,705        269        252        56,433  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans held for investment

   $ 3,806,332      $ 589,552      $ 1,785,300      $ 20,791      $ 68,983      $ 6,270,958  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2011

                                         
     Commercial      Construction      Real Estate      Consumer      Leases      Total  

Grade:

                 

Pass

   $ 3,185,625      $ 385,639      $ 1,717,434      $ 24,453      $ 57,255      $ 5,370,406  

Special mention

     30,872        5,064        32,413        50        3,952        72,351  

Substandard-accruing

     45,740        10,204        49,601        6        153        105,704  

Non-accrual

     12,913        21,119        19,803        313        432        54,580  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans held for investment

   $ 3,275,150      $ 422,026      $ 1,819,251      $ 24,822      $ 61,792      $ 5,603,041  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table details activity in the reserve for loan losses by portfolio segment for the six months ended June 30, 2012 and June 30, 2011. Allocation of a portion of the reserve to one category of loans does not preclude its availability to absorb losses in other categories.

 

June 30, 2012

                                             

(in thousands)

   Commercial      Construction      Real Estate     Consumer     Leases      Unallocated     Total  

Beginning balance

   $ 17,337      $ 7,845      $ 33,721     $ 223     $ 2,356      $ 8,813     $ 70,295  

Provision for possible loan losses

     2,058        2,179        (806     62       440        (463     3,470  

Charge-offs

     1,510        —           615       —          121        —          2,246  

Recoveries

     350        —           456       8       71        —          885  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net charge-offs

     1,160        —           159       (8     50        —          1,361  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance

   $ 18,235      $ 10,024      $ 32,756     $ 293     $ 2,746      $ 8,350     $ 72,404  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Period end amount allocated to:

                 

Loans individually evaluated for impairment

   $ 5,121      $ —         $ 1,232     $ 111     $ 48      $ —        $ 6,512  

Loans collectively evaluated for impairment

     —           —           —          —          —           —          —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance

   $ 5,121      $ —         $ 1,232     $ 111     $ 48      $ —        $ 6,512  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

June 30, 2011

                                              

(in thousands)

   Commercial      Construction     Real Estate      Consumer      Leases     Unallocated      Total  

Beginning balance

   $ 15,918      $ 7,336     $ 38,049      $ 306      $ 5,405     $ 4,496      $ 71,510  

Provision for possible loan losses

     6,518        (998     5,935        93        (1,366     5,539        15,721  

Charge-offs

     5,647        —          13,788        317        996       —           20,748  

Recoveries

     689        243       153        4        176       —           1,265  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Net charge-offs

     4,958        (243     13,635        313        820       —           19,483  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Ending balance

   $ 17,478      $ 6,581     $ 30,349      $ 86      $ 3,219     $ 10,035      $ 67,748  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Period end amount allocated to:

                  

Loans individually evaluated for impairment

   $ 3,154       $ 370      $ 6,628       $ 55       $ 205      $ —         $ 10,412  

Loans collectively evaluated for impairment

     —           —          —           —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Ending balance

   $ 3,154      $ 370     $ 6,628      $ 55      $ 205     $ —         $ 10,412  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

We have traditionally maintained an unallocated reserve component to allow for uncertainty in economic and other conditions affecting the quality of the loan portfolio. The unallocated portion of our loan loss reserve has decreased since June 30, 2011. We believe the level of unallocated reserves at June 30, 2012 is warranted due to the ongoing weak economic environment which has produced more frequent losses, including those resulting from fraud by borrowers. Our methodology used to calculate the allowance considers historical losses, however, the historical loss rates for specific product types or credit risk grades may not fully incorporate the effects of continued weakness in the economy. In addition, a substantial portion of losses realized over the past several years were related to commercial real estate loans. Continuing uncertainty and illiquidity in the commercial real estate market has produced and continues to cause material changes in appraised values that can influence our impairment calculations on currently impaired loans and on pass-rated loans that may experience weakness if economic conditions and valuations do not stabilize.

 

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Table of Contents

Generally we place loans on non-accrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining unpaid principal amount of the loan is deemed to be fully collectible. If collectability is questionable, then cash payments are applied to principal. The table below summarizes our non-accrual loans by type and purpose as of June 30, 2012 (in thousands):

 

Commercial

  

Business loans

   $ 19,248  

Construction

  

Market risk

     19,959  

Real estate

  

Market risk

     6,310  

Commercial

     6,413  

Secured by 1-4 family

     3,982  

Consumer

     269  

Leases

     252  
  

 

 

 

Total non-accrual loans

   $ 56,433  
  

 

 

 

As of June 30, 2012, non-accrual loans included in the table above included $10.8 million related to loans that met the criteria for restructured.

 

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Table of Contents

A loan held for investment is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due (both principal and interest) according to the terms of the loan agreement. In accordance with FASB ASC 310 Receivables, we have also included all restructured loans in our impaired loan totals. The following tables detail our impaired loans, by portfolio class as of June 30, 2012 and December 31, 2011 (in thousands):

 

June 30, 2012

                                  
      Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

              

Commercial

              

Business loans

   $ 651      $ 651      $ —         $ 630      $ —     

Energy

     —           —           —           —           —     

Other

     —           —           —           —           —     

Construction

              

Market risk

     19,959        19,959        —           19,216        341  

Secured by 1-4 family

     —           —           —           —           —     

Other

     —           —           —           —           —     

Real estate

              

Market risk

     3,926        3,926        —           5,187        —     

Commercial

     6,375        6,376        —           6,795        —     

Secured by 1-4 family

     1,442        1,442        —           1,453        —     

Consumer

     —           —           —           —           —     

Leases

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with no allowance recorded

   $ 32,353      $ 32,354      $ —         $ 33,281      $ 341  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

              

Commercial

              

Business loans

   $ 18,597      $ 23,553      $ 5,121      $ 12,109      $ —     

Energy

     —           —           —           —           —     

Other

     —           —           —           —           —     

Construction

              

Market risk

     —           —           —           1,237        —     

Secured by 1-4 family

     —           —           —           —           —     

Other

     —           —           —           —           —     

Real estate

              

Market risk

     16,327        16,326        878        15,752        —     

Commercial

     38        38        6        13        —     

Secured by 1-4 family

     2,540        2,670        349        2,303        —     

Consumer

     269        269        111        285        —     

Leases

     252        252        48        309        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with an allowance recorded

   $ 38,023      $ 43,108      $ 6,513      $ 32,008      $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Combined:

              

Commercial

              

Business loans

   $ 19,248      $ 24,204      $ 5,121      $ 12,739      $ —     

Energy

     —           —           —           —           —     

Other

     —           —           —           —           —     

Construction

              

Market risk

     19,959        19,959        —           20,453        341  

Secured by 1-4 family

     —           —           —           —           —     

Other

     —           —           —           —           —     

Real estate

              

Market risk

     20,253        20,252        878        20,939        —     

Commercial

     6,413        6,414        6        6,808        —     

Secured by 1-4 family

     3,982        4,112        349        3,756        —     

Consumer

     269        269        111        285        —     

Leases

     252        252        48        309        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 70,376      $ 75,462      $ 6,513      $ 65,289      $ 341  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

December 31, 2011

                                  
      Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

              

Commercial

              

Business loans

   $ 1,716      $ 10,378      $ —         $ 1,697      $ —     

Construction

              

Market risk

     19,236        19,236        —           19,315        291  

Real estate

              

Market risk

     5,711        11,217        —           7,064        —     

Commercial

     4,575        4,575        —           5,111        —     

Secured by 1-4 family

     —           —           —           899        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with no allowance recorded

   $ 31,238      $ 45,406      $ —         $ 34,086      $ 291  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

              

Commercial

              

Business loans

   $ 11,197      $ 11,197      $ 3,124      $ 11,056      $ —     

Construction

              

Market risk

     1,883        1,882        298        1,916        —     

Real estate

              

Market risk

     30,533        34,275        1,131        19,146        —     

Commercial

     1,809        1,809        271        730        —     

Secured by 1-4 family

     2,279        2,279        330        1,465        —     

Consumer

     313        313        52        310        —     

Leases

     432        432        65        2,328        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with an allowance recorded

   $ 48,446      $ 52,187      $ 5,271      $ 36,951      $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Combined:

              

Commercial

              

Business loans

   $ 12,913      $ 21,575      $ 3,124      $ 12,753      $ —     

Construction

              

Market risk

     21,119        21,118        298        21,231        291  

Real estate

              

Market risk

     36,244        45,492        1,131        26,210        —     

Commercial

     6,384        6,384        271        5,841        —     

Secured by 1-4 family

     2,279        2,279        330        2,364        —     

Consumer

     313        313        52        310        —     

Leases

     432        432        65        2,328        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 79,684      $ 97,593      $ 5,271      $ 71,037      $ 291  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Average impaired loans outstanding during the six months ended June 30, 2012 and 2011 totaled $65.3 million and $103.6 million, respectively.

The table below provides an age analysis of our past due loans that are still accruing as of June 30, 2012 (in thousands):

 

     30-59
Days Past
Due
     60-89
Days
Past Due
     Greater
Than 90
Days and
Accruing(1)
    Total Past
Due
     Current      Total  

Commercial

                

Business loans

   $ 22,528      $ 1,569      $ 4,155       $ 28,252      $ 2,852,275      $ 2,880,527  

Energy

     4,050        —           —          4,050        902,508        906,558  

Construction

                

Market risk

     —           —           —          —           561,471        561,471  

Secured by 1-4 family

     —           —           —          —           8,122        8,122  

Real estate

                

Market risk

     16,448        6,794        266         23,508        1,389,456        1,412,964  

Commercial

     —           —           —          —           289,671        289,671  

Secured by 1-4 family

     3,463        —           —          3,463        62,497        65,960  

Consumer

     39        —           —          39        20,483        20,522  

Leases

     155        —           —          155        68,576        68,731  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total loans held for investment

   $ 46,683      $ 8,363      $ 4,421       $ 59,467      $ 6,155,059      $ 6,214,526  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(1)

Loans past due 90 days and still accruing includes premium finance loans of $3.2 million. These loans are generally secured by obligations of insurance carriers to refund premiums on cancelled insurance policies. The refund of premiums from the insurance carriers can take 180 days or longer from the cancellation date.

Restructured loans are loans on which, due to the borrower’s financial difficulties, we have granted a concession that we would not otherwise consider. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two. Modifications of terms that could potentially qualify as a restructuring include reduction of contractual interest rate, extension of the maturity date at a contractual interest rate lower than the current rate for new debt with similar risk, or a reduction of the face amount of debt, or either forgiveness of either principal or accrued interest. As of June 30, 2012, we have $13.9 million in loans considered restructured that are not on nonaccrual. These loans have $727,000 in unfunded commitments. Of the nonaccrual loans at June 30, 2012, $10.8 million met the criteria for restructured. These loans have no unfunded commitments. A loan continues to qualify as restructured until a consistent payment history or change in borrower’s financial condition has been evidenced, generally no less than twelve months. Assuming that the restructuring agreement specifies an interest rate at the time of the restructuring that is greater than or equal to the rate that we are willing to accept for a new extension of credit with comparable risk, then the loan no longer has to be considered a restructuring if it is in compliance with modified terms in calendar years after the year of the restructure.

The following table summarizes, as of June 30, 2012, loans that have been restructured during 2012 (in thousands):

 

     Number of
Contracts
     Pre-Restructuring
Outstanding
Recorded
Investment
     Post-Restructuring
Outstanding
Recorded
Investment
 

Commercial business loans

     1      $ 802      $ 791  

Real estate market risk

     2      $ 1,726      $ 1,177  
  

 

 

    

 

 

    

 

 

 

Total new restructured loans in 2012

     3      $ 2,528      $ 1,968  
  

 

 

    

 

 

    

 

 

 

The restructured loans generally include terms to reduce the interest rate and extend payment terms. We have not forgiven any principal on the above loans. At June 30, 2012, $1.7 million of the above loans restructured in 2012 are on non-accrual. The restructuring of the loans did not have a significant impact on our allowance for loan losses at June 30, 2012.

 

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Table of Contents

The following table provides information on how loans were modified as a TDR during the six months ended June 30, 2012 (in thousands):

 

Extended maturity

   $ 1,968  

Adjusted payment schedule

     —     

Combination of maturity extension and payment schedule adjustment

     —     

Other

     —     
  

 

 

 

Total

   $ 1,968  
  

 

 

 

The following table summarizes, as of June 30, 2012, loans that were restructured within the last 12 months that have subsequently defaulted (in thousands):

 

     Number of
Contracts
     Recorded
Investment
 

Commercial - secured by real estate

     1      $ 875  

Real estate - market risk

     1        2,453  

The loans above were subsequently foreclosed and are included in the June 30, 2012 OREO balance.

(5) OREO AND VALUATION ALLOWANCE FOR LOSSES ON OREO

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

 

     Three months ended June 30,     Six months ended June 30,  
     2012     2011     2012     2011  

Beginning balance

   $ 32,601     $ 26,172     $ 34,077     $ 42,261  

Additions

     875       5,667       3,397       6,593  

Sales

     (2,471     (3,829     (3,728     (17,524

Valuation allowance for OREO

     (2,700     —          (3,556     (1,921

Direct write-downs

     (423     (725     (2,308     (2,124
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 27,882     $ 27,285     $ 27,882     $ 27,285  
  

 

 

   

 

 

   

 

 

   

 

 

 

(6) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

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

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit-worthiness on a case-by-case basis.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

 

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Table of Contents

The table below summarizes our financial instruments whose contract amounts represent credit risk at June 30, 2012 (in thousands):

 

Commitments to extend credit

   $ 2,119,754  

Standby letters of credit

     70,392  

(7) REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of June 30, 2012, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

Financial institutions are categorized as well capitalized or adequately capitalized, based on minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the tables below. As shown below, the Company’s capital ratios exceed the regulatory definition of well capitalized as of June 30, 2012 and 2011. As of June 30, 2011, the most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since the notification that management believes have changed the Bank’s category. Based upon the information in its most recently filed call report, the Bank continues to meet the capital ratios necessary to be well capitalized under the regulatory framework for prompt corrective action and continues to meet the capital ratios necessary to be well capitalized under the regulatory framework for prompt corrective action.

 

     June 30,  
     2012     2011  

Risk-based capital:

    

Tier 1 capital

     9.54     10.16

Total capital

     10.48     11.25

Leverage

     9.02     10.46

(8) STOCK-BASED COMPENSATION

The fair value of our stock option and stock appreciation right (“SAR”) grants are estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide the best single measure of the fair value of its employee stock options.

Stock-based compensation consists of options issued prior to the adoption of Accounting Standards Codification (“ASC”) 718, Compensation – Stock Compensation (“ASC 718”), SARs and restricted stock units (“RSUs”). The SARs and RSUs were granted from 2006 through 2010.

 

23


Table of Contents
     Three months ended March 31,      Six months ended June 30,  

(in thousands)

   2012      2011      2012      2011  

Stock- based compensation expense recognized:

           

SARs

   $ 187       $ 218        375         724  

RSUs

     1,416        1,834        3,178        3,462  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total compensation expense recognized

   $ 1,603       $ 2,052       $ 3,553       $ 4,186  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     June 30, 2012  
     Options      SARs and RSUs  

Unrecognized compensation expense related to unvested awards

   $ —         $ 9,401  

Weighted average period over which expense is expected to be recognized, in years

     —           3.09  

(9) DISCONTINUED OPERATIONS

Subsequent to the end of the first quarter of 2007, we and the purchaser of our residential mortgage loan division (“RML”) agreed to terminate and settle the contractual arrangements related to the sale of the division, which had been completed as of the end of the third quarter of 2006. Historical operating results of RML are reflected as discontinued operations in the financial statements.

During the three months ended June 30, 2012 and 2011, the loss from discontinued operations was $1,000 and $54,000, net of taxes, respectively. During the six months ended June 30, 2012 and 2011, the gain and loss from discontinued operations was $3,000 and $114,000, net of taxes, respectively. The 2011 loss is primarily related to continuing legal and salary expenses incurred in dealing with the remaining loans and requests from investors related to the repurchase of previously sold loans. We still have approximately $388,000 in loans held for sale from discontinued operations that are carried at the estimated market value at quarter-end, which is less than the original cost. We plan to sell these loans, but timing and price to be realized cannot be determined at this time due to market conditions. In addition, we continue to address requests from investors related to repurchasing loans previously sold. While the balances as of June 30, 2012 include a liability for exposure to additional contingencies, including risk of having to repurchase loans previously sold, we recognize that market conditions may result in additional exposure to loss and the extension of time necessary to complete the discontinued mortgage operation.

(10) FAIR VALUE DISCLOSURES

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal market for the asset or liability in an orderly transaction between market participants on the measurement date.

We determine the fair market values of our financial instruments based on the fair value hierarchy as prescribed in ASC 820. The standard describes three levels of inputs that may be used to measure fair value as provided below.

 

        Level 1

 

Quoted prices in active markets for identical assets or liabilities. Level 1 assets include U.S. Treasuries that are highly liquid and are actively traded in over-the-counter markets.

        Level 2

 

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets include U.S. government and agency mortgage-backed debt securities, corporate securities, municipal bonds, and Community Reinvestment Act funds. This category includes derivative assets and liabilities where values are obtained from independent pricing services.

 

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        Level 3

 

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair values requires significant management judgment or estimation. This category also includes impaired loans and OREO where collateral values have been based on third party appraisals; however, due to current economic conditions, comparative sales data typically used in appraisals may be unavailable or more subjective due to lack of market activity. Additionally, this category includes certain mortgage loans that were transferred from loans held for sale to loans held for investment at a lower of cost or fair value.

Assets and liabilities measured at fair value at June 30, 2012 are as follows (in thousands):

 

     Fair Value Measurements Using  
      Level 1      Level 2     Level 3  

Available for sale securities:(1)

       

Residential mortgage-backed securities

   $ —         $ 75,047     $ —     

Corporate securities

     —           5,200       —     

Municipals

     —           27,045       —     

Other

     —           7,672       —     

Loans(2) (4)

     —           —          10,944  

OREO(3) (4)

     —           —          27,882  

Derivative asset(5)

     —           25,400       —     

Derivative liability(5)

     —           (25,400     —     

 

(1)

Securities are measured at fair value on a recurring basis, generally monthly.

(2)

Includes impaired loans that have been measured for impairment at the fair value of the loan’s collateral.

(3)

OREO is transferred from loans to OREO at fair value less selling costs.

(4)

Fair value of loans and OREO is measured on a nonrecurring basis, generally annually or more often as warranted by market and economic conditions

(5)

Derivative assets and liabilities are measured at fair value on a recurring basis, generally quarterly.

Level 3 Valuations

Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. Currently, we measure fair value for certain loans on a nonrecurring basis as described below.

Loans

During the three and six months ended June 30, 2012, certain impaired loans were reevaluated and reported at fair value through a specific valuation allowance allocation of the allowance for possible loan losses based upon the fair value of the underlying collateral. The $10.9 million total above includes impaired loans at June 30, 2012 with a carrying value of $12.2 million that were reduced by specific valuation allowance allocations totaling $1.3 million for a total reported fair value of $10.9 million based on collateral valuations utilizing Level 3 valuation inputs. Fair values were based on third party appraisals; however, based on the current economic conditions, comparative sales data typically used in the appraisals may be unavailable or more subjective due to the lack of real estate market activity.

OREO

Certain foreclosed assets, upon initial recognition, were valued based on third party appraisals. At June 30, 2012, OREO with a carrying value of $36.9 million was reduced by specific valuation allowance allocations totaling $9.0 million for a total reported fair value of $27.9 million based on valuations utilizing Level 3 valuation inputs. Fair values were based on third party appraisals; however, based on the current economic conditions, comparative sales data typically used in the appraisals may be unavailable or more subjective due to the lack of real estate market activity.

 

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Fair Value of Financial Instruments

Generally accepted accounting principles require disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. This disclosure does not and is not intended to represent the fair value of the Company.

A summary of the carrying amounts and estimated fair values of financial instruments is as follows (in thousands):

 

      June 30, 2012      December 31, 2011  
      Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 

Cash and cash equivalents

   $ 142,651      $ 142,651      $ 101,258      $ 101,258  

Securities, available-for-sale

     114,964        114,964        143,710        143,710  

Loans held for sale

     2,408,032        2,408,032        2,080,081        2,080,081  

Loans held for sale from discontinued operations

     388        388        393        393  

Loans held for investment, net

     6,162,288        6,168,056        5,502,076        5,506,899  

Derivative asset

     25,400        25,400        20,071        20,071  

Deposits

     6,660,290        6,660,748        5,556,257        5,557,062  

Federal funds purchased

     271,835        271,835        412,249        412,249  

Borrowings

     1,337,204        1,337,206        1,355,867        1,355,869  

Trust preferred subordinated debentures

     113,406        113,406        113,406        113,406  

Derivative liability

     25,400        25,400        20,071        20,071  

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

Cash and cash equivalents

The carrying amounts reported in the consolidated balance sheet for cash and cash equivalents approximate their fair value, which is characterized as a Level 1 asset in the fair value hierarchy.

Securities

The fair value of investment securities is based on prices obtained from independent pricing services which are based on quoted market prices for the same or similar securities, which is characterized as a Level 2 asset in the fair value hierarchy. We have obtained documentation from the primary pricing service we use about their processes and controls over pricing. In addition, on a quarterly basis we independently verify the prices that we receive from the service provider using two additional independent pricing sources. Any significant differences are investigated and resolved.

Loans, net

For variable-rate loans that reprice frequently with no significant change in credit risk, fair values are generally based on carrying values. The fair value for all other loans is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality, which is characterized as a Level 3 asset in the fair value hierarchy. The carrying amount of accrued interest approximates its fair value. The carrying amount of loans held for sale approximates fair value.

Derivatives

The estimated fair value of the interest rate swaps and caps are obtained from independent pricing services, which is characterized as a Level 2 asset in the fair value hierarchy. On a quarterly basis, we independently verify the fair value using an additional independent pricing source.

 

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Deposits

The carrying amounts for variable-rate money market accounts approximate their fair value. Fixed-term certificates of deposit fair values are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities, which is characterized as a Level 3 liability in the fair value hierarchy.

Federal funds purchased, other borrowings and trust preferred subordinated debentures

The carrying value reported in the consolidated balance sheet for federal funds purchased and other borrowings approximates their fair value. The fair value of other borrowings and trust preferred subordinated debentures is estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar borrowings, which is characterized as a Level 3 liability in the fair value hierarchy.

(11) DERIVATIVE FINANCIAL INSTRUMENTS

The fair value of derivative positions outstanding is included in other assets and other liabilities in the accompanying consolidated balance sheets.

During 2012 and 2011, we entered into certain interest rate derivative positions that are not designated as hedging instruments. These derivative positions relate to transactions in which we enter into an interest rate swap, cap and/or floor with a customer while at the same time entering into an offsetting interest rate swap, cap and/or floor with another financial institution. In connection with each swap transaction, we agree to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, we agree to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows our customer to effectively convert a variable rate loan to a fixed rate. Because we act as an intermediary for our customer, changes in the fair value of the underlying derivative contracts substantially offset each other and do not have a material impact on our results of operations.

The notional amounts and estimated fair values of interest rate derivative positions outstanding at June 30, 2012 presented in the following table (in thousands):

 

     Notional
Amount
    Estimated
Fair Value
 

Non-hedging interest rate derivative:

    

Commercial loan/lease interest rate swaps

   $ 357,336     $ 25,423  

Commercial loan/lease interest rate swaps

     (357,336     (25,423

Commercial loan/lease interest rate caps

     (34,450     (23

Commercial loan/lease interest rate caps

     34,450       23  

The weighted-average receive and pay interest rates for interest rate swaps outstanding at June 30, 2012 were as follows:

 

      Weighted-Average  
      Interest
Rate
Received
    Interest
Rate
Paid
 

Non-hedging interest rate swaps

     5.13     2.08

The weighted-average strike rate for outstanding interest rate caps was 2.33% at June 30, 2012.

Our credit exposure on interest rate swaps and caps is limited to the net favorable value and interest payments of all swaps and caps by each counterparty. In such cases collateral may be required from the counterparties involved if the net value of the swaps and caps exceeds a nominal amount considered to be immaterial. Our credit exposure, net of any collateral pledged, relating to interest rate swaps and caps was approximately $25.4 million at June 30, 2012, all of which relates to bank customers. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap and cap values. At June 30, 2012, we had $12.9 million in cash collateral pledged for these derivatives included in interest-bearing deposits.

 

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(12) STOCKHOLDERS’ EQUITY

We had comprehensive income of $29.2 million for the three months ended June 30, 2012 and comprehensive income of $16.7 million for the three months ended June 30, 2011. Comprehensive income during the three months ended June 30, 2012 included a net after-tax loss of $406,000 and comprehensive income during the three months ended June 30, 2011 included a net after-tax gain of $28,000 due to changes in the net unrealized gains/losses on securities available-for-sale.

(13) LEGAL MATTERS

We are aggressively defending against a $65.4 million jury verdict that was rendered in August 2011, in rural southeastern Oklahoma. Post-trial motions were denied without comment in early July 2012, and an appeal has been filed in the Oklahoma Supreme Court.

The Oklahoma case was filed in May 2010 by one of the guarantors of a defaulted loan to an auto dealership in Hugo, Oklahoma, after we already had filed suit in Texas against the debtor and the three co-guarantors to recover the debt, and despite a forum selection clause in the guaranty requiring that any lawsuits be brought in Texas. The guarantor conceded he had signed the guaranty and that the guaranty was valid, but complained that he later had been defrauded because we had failed to notify him about on-going fraud at the dealership. We disputed that we had any such duty to him as guarantor under Oklahoma law, particularly since the guaranty expressly disclaimed such a duty and since he was a co-owner and salaried employee of the dealership. We repeatedly objected to the case proceeding in Oklahoma in view of the clause requiring any lawsuit to be brought in Texas, but these objections were rejected. We then obtained an injunction from the Texas court against the guarantor proceeding with the Oklahoma suit, but the guarantor nevertheless continued to trial in the Oklahoma suit in violation of that injunction.

Lacking much arguable economic loss, if any, the guarantor repeatedly emphasized to the jury in the Oklahoma case that we were claiming about $6.7 million, plus accumulating interest, on the debt and guaranty in the Texas lawsuit, and that we were asking for those damages to be trebled because of RICO violations. The Oklahoma jury proceeded to award the guarantor a total of $21.8 million in money damages, which was almost exactly three times his estimated prospective liability on his guaranty, and went on to award twice that amount in punitive damages.

Subsequent to the verdict in the Oklahoma case, the Texas Court of Appeals upheld the injunction and specifically ruled that the guaranty’s forum selection clause required any claims by the guarantor to be brought in the Texas court.

We have been advised by counsel that we have numerous grounds to reverse the Oklahoma verdict entirely or substantially reduce the amount, such as the guarantor’s pursuit of the Oklahoma case in violation of the forum selection clause in the guaranty and the Texas court’s injunction, the absence of any alleged contractual or other legal duty to the guarantor, and the lack of proof of actual economic damages. In addition, we continued to pursue the Texas lawsuit over the guaranty, and on April 18, 2012, we received summary judgment ordering the guarantor to pay us approximately $7 million on the debt, which could offset a portion of any arguable liability in the Oklahoma case. Counsel has also advised us the judgment in the Texas case may constitute a potential legal bar to any effectiveness of the Oklahoma judgment.

In light of these factors, we currently believe a materially negative outcome in this matter is not probable, despite the uncertainties inherent in litigation. We further have not been able to determine the amount or range of amounts, as likely for any liability. We thus have not established a reserve related to any potential exposure. The loss related to the loan was recognized in the second quarter of 2010 and we have no remaining balance sheet exposure on the principal balance of the loan.

(14) NEW ACCOUNTING PRONOUNCEMENTS

ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”) amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards (“IFRS”). ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 is effective for annual periods beginning after December 15, 2011, and did not have a significant impact on our financial statements.

 

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ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income” (“ASU 2011-05”) amends Topic 220, “Comprehensive Income,” to require that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. ASU 2011-05 is effective for annual and interim periods beginning after December 15, 2011; however certain provisions related to the presentation of reclassification adjustments have been deferred by ASU 2011-12 “Comprehensive Income (Topic 820) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” ASU 2011-05 did not have a significant impact on our financial statements.

ASU 2011-08, “Intangibles – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment” (“ASU 2011-08”) amends Topic 350, “Intangibles – Goodwill and Other,” to give entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. ASU 2011-08 is effective of annual and interim impairment tests beginning after December 15, 2011, and did not have a significant impact on our financial statements.

 

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QUARTERLY FINANCIAL SUMMARY – UNAUDITED

Consolidated Daily Average Balances, Average Yields and Rates

(In thousands)

 

     For the three months ended
June 30, 2012
    For the three months ended
June 30, 2011
 
     Average
Balance
    Revenue/
Expense(1)
    Yield/
Rate
    Average
Balance
    Revenue/
Expense(1)
    Yield/
Rate
 

Assets

           

Securities – taxable

  $ 91,623     $ 948        4.16   $ 127,269     $ 1,346        4.24

Securities – non-taxable(2)

    26,817       393        5.89     35,804       514        5.76

Federal funds sold

    8,077       4        0.20     14,303       5        0.14

Deposits in other banks

    60,416       48        0.32     77,928       65        0.33

Loans held for sale from continuing operations

    2,062,449       21,087        4.11     808,165       9,591        4.76

Loans

    5,950,913       73,204        4.95     4,890,696       63,918        5.24

Less reserve for loan losses

    71,779       —          —          68,031       —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans, net of reserve

    7,941,583       94,291        4.78     5,630,830       73,509        5.24
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

    8,128,516       95,684        4.73     5,886,134       75,439        5.14

Cash and other assets

    394,086           306,372      
 

 

 

       

 

 

     

Total assets

  $ 8,522,602         $ 6,192,506      
 

 

 

       

 

 

     

Liabilities and Stockholders’ Equity

           

Transaction deposits

  $ 694,463     $ 198        0.11   $ 375,084     $ 55        0.06

Savings deposits

    2,664,598       2,107        0.32     2,465,118       1,700        0.28

Time deposits

    584,581       831        0.57     541,337       1,351        1.00

Deposits in foreign branches

    444,478       346        0.31     415,998       311        0.30
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest bearing deposits

    4,388,120       3,482        0.32     3,797,537       3,417        0.36

Other borrowings

    1,428,575       736        0.21     233,388       110        0.19

Trust preferred subordinated debentures

    113,406       688        2.44     113,406       638        2.26
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest bearing liabilities

    5,930,101       4,906        0.33     4,144,331       4,165        0.40

Demand deposits

    1,864,456           1,455,366      

Other liabilities

    69,076           40,177      

Stockholders’ equity

    658,969           552,632      
 

 

 

       

 

 

     

Total liabilities and stockholders’ equity

  $ 8,522,602         $ 6,192,506      
 

 

 

       

 

 

     
           
   

 

 

       

 

 

   

Net interest income

    $ 90,778          $ 71,274     
   

 

 

       

 

 

   

Net interest margin

        4.49         4.86

Net interest spread

        4.40         4.74

Additional information from discontinued operations:

           

Loans held for sale

  $ 389         $ 415      

Borrowed funds

    389           415      

Net interest income

    $ 6          $ 7     

Net interest margin - consolidated

        4.49         4.86

 

(1)

The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income.

(2)

Taxable equivalent rates used where applicable.

 

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QUARTERLY FINANCIAL SUMMARY – UNAUDITED

Consolidated Daily Average Balances, Average Yields and Rates

(In thousands)

 

     For the six months ended
June 30, 2012
    For the six months ended
June 30, 2011
 
     Average
Balance
     Revenue/
Expense(1)
    Yield/
Rate
    Average
Balance
     Revenue/
Expense(1)
    Yield/
Rate
 

Assets

              

Securities – taxable

   $ 100,313      $ 1,989         3.99   $ 133,603      $ 2,846         4.30

Securities – non-taxable(2)

     27,662        802         5.83     36,475        1,046         5.78

Federal funds sold

     7,463               0.13     29,230        33         0.23

Deposits in other banks

     54,943        97         0.36     177,027        262         0.30

Loans held for sale from continuing operations

     2,049,536        42,402         4.16     772,124        18,268         4.77

Loans

     5,805,953        143,663         4.98     4,806,778        123,281         5.17

Less reserve for loan losses

     71,020        —          —          69,081        —          —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loans, net of reserve

     7,784,469        186,065         4.81     5,509,821        141,549         5.18
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total earning assets

     7,974,850        188,958         4.76     5,886,156        145,736         4.99

Cash and other assets

     391,046            301,742       
  

 

 

        

 

 

      

Total assets

   $ 8,365,896          $ 6,187,898       
  

 

 

        

 

 

      

Liabilities and Stockholders’ Equity

              

Transaction deposits

   $ 629,891      $ 338         0.11   $ 360,611      $ 110         0.06

Savings deposits

     2,600,005        4,190         0.32     2,467,265        4,071         0.33

Time deposits

     604,702        1,751         0.58     625,006        3,272         1.06

Deposits in foreign branches

     426,950        675         0.32     396,393        835         0.42
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest bearing deposits

     4,261,548        6,954         0.33     3,849,275        8,288         0.43

Other borrowings

     1,491,646        1,455         0.20     196,623        219         0.22

Trust preferred subordinated debentures

     113,406        1,399         2.48     113,406        1,271         2.26
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest bearing liabilities

     5,866,600        9,808         0.34     4,159,304        9,778         0.47

Demand deposits

     1,782,423            1,436,654       

Other liabilities

     73,592            43,944       

Stockholders’ equity

     643,281            547,996       
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 8,365,896          $ 6,187,898       
  

 

 

        

 

 

      
              
     

 

 

        

 

 

   

Net interest income

      $ 179,150          $ 135,958    
     

 

 

        

 

 

   

Net interest margin

          4.52