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, 2013

 

¨ 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 23, 2013, 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

     40,867,316   

 

 

 


Table of Contents

Texas Capital Bancshares, Inc.

Form 10-Q

Quarter Ended June 30, 2013

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

     44   

    Item 4.

 

Controls and Procedures

     47   

Part II. Other Information

  

    Item 1A.

 

Risk Factors

     47   

    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,
 
     2013     2012     2013     2012  

Interest income

        

Loans

   $ 106,418      $ 94,291      $ 209,600      $ 186,065   

Securities

     773        1,203        1,712        2,510   

Federal funds sold

     13        4        19        5   

Deposits in other banks

     60        48        112        97   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     107,264        95,546        211,443        188,677   

Interest expense

        

Deposits

     3,228        3,482        6,473        6,954   

Federal funds purchased

     206        240        418        521   

Repurchase agreements

     5        4        9        7   

Other borrowings

     143        492        356        927   

Subordinated notes

     1,829        —          3,658        —     

Trust preferred subordinated debentures

     633        688        1,267        1,399   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     6,044        4,906        12,181        9,808   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     101,220        90,640        199,262        178,869   

Provision for credit losses

     7,000        1,000        9,000        4,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     94,220        89,640        190,262        174,869   

Non-interest income

        

Service charges on deposit accounts

     1,749        1,624        3,450        3,228   

Trust fee income

     1,269        1,232        2,510        2,346   

Bank owned life insurance (BOLI) income

     463        588        961        1,109   

Brokered loan fees

     4,778        4,128        9,522        7,779   

Swap fees

     981        622        2,633        1,419   

Other

     1,888        2,268        3,333        3,771   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     11,128        10,462        22,409        19,652   

Non-interest expense

        

Salaries and employee benefits

     45,191        30,230        78,732        59,249   

Net occupancy expense

     4,135        3,679        7,992        7,283   

Marketing

     4,074        3,174        8,046        5,997   

Legal and professional

     4,707        3,330        8,647        7,321   

Communications and technology

     3,347        2,720        6,469        5,203   

Allowance and other carrying costs for OREO

     482        3,812        912        7,154   

Other

     6,798        7,028        13,636        14,042   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     68,734        53,973        124,434        106,249   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     36,614        46,129        88,237        88,272   

Income tax expense

     12,542        16,506        31,021        31,568   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     24,072        29,623        57,216        56,704   

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

     1        (1     —          3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     24,073        29,622        57,216        56,707   

Preferred stock dividends

     2,438        —          2,519        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 21,635      $ 29,622      $ 54,697      $ 56,707   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

        

Change in net unrealized gain on available-for-sale securities arising during period, before tax

   $ (1,028   $ (625   $ (1,752   $ (912

Income tax benefit related to net unrealized gain on available-for-sale securities

     (360     (219     (613     (319
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss net of tax

     (668     (406     (1,139     (593
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 23,405      $ 29,216      $ 56,077      $ 56,114   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

        

Income from continuing operations

   $ 0.53      $ 0.78      $ 1.34      $ 1.50   

Net income

   $ 0.53      $ 0.78      $ 1.34      $ 1.50   

Diluted earnings per common share

        

Income from continuing operations

   $ 0.52      $ 0.76      $ 1.31      $ 1.45   

Net income

   $ 0.52      $ 0.76      $ 1.31      $ 1.45   

See accompanying notes to consolidated financial statements.

 

 

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Table of Contents

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands except share data)

 

     June 30,     December 31,  
     2013     2012  
     (Unaudited)        

Assets

    

Cash and due from banks

   $ 90,992      $ 111,938   

Interest-bearing deposits

     142,928        94,410   

Federal funds sold and securities purchased under resale agreements

     85,120        —     

Securities, available-for-sale

     75,861        100,195   

Loans held for sale

     2,838,234        3,175,272   

Loans held for sale from discontinued operations

     298        302   

Loans held for investment (net of unearned income)

     7,510,662        6,785,535   

Less: Allowance for loan losses

     79,428        74,337   
  

 

 

   

 

 

 

Loans held for investment, net

     7,431,234        6,711,198   

Premises and equipment, net

     11,915        11,445   

Accrued interest receivable and other assets

     280,067        316,201   

Goodwill and intangible assets, net

     21,639        19,883   
  

 

 

   

 

 

 

Total assets

   $ 10,978,288      $ 10,540,844   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits:

    

Non-interest bearing

   $ 2,928,735      $ 2,535,375   

Interest bearing

     4,702,902        4,576,120   

Interest bearing in foreign branches

     348,961        329,309   
  

 

 

   

 

 

 

Total deposits

     7,980,598        7,440,804   

Accrued interest payable

     1,023        650   

Other liabilities

     102,676        91,581   

Federal funds purchased

     307,515        273,179   

Repurchase agreements

     27,079        23,936   

Other borrowings

     1,300,036        1,650,046   

Subordinated notes

     111,000        111,000   

Trust preferred subordinated debentures

     113,406        113,406   
  

 

 

   

 

 

 

Total liabilities

     9,943,333        9,704,602   

Stockholders’ equity:

    

Preferred stock

     150,000        —     

Common stock, $.01 par value:

    

Authorized shares – 100,000,000

    

Issued shares – 40,862,898 and 40,727,996 at June 30, 2013 and December 31, 2012, respectively

     408        407   

Additional paid-in capital

     445,270        450,116   

Retained earnings

     437,152        382,455   

Treasury stock (shares at cost: 417 at June 30, 2013 and December 31, 2012)

     (8     (8

Accumulated other comprehensive income, net of taxes

     2,133        3,272   
  

 

 

   

 

 

 

Total stockholders’ equity

     1,034,955        836,242   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 10,978,288      $ 10,540,844   
  

 

 

   

 

 

 

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
       
    Shares     Amount     Shares     Amount         Shares     Amount       Total  

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 benefit 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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

    —        $ —          40,727,996      $ 407      $ 450,116      $ 382,455        (417   $ (8   $ 3,272      $ 836,242   

Comprehensive income:

                   

Net income (unaudited)

    —          —          —          —          —          57,216        —          —          —          57,216   

Change in unrealized gain on available-for-sale securities, net of taxes of $613 (unaudited)

    —          —          —          —          —          —          —          —          (1,139     (1,139
                   

 

 

 

Total comprehensive income (unaudited)

                      56,077   

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

    —          —          —          —          (659     —          —          —          —          (659

Stock-based compensation expense recognized in earnings (unaudited)

    —          —          —          —          1,843        —          —          —          —          1,843   

Issuance of preferred stock (unaudited)

    6,000,000        150,000        —          —          (5,013     —          —          —          —          144,987   

Preferred stock dividend (unaudited)

    —          —          —          —          —          (2,519     —          —          —          (2,519

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

    —          —          134,902        1        (1,017     —          —          —          —          (1,016
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013 (unaudited)

    6,000,000      $ 150,000        40,862,898      $ 408      $ 445,270      $ 437,152        (417   $ (8   $ 2,133      $ 1,034,955   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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,  
     2013     2012  

Operating activities

    

Net income from continuing operations

   $ 57,216      $ 56,704   

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

    

Provision for credit losses

     9,000        4,000   

Depreciation and amortization

     2,494        2,378   

Amortization and accretion on securities

     14        24   

Bank owned life insurance (BOLI) income

     (961     (1,109

Stock-based compensation expense

     11,250        3,553   

Tax benefit (expense) from stock-based award exercises

     (659     3,261   

Excess tax benefits (expense) from stock-based compensation arrangements

     1,882        (4,971

Originations of loans held for sale

     (27,736,248     (22,189,120

Proceeds from sales of loans held for sale

     28,073,286        21,861,172   

Gain on sale of assets

     (439     (785

Changes in operating assets and liabilities:

    

Accrued interest receivable and other assets

     33,892        (17,904

Accrued interest payable and other liabilities

     2,237        (1,882
  

 

 

   

 

 

 

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

     452,964        (284,679

Net cash provided by operating activities of discontinued operations

     4        8   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     452,968        (284,671

Investing activities

    

Purchases of available-for-sale securities

     —          (6

Maturities and calls of available-for-sale securities

     12,245        13,425   

Principal payments received on available-for-sale securities

     10,323        14,392   

Net increase in loans held for investment

     (729,034     (664,215

Purchase of premises and equipment, net

     (2,292     (2,377

Proceeds from sale of foreclosed assets

     3,660        4,172   

Cash paid for acquisition

     (2,445     —     
  

 

 

   

 

 

 

Net cash used in investing activities of continuing operations

     (707,543     (634,609

Financing activities

    

Net increase in deposits

     539,794        1,104,033   

Proceeds from issuance of stock related to stock-based awards

     (1,016     1,446   

Proceeds from issuance of preferred stock

     144,987        —     

Preferred dividends paid

     (2,085     —     

Net decrease in other borrowings

     (346,867     (18,663

Excess tax benefits (expense) from stock-based compensation arrangements

     (1,882     4,971   

Net increase (decrease) in federal funds purchased

     34,336        (140,414
  

 

 

   

 

 

 

Net cash provided by financing activities of continuing operations

     367,267        951,373   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     112,692        32,093   

Cash and cash equivalents at beginning of period

     206,348        110,558   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 319,040      $ 142,651   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash paid during the period for interest

   $ 11,808      $ 9,520   

Cash paid during the period for income taxes

     38,112        34,072   

Non-cash transactions:

    

Transfers from loans/leases to OREO and other repossessed assets

     912        3,410   

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, 2012, included in our Annual Report on Form 10-K filed with the SEC on February 21, 2013 (the “2012 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 GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for loan losses, the fair value of 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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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, 2013 and December 31, 2012.

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 legal ownership interests in mortgage loans for sale in the secondary market through our mortgage finance division. The ownership interests are purchased from unaffiliated mortgage originators who are seeking additional funding through sale of the undivided ownership interests to facilitate their ability to originate loans. The mortgage originator has no obligation to offer and we have no obligation to purchase these interests. The originator closes mortgage loans consistent with underwriting standards established by approved investors, and, at the time of the sale to the investor, our ownership interest and that of the originator are delivered by us to the investor selected by the originator and approved by us. We typically purchase up to a 99% ownership interest 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, because we intend to sell the loans, they are classified as held for sale and are carried at the lower of cost or fair value, determined on an individual loan basis. Because of conditions in agreements with originators designed to reduce transaction risks, under the form-based rules of Accounting Standards Codification 860, Transfers and Servicing of Financial Assets (“ASC 860”), the ownership interests do not qualify as participating interests. Under ASC 860, the ownership interests are deemed to be loans to the originator, although we have an actual, legal ownership interest in the underlying residential mortgage loans to individual borrowers.

 

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Due to market conditions or events of default by the investor or the originator, we could be required to purchase the remaining interests in the underlying mortgage loans and transfer them to our loans held for investment portfolio at fair value. Mortgage 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.

We sell participations in our ownership interests to other financial institutions. These qualify as participating interests under ASC 860 and are appropriately netted from our loans held for sale balance on the balance sheet.

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 a general reserve for estimated 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 collectibility 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 permanent declines in value and are recorded in other 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. Capitalized 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.

 

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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 is the date of the grant.

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, 2013 and 2012 is reported in the accompanying consolidated statements of changes in stockholders’ equity and consolidated statements of income and comprehensive income.

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. In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.

 

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(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,  
     2013      2012     2013      2012  

Numerator:

          

Net income from continuing operations

   $ 24,072       $ 29,623      $ 57,216       $ 56,704   

Preferred stock dividends

     2,438         —          2,519         —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income from continuing operations available to common shareholders

     21,634         29,623        54,697         56,704   

Income (loss) from discontinued operations

     1         (1     —           3   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

   $ 21,635       $ 29,622      $ 54,697       $ 56,707   
  

 

 

    

 

 

   

 

 

    

 

 

 

Denominator:

          

Denominator for basic earnings per share - weighted average shares

     40,813,918         38,012,677        40,784,769         37,903,976   

Effect of employee stock-based awards(1)

     415,049         674,343        436,219         697,924   

Effect of warrants to purchase common stock

     494,558         454,524        496,464         437,132   
  

 

 

    

 

 

   

 

 

    

 

 

 

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

     41,723,525         39,141,544        41,717,452         39,039,032   
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic earnings per common share from continuing operations

   $ 0.53       $ 0.78      $ 1.34       $ 1.50   
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic earnings per common share

   $ 0.53       $ 0.78      $ 1.34       $ 1.50   
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted earnings per share from continuing operations

   $ 0.52       $ 0.76      $ 1.31       $ 1.45   
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted earnings per common share

   $ 0.52       $ 0.76      $ 1.31       $ 1.45   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Stock options, SARs and RSUs outstanding of 99,500 at June 30, 2013 and 10,000 at June 30, 2012 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, 2013, our net unrealized gain on the available-for-sale securities portfolio value was $3.3 million compared to $5.0 million at December 31, 2012. As indicated by the difference in the gain as a percent of the amortized cost, the reduction in the total unrealized gain was due almost entirely to the reduction in the balances of the securities held. As a percent of outstanding balances, the unrealized gain was 4.33% and 5.02%, respectively, for the periods presented.

 

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

 

     June 30, 2013  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
 

Available-for-Sale Securities:

          

Residential mortgage-backed securities

   $ 47,009       $ 3,128       $ —        $ 50,137   

Municipals

     18,051         320         —          18,371   

Equity securities(1)

     7,519         —           (166     7,353   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 72,579       $ 3,448       $ (166   $ 75,861   
  

 

 

    

 

 

    

 

 

   

 

 

 
     December 31, 2012  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
 

Available-for-Sale Securities:

          

Residential mortgage-backed securities

   $ 57,342       $ 4,239       $ —        $ 61,581   

Corporate securities

     5,000         80         —          5,080   

Municipals

     25,300         594         —          25,894   

Equity securities(1)

     7,519         121         —          7,640   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 95,161       $ 5,034       $ —        $ 100,195   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Equity securities consist of Community Reinvestment Act funds.

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

 

     June 30, 2013  
     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

   $ 781      $ 10,418      $ 17,507      $ 18,303      $ 47,009   

Estimated fair value

     833        11,069        18,786        19,449        50,137   

Weighted average yield(3)

     4.25     4.98     5.09     2.59     4.08

Municipals:(2)

          

Amortized cost

     7,880        10,171        —          —          18,051   

Estimated fair value

     8,002        10,369        —          —          18,371   

Weighted average yield(3)

     5.64     5.72     —          —          5.68

Equity securities:(4)

          

Amortized cost

     7,519        —          —          —          7,519   

Estimated fair value

     7,353        —          —          —          7,353   
          

 

 

 

Total available-for-sale securities:

          

Amortized cost

           $ 72,579   
          

 

 

 

Estimated fair value

           $ 75,861   
          

 

 

 

 

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     December 31, 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

   $ 656      $ 5,698      $ 23,111      $ 27,877      $ 57,342   

Estimated fair value

     690        6,113        24,948        29,830        61,581   

Weighted average yield(3)

     4.20     5.29     4.86     3.41     4.19

Corporate securities:

          

Amortized cost

     5,000        —          —          —          5,000   

Estimated fair value

     5,080        —          —          —          5,080   

Weighted average yield(3)

     7.38     —          —          —          7.38

Municipals:(2)

          

Amortized cost

     6,575        16,448        2,277        —          25,300   

Estimated fair value

     6,646        16,895        2,353        —          25,894   

Weighted average yield(3)

     5.75     5.66     6.01     —          5.72

Equity securities:(4)

          

Amortized cost

     7,519        —          —          —          7,519   

Estimated fair value

     7,640        —          —          —          7,640   

Total available-for-sale securities:

          
          

 

 

 

Amortized cost

           $ 95,161   
          

 

 

 

Estimated fair value

           $ 100,195   
          

 

 

 

 

(1) Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
(2) Yields have been adjusted to a tax equivalent basis assuming a 35% federal tax rate.
(3) Yields are calculated based on amortized cost.
(4) These equity securities do not have a stated maturity.

Securities with carrying values of approximately $54.4 million were pledged to secure certain borrowings and deposits at June 30, 2013. Of the pledged securities at June 30, 2013, approximately $7.7 million were pledged for certain deposits, and approximately $46.7 million were pledged for repurchase agreements.

The following table discloses, as of June 30, 2013, our investment securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months (in thousands):

 

     Less Than 12 Months     12 Months or Longer      Total  
     Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
 

Equity securities

   $ 7,353       $ (166   $ —         $ —         $ 7,353       $ (166

At June 30, 2013, there was one investment position in an unrealized loss position. This security is a publicly traded equity fund and is subject to market pricing volatility. We do not believe these unrealized losses are “other than temporary” as (1) we do not have the intent to sell of the securities in the table above; and (2) it is not probable that we will be unable to collect the amounts contractually due. We have not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities.

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

 

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(4) LOANS AND ALLOWANCE FOR LOAN LOSSES

At June 30, 2013 and December 31, 2012, loans were as follows (in thousands):

 

     June 30,
2013
    December 31,
2012
 

Commercial

   $ 4,470,861      $ 4,106,419   

Construction

     969,071        737,637   

Real estate

     2,015,045        1,892,451   

Consumer

     24,026        19,493   

Leases

     77,111        69,470   
  

 

 

   

 

 

 

Gross loans held for investment

     7,556,114        6,825,470   

Deferred income (net of direct origination costs)

     (45,452     (39,935

Allowance for loan losses

     (79,428     (74,337
  

 

 

   

 

 

 

Total loans held for investment, net

     7,431,234        6,711,198   

Loans held for sale

     2,838,234        3,175,272   
  

 

 

   

 

 

 

Total

   $ 10,269,468      $ 9,886,470   
  

 

 

   

 

 

 

Commercial Loans and Leases. Our commercial loan and lease 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 the 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.

Loans Held for Sale. Our loans held for sale consist of ownership interests purchased in single-family residential mortgages funded through our mortgage finance group. These loans are typically on our balance sheet for 10 to 20 days or less. We have agreements with mortgage lenders and purchase legal interests 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. Loans held for sale as of June 30, 2013 and December 31, 2012 are net of $309.4 million and $436.0 million, respectively, of participations sold.

 

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As of June 30, 2013, 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 appropriateness 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.

At June 30, 2013, we had a blanket floating lien based on certain real estate loans used as collateral for FHLB borrowings.

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.

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

 

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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, 2013 and December 31, 2012 (in thousands):

 

June 30, 2013                                          
     Commercial      Construction      Real Estate      Consumer      Leases      Total  

Grade:

                 

Pass

   $ 4,361,145       $ 964,837       $ 1,911,825       $ 23,686       $ 68,837       $ 7,330,330   

Special mention

     34,357         4,131         40,615         331         3,206         82,640   

Substandard-accruing

     57,782         103         41,806         —           5,003         104,694   

Non-accrual

     17,577         —           20,799         9         65         38,450   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans held for investment

   $ 4,470,861       $ 969,071       $ 2,015,045       $ 24,026       $ 77,111       $ 7,556,114   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2012                                          
     Commercial      Construction      Real Estate      Consumer      Leases      Total  

Grade:

                 

Pass

   $ 4,013,538       $ 703,673       $ 1,816,027       $ 19,436       $ 68,327       $ 6,621,001   

Special mention

     33,137         11,957         12,461         —           919         58,474   

Substandard-accruing

     44,371         4,790         40,897         —           104         90,162   

Non-accrual

     15,373         17,217         23,066         57         120         55,833   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans held for investment

   $ 4,106,419       $ 737,637       $ 1,892,451       $ 19,493       $ 69,470       $ 6,825,470   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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, 2013 and June 30, 2012. 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, 2013                                             
(in thousands)    Commercial      Construction      Real Estate     Consumer     Leases     Unallocated     Total  

Beginning balance

   $ 21,547       $ 12,097       $ 30,893      $ 226      $ 2,460      $ 7,114      $ 74,337   

Provision for loan losses

     13,139         615         (2,905     11        343        (2,528     8,675   

Charge-offs

     4,474         —           131        45        —          —          4,650   

Recoveries

     745         —           15        45        261        —          1,066   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs (recoveries)

     3,729         —           116        —          (261     —          3,584   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 30,957       $ 12,712       $ 27,872      $ 237      $ 3,064      $ 4,586      $ 79,428   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period end amount allocated to:

                

Loans individually evaluated for impairment

   $ 2,934       $ —         $ 548      $ 1      $ 10      $ —        $ 3,493   

Loans collectively evaluated for impairment

     28,023         12,712         27,324        236        3,054        4,586        75,935   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 30,957       $ 12,712       $ 27,872      $ 237      $ 3,064      $ 4,586      $ 79,428   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
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 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 (recoveries)

     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

     13,114         10,024         31,524        182        2,698        8,350        65,892   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Our recorded investment in loans as of June 30, 2013, December 31, 2012 and June 30, 2012 related to each balance in the allowance for loans losses by portfolio segment and disaggregated on the basis of our impairment methodology was as follows (in thousands):

 

June 30, 2013                                          
(in thousands)    Commercial      Construction      Real Estate      Consumer      Leases      Total  

Loans individually evaluated for impairment

   $ 19,475       $ —         $ 23,666       $ 9       $ 65       $ 43,215   

Loans collectively evaluated for impairment

     4,451,387         969,071         1,991,378         24,017         77,046         7,512,899   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,470,862       $ 969,071       $ 2,015,044       $ 24,026       $ 77,111       $ 7,556,114   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2012                                          
(in thousands)    Commercial      Construction      Real Estate      Consumer      Leases      Total  

Loans individually evaluated for impairment

   $ 15,373       $ 18,179       $ 32,512       $ 57       $ 120       $ 66,241   

Loans collectively evaluated for impairment

     4,091,046         719,458         1,859,939         19,436         69,350         6,759,229   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,106,419       $ 737,637       $ 1,892,451       $ 19,493       $ 69,470       $ 6,825,470   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
June 30, 2012                                          
(in thousands)    Commercial      Construction      Real Estate      Consumer      Leases      Total  

Loans individually evaluated for impairment

   $ 19,248       $ 19,959       $ 30,648       $ 269       $ 252       $ 70,376   

Loans collectively evaluated for impairment

     3,787,084         569,593         1,754,652         20,522         68,731         6,200,582   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 December 31, 2012. We believe the level of unallocated reserves at June 30, 2013 is warranted due to the ongoing weak economic environment which has produced more frequent losses, including those

 

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resulting from fraud by borrowers, that do not correlate to historical loss rates for specific product types or credit risk grades. 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.

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, 2013 (in thousands):

 

     June 30,      December 31,  
     2013      2012  

Commercial

     

Business loans

   $ 15,909       $ 15,373   

Energy loans

     1,668         —     

Construction

     

Market risk

     —           17,217   

Real estate

     

Market risk

     9,591         11,054   

Commercial

     7,692         8,617   

Secured by 1-4 family

     3,516         3,395   

Consumer

     9         57   

Leases

     65         120   
  

 

 

    

 

 

 

Total non-accrual loans

   $ 38,450       $ 55,833   
  

 

 

    

 

 

 

As of June 30, 2013, non-accrual loans included in the table above included $16.4 million related to loans that met the criteria for restructured.

 

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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, 2013 and December 31, 2012 (in thousands):

 

June 30, 2013                                   
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

              

Commercial

              

Business loans

   $ 4,667       $ 7,066       $ —         $ 3,042       $ —     

Energy

     1,668         3,498         —           278         —     

Construction

              

Market risk

     —           —           —           6,104         114   

Real estate

              

Market risk

     8,682         8,682         —           8,839         —     

Commercial

     7,692         7,692         —           8,003         —     

Secured by 1-4 family

     2,557         2,556         —           2,600         —     

Consumer

     —           —           —           —           —     

Leases

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with no allowance recorded

   $ 25,266       $ 29,494       $ —         $ 28,866       $ 114   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

              

Commercial

              

Business loans

   $ 13,140       $ 13,140       $ 2,934       $ 14,979       $ —     

Energy

     —           —           —           1,749         —     

Construction

              

Market risk

     —           —           —           321         —     

Real estate

              

Market risk

     3,776         3,776         243         9,153         —     

Commercial

     —           —           —           954         —     

Secured by 1-4 family

     959         1,065         305         729         —     

Consumer

     9         9         1         39         —     

Leases

     65         65         10         85         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with an allowance recorded

   $ 17,949       $ 18,055       $ 3,493       $ 28,009       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Combined:

              

Commercial

              

Business loans

   $ 17,807       $ 20,206       $ 2,934       $ 18,021       $ —     

Energy

     1,668         3,498         —           2,027         —     

Construction

              

Market risk

     —           —           —           6,425         114   

Real estate

              

Market risk

     12,458         12,458         243         17,992         —     

Commercial

     7,692         7,692         —           8,957         —     

Secured by 1-4 family

     3,516         3,621         305         3,329         —     

Consumer

     9         9         1         39         —     

Leases

     65         65         10         85         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 43,215       $ 47,549       $ 3,493       $ 56,875       $ 114   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
December 31, 2012                                   
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

              

Commercial

              

Business loans

   $ 2,938       $ 2,938       $ —         $ 1,409       $ —     

Construction

              

Market risk

     17,217         17,217         —           18,571         677   

Real estate

              

Market risk

     9,061         9,061         —           7,944         —     

Commercial

     6,604         6,604         —           6,451         —     

Secured by 1-4 family

     2,632         2,632         —           1,827         —     

Consumer

     —           —           —           —           —     

Leases

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with no allowance recorded

   $ 38,452       $ 38,452       $ —         $ 36,202       $ 677   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

              

Commercial

              

Business loans

   $ 12,435       $ 18,391       $ 2,983       $ 15,484       $ —     

Construction

              

Market risk

     962         962         14         321         —     

Real estate

              

Market risk

     11,439         11,439         535         11,811         —     

Commercial

     2,013         2,013         89         671         —     

Secured by 1-4 family

     763         763         275         1,632         —     

Consumer

     57         57         16         59         —     

Leases

     120         120         18         182         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with an allowance recorded

   $ 27,789       $ 33,745       $ 3,930       $ 30,160       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Combined:

              

Commercial

              

Business loans

   $ 15,373       $ 21,329       $ 2,983       $ 16,893       $ —     

Construction

              

Market risk

     18,179         18,179         14         18,892         677   

Real estate

              

Market risk

     20,500         20,500         535         19,755         —     

Commercial

     8,617         8,617         89         7,122         —     

Secured by 1-4 family

     3,395         3,395         275         3,459         —     

Consumer

     57         57         16         59         —     

Leases

     120         120         18         182         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 66,241       $ 72,197       $ 3,930       $ 66,362       $ 677   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Average impaired loans outstanding during the six months ended June 30, 2013 and 2012 totaled $56.9 million and $69.7 million, respectively.

The table below provides an age analysis of our past due loans that are still accruing as of June 30, 2013 (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

   $ 17,967       $ 3,889       $ 5,422       $ 27,278       $ 3,536,331       $ 3,563,609   

Energy

     4,316         7,915         —           12,231         877,444         889,675   

Construction

                 

Market risk

     285         —           —           285         959,808         960,093   

Secured by 1-4 family

     —           —           —           —           8,978         8,978   

Real estate

                 

Market risk

     9,394         1,948         2,211         13,553         1,482,063         1,495,616   

Commercial

     1,764         —           —           1,764         398,727         400,491   

Secured by 1-4 family

     —           480         —           480         97,659         98,139   

Consumer

     3,275         383         —           3,658         20,359         24,017   

Leases

     —           36         —           36         77,010         77,046   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans held for investment

   $ 37,001       $ 14,651       $ 7,633       $ 59,285       $ 7,458,379       $ 7,517,664   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Loans past due 90 days and still accruing includes premium finance loans of $4.2 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 for borrowers of similar credit quality. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two. Modifications of terms that could potentially qualify as a restructuring include reduction of contractual interest rate, extension of the maturity date at a contractual interest rate lower than the current rate for new debt with similar risk, or a reduction of the face amount of debt, or forgiveness of either principal or accrued interest. As of June 30, 2013 and December 31, 2012, we have $4.8 million and $10.4 million, respectively, in loans considered restructured that are not on nonaccrual. As of June 30, 2013 these loans did not have an unfunded commitment total compared to $599,000 at December 31, 2012. Of the nonaccrual loans at June 30, 2013 and December 31, 2012, $16.4 million and $19.6 million, respectively, met the criteria for restructured. These loans have no unfunded commitments at their respective balance sheet date. 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.

 

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Table of Contents

The following tables summarize, for the six months ended June 30, 2013 and 2012, loans that have been restructured during 2013 and 2012, respectively, (in thousands):

 

June 30, 2013                     
      Number of
Contracts
     Pre-Restructuring
Outstanding
Recorded
Investment
     Post-
Restructuring
Outstanding
Recorded
Investment
 

Commercial business loans

     1       $ 1,945       $ 1,898   
  

 

 

    

 

 

    

 

 

 

Total new restructured loans in 2013

     1       $ 1,945       $ 1,898   
  

 

 

    

 

 

    

 

 

 
June 30, 2012                     
     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. The restructuring of the loans did not have a significant impact on our allowance for loan losses at June 30, 2013.

The following tables provide information on how loans were modified as a restructured loan during the six months ended June 30, 2013 and 2012 (in thousands):

 

     June 30,  
     2013      2012  

Extended maturity

   $ —         $ 1,968   

Combination of maturity extension and payment schedule adjustment

     1,898         —     
  

 

 

    

 

 

 

Total

   $ 1,898       $ 1,968   
  

 

 

    

 

 

 

As of June 30, 2013, we did not have any loans that were restructured within the last 12 months that subsequently defaulted.

(5) OREO AND VALUATION ALLOWANCE FOR LOSSES ON OREO

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

 

    

Three months ended

June 30,

   

Six months ended

June 30,

 
     2013     2012     2013     2012  

Beginning balance

   $ 14,426      $ 32,601      $ 15,991      $ 34,077   

Additions

     912        875        912        3,397   

Sales

     (1,902     (2,471     (3,396     (3,728

Valuation allowance for OREO

     (164     (2,700     (164     (3,556

Direct write-downs

     (219     (423     (290     (2,308
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 13,053      $ 27,882      $ 13,053      $ 27,882   
  

 

 

   

 

 

   

 

 

   

 

 

 

(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

 

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Table of Contents

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.

The table below summarizes our financial instruments whose contract amounts represent credit risk at June 30, 2013 (in thousands):

 

Commitments to extend credit

   $ 2,891,481   

Standby letters of credit

     107,388   

(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, 2013, 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 in the table below, the Company’s capital ratios exceed the regulatory definition of adequately capitalized as of June 30, 2013 and 2012. Based upon the information in its most recently filed call report, the Bank meets the capital ratios necessary to be well capitalized.

We believe we have at all times applied the appropriate risk weights (i.e., a 50%, or 20% for FHA/VA, risk weighting) to the ownership interests in mortgage loans owned by us. However, there can be no assurances that we will not ultimately be required to change the applicable risk weight on these assets, either retroactively or prospectively. Changes in risk weights applicable to these assets held by the Bank could cause our Bank to report historical deficiencies relative to well-capitalized or minimum capital standards and cause us to raise additional capital or reduce asset balances to maintain minimum and well-capitalized levels of regulatory capital that could adversely affect future operating results. We will determine if our business practices could be changed to maintain the risk weights historically applied, if necessary, and if those changes would be consistent with operating and financial risks acceptable to the Bank. The Company’s ownership in mortgage loans, in the capital ratios to be included in regulatory filings and reflected below beginning with the first quarter of 2013, utilize 100% risk weighting consistent with our understanding of the OCC’s current interpretation of the supplemental call reports instructions issued in early April 2013 that require reporting of such assets as loans to nondepository financial institutions.

 

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During the first six months of 2013, we downstreamed an additional $190 million to the Bank and applied a 100% risk weight to the loans held for sale portfolio. With the 100% risk weighting for June 30, 2013, the Bank remains well capitalized and we have $89 million in the parent company and $50 million in an available line of credit to support the Bank’s future capital needs. As is typical in the mortgage business, month-end and quarter-end balances are generally much higher than average balances. The difference between the quarter-end balance and the average balance for the second quarter required approximately $43 million in additional capital using the 100% risk weight applied.

 

     June 30,  
     2013     2012  

Risk-based capital:

    

Tier 1 capital

     9.60     9.54

Total capital

     11.26     10.48

Leverage

     11.11     9.02

On August 1, 2012 we completed a sale of 2.3 million shares of our common stock in a public offering. Net proceeds from the sale totaled $87.0 million. The additional equity was used for general corporate purposes, including retirement of $15.0 million of debt and additional capital to support continued loan growth at our bank.

On September 21, 2012, we issued $111.0 million of subordinated notes. The notes mature in September 2042 and bear interest at a rate of 6.50% per annum, payable quarterly. The proceeds were used for general corporate purposes including funding regulatory capital infusions into the Bank. The indenture contains customary financial covenants and restrictions.

On March 28, 2013, we completed a sale of 6.0 million shares of 6.5% non-cumulative preferred stock in a public offering. Net proceeds from the sale totaled $145.0 million. The additional equity is being used for general corporate purposes, which may include funding regulatory capital infusions into the Bank.

(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 SARs and RSUs that were granted from 2007 through 2013.

 

     Three months ended June 30,      Six months ended June 30,  
(in thousands)    2013      2012      2013      2012  

Stock- based compensation expense recognized:

           

SARs

   $ 145       $ 187       $ 282       $ 375   

RSUs

     805         1,416         1,561         3,178   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total compensation expense recognized

   $ 950       $ 1,603       $ 1,843       $ 3,553   
  

 

 

    

 

 

    

 

 

    

 

 

 
                   June 30, 2013  
(in thousands)                  Options      SARs and RSUs  

Unrecognized compensation expense related to unvested awards

         $ —         $ 10,837   

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

           N/A         3.54   

 

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In connection with the 2010 Long-term Incentive Plan, the Company has issued cash-based performance units. A summary of the compensation cost for these units is as follows (in thousands):

 

     Three months ended
June 30,
     Six months ended June
30,
 
     2013      2012      2013      2012  

Cash-based performance units

   $   8,368       $   2,358       $   9,407       $   2,902   

The compensation cost for the three months and six months ended June 30, 2013, includes approximately $4.1 million related to a charge taken to reflect the financial effect of the organizational changes announced during the second quarter of 2013 and includes assumptions about future payouts that may or may not happen. Additionally, there was another $2.2 million of charges related to the increased probability that certain performance targets for executive cash based incentives will be met, reflecting the increase in our stock price.

(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, 2013 and 2012, the income and loss from discontinued operations was $338 and $675, net of taxes, respectively. During the six months ended June 30, 2013 and 2012, the loss and income from discontinued operations was $301 and $3,100, net of taxes, respectively. The 2013 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 $298,000 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, 2013 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.

Assets and liabilities measured at fair value at June 30, 2013 and December 31, 2012 are as follows (in thousands):

 

June 30, 2013                    
     Fair Value Measurements Using  
     Level 1      Level 2     Level 3  

Available for sale securities:(1)

       

Residential mortgage-backed securities

   $ —         $ 50,137      $ —     

Municipals

     —           18,371        —     

Equity securities

     —           7,353        —     

Loans(2) (4)

     —           —          12,392   

OREO(3) (4)

     —           —          13,053   

Derivative asset(5)

     —           11,124        —     

Derivative liability(5)

     —           (11,124     —     
December 31, 2012                    

Available for sale securities:(1)

       

Residential mortgage-backed securities

   $ —         $ 61,581      $ —     

Corporate securities

     —           5,080        —     

Municipals

     —           25,894        —     

Equity securities

     —           7,640        —     

Loans(2) (4)

     —           —          11,639   

OREO(3) (4)

     —           —          15,991   

Derivative asset(5)

     —           28,465        —     

Derivative liability(5)

     —           (28,465     —     

 

(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, 2013, certain impaired loans were reevaluated and reported at fair value through a specific allocation of the allowance for loan losses based upon the fair value of the underlying collateral. The $12.4 million total above includes impaired loans at June 30, 2013 with a carrying value of $12.4 million that did not have specific allowance allocations for a total reported fair value of $12.4 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.

 

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OREO

Certain foreclosed assets, upon initial recognition, are valued based on third party appraisals less estimated selling costs. At June 30, 2013, OREO with a carrying value of $17.7 million was reduced by specific valuation allowance allocations totaling $4.6 million for a total reported fair value of $13.1 million based on valuations utilizing Level 3 valuation inputs. Fair values are 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.

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, 2013      December 31, 2012  
     Carrying      Estimated      Carrying      Estimated  
     Amount      Fair Value      Amount      Fair Value  

Cash and cash equivalents

   $ 319,040       $ 319,040       $ 206,348       $ 206,348   

Securities, available-for-sale

     75,861         75,861         100,195         100,195   

Loans held for sale

     2,838,234         2,838,234         3,175,272         3,175,272   

Loans held for sale from discontinued operations

     298         298         302         302   

Loans held for investment, net

     7,431,234         7,435,054         6,711,198         6,714,031   

Derivative asset

     11,124         11,124         28,465         28,465   

Deposits

     7,980,598         7,980,929         7,440,804         7,441,240   

Federal funds purchased

     307,515         307,515         273,179         273,179   

Borrowings

     1,327,115         1,327,115         1,673,982         1,673,983   

Subordinated notes

     111,000         108,673         111,000         112,757   

Trust preferred subordinated debentures

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

Derivative liability

     11,124         11,124         28,465         28,465   

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

Loans are characterized as Level 3 assets in the fair value hierarchy. 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. The carrying amount of accrued interest approximates its fair value. The carrying amount of loans held for sale approximates fair value.

 

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Derivatives

The estimated fair value of the interest rate swaps 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.

Deposits

Deposits are characterized as Level 3 liabilities in the fair value hierarchy. The carrying amounts for variable-rate money market accounts approximate their fair value. 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.

Federal funds purchased, other borrowings, subordinated notes and trust preferred subordinated debentures

The carrying value reported in the consolidated balance sheet for federal funds purchased and other short-term, floating rate borrowings approximates their fair value, which is characterized as a Level 1 asset in the fair value hierarchy. The fair value of any fixed rate short-term borrowings and trust preferred subordinated debentures are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar borrowings, which is characterized as a Level 3 liability in the fair value hierarchy. The subordinated notes are publicly traded and are valued based on market prices, which is characterized as a Level 2 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 2013 and 2012, 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, 2013 and December 31, 2012 are presented in the following tables (in thousands):

 

     June 30, 2013     December 31, 2012  
     Notional
Amount
    Estimated
Fair Value
    Notional
Amount
    Estimated
Fair Value
 

Non-hedging interest rate derivative:

        

Commercial loan/lease interest rate swaps

   $ 659,039      $ 11,281      $ 523,216      $ 28,469   

Commercial loan/lease interest rate swaps

     (659,039     (11,281     (523,216     (28,469

Commercial loan/lease interest rate caps

     (51,192     (157     (42,380     (4

Commercial loan/lease interest rate caps

     51,192        157        42,380        4   

 

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The weighted-average receive and pay interest rates for interest rate swaps outstanding at June 30, 2013 were as follows:

 

     June 30, 2013     December 31, 2012  
     Weighted-Average Interest Rate     Weighted-Average Interest Rate  
     Received     Paid     Received     Paid  

Non-hedging interest rate swaps

     4.86     3.16     4.76     3.11

The weighted-average strike rate for outstanding interest rate caps was 1.95% at June 30, 2013 and 2.06% at December 31, 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 $11.1 million at June 30, 2013 and approximately $28.5 million at December 31, 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, 2013 and December 31, 2012, we had $10.4 million and $17.1 million, respectively, in cash collateral pledged for these derivatives included in interest-bearing deposits.

(12) STOCKHOLDERS’ EQUITY

On August 1, 2012, we completed a sale of 2.3 million shares of our common stock in a public offering. Net proceeds from the sale totaled $87.0 million. The additional equity was used for general corporate purposes, including retirement of $15.0 million of debt and additional capital to support continued loan growth at our bank.

On March 28, 2013, we completed a sale of 6.0 million shares of 6.5% non-cumulative preferred stock, par value $0.01, with a liquidation preference of $25 per share, in a public offering. Dividends on the preferred stock are not cumulative and will be paid when declared by our board of directors to the extent that we have lawfully available funds to pay dividends. If declared, dividends will accrue and be payable quarterly, in arrears, on the liquidation preference amount, on a non-cumulative basis, at a rate of 6.50% per annum. We paid $2.1 million in dividends on the preferred stock on June 15, 2013. Holders of preferred stock will not have voting rights, except with respect to authorizing or increasing the authorized amount of senior stock, certain changes in the terms of the preferred stock, certain dividend non-payments and as otherwise required by applicable law. Net proceeds from the sale totaled $145.0 million. The additional equity is being used for general corporate purposes, including funding regulatory capital infusions into the Bank.

(13) NEW ACCOUNTING PRONOUNCEMENTS

ASU 2013-01, “Balance Sheet (Topic 210) – Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” (“ASU 2013-01”) amends Topic 210, “Balance Sheet” to clarify that the scope of ASU 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” would apply to derivatives including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements and securities borrowing and securities lending transactions that are either offset in accordance with Topic 815, “Derivatives and Hedging”. ASU 2013-01 was effective January 1, 2013 and did not have a significant impact on our financial statements.

ASU 2013-02, “Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”) amends Topic 220, “Comprehensive Income” to improve the reporting of reclassifications out of accumulated other comprehensive income. Entities are required to separately present significant amounts reclassified out of accumulated other comprehensive income for each component of accumulated other comprehensive income and to disclose, for each affected line item in the income statement, the amount of accumulated other comprehensive income that has been reclassified into that line item. ASU 2013-02 was effective for fiscal years, and interim periods within those years, beginning after December 13, 2012 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, 2013
    For the three months ended
June 30, 2012
 
      Average
Balance
     Revenue/
Expense(1)
     Yield/
Rate
    Average
Balance
     Revenue/
Expense(1)
     Yield/
Rate
 

Assets

                

Securities – taxable

   $ 60,063       $ 594         3.97   $ 91,623       $ 948         4.16

Securities – non-taxable(2)

     18,843         275         5.85     26,817         393         5.89

Federal funds sold

     54,448         13         0.10     8,077         4         0.20

Deposits in other banks

     91,177         60         0.26     60,416         48         0.32

Loans held for sale

     2,406,246         22,440         3.74     2,062,449         21,087         4.11

Loans

     7,152,323         83,978         4.71     5,950,913         73,204         4.95

Less reserve for loan losses

     75,006         —           —          71,779         —           —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Loans, net of reserve

     9,483,563         106,418         4.50     7,941,583         94,291         4.78
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total earning assets

     9,708,094         107,360         4.44     8,128,516         95,684         4.73

Cash and other assets

     402,898              386,867         
  

 

 

         

 

 

       

Total assets

   $ 10,110,992            $ 8,515,383         
  

 

 

         

 

 

       

Liabilities and Stockholders’ Equity

                

Transaction deposits

   $ 1,051,199       $ 233         0.09   $ 694,463       $ 198         0.11

Savings deposits

     3,340,420         2,292         0.28     2,664,598         2,107         0.32

Time deposits

     397,868         407         0.41     584,581         831         0.57

Deposits in foreign branches

     340,713         296         0.35     444,478         346         0.31
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest bearing deposits

     5,130,200         3,228         0.25     4,388,120         3,482         0.32

Other borrowings

     727,158         354         0.20     1,420,965         736         0.21

Subordinated notes

     111,000         1,829         6.61     —           —           —     

Trust preferred subordinated debentures

     113,406         633         2.24     113,406         688         2.44
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest bearing liabilities

     6,081,764         6,044         0.40     5,922,491         4,906         0.33

Demand deposits

     2,914,341              1,864,456         

Other liabilities

     91,608              69,468         

Stockholders’ equity

     1,023,279              658,968         
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 10,110,992            $ 8,515,383         
  

 

 

         

 

 

       
                
     

 

 

         

 

 

    

Net interest income

      $ 101,316            $ 90,778      
     

 

 

         

 

 

    

Net interest margin

           4.19           4.49

Net interest spread

           4.04           4.40

Additional information from discontinued operations:

                

Loans held for sale

   $ 299            $ 389         

Borrowed funds

     299              389         

Net interest income

      $ 6            $ 6      

Net interest margin - consolidated

           4.19           4.49

 

(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, 2013
    For the six months ended
June 30, 2012
 
      Average
Balance
     Revenue/
Expense(1)
     Yield/
Rate
    Average
Balance
     Revenue/
Expense(1)
     Yield/
Rate
 

Assets