Texas Capital Bancshares Inc 10-Q for FY2021 Q1
Texas Capital Bancshares Inc (TXCP)
10-Q
2021-04-22
For: 2021-03-31
View Original
Added on
April 07, 2026
About this 10-Q
Texas Capital Bancshares Inc filed this 10-Q on April 22, 2021, covering the quarter ended March 31, 2021 (FY2021 Q1).
Headline figures
Quarter ended March 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Net income
- $71.94M
- compared with a net loss of $16.69M a year earlier
- Diluted EPS
- $1.33
- compared with -$0.38 a year earlier
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. | |||||
For the quarterly period ended March 31, 2021
| 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)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||||||||
(214 ) 932-6600
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| x | Accelerated Filer | ☐ | |||||||||||||||||||||
| Non-Accelerated Filer | ☐ | Smaller Reporting Company | |||||||||||||||||||||
| Emerging Growth Company | |||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
APPLICABLE ONLY TO CORPORATE ISSUERS:
On April 21, 2021, 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 50,581,310
Table of Contents
Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended March 31, 2021
Index
| Item 1. | |||||||||||
| Item 2. | |||||||||||
| Item 3. | |||||||||||
| Item 4. | |||||||||||
| Item 1. | |||||||||||
| Item 1A. | |||||||||||
| Item 6. | |||||||||||
Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
| (in thousands except share data) | March 31, 2021 | December 31, 2020 | |||||||||
| (Unaudited) | |||||||||||
| Assets | |||||||||||
| Cash and due from banks | $ | $ | |||||||||
| Interest-bearing deposits in other banks | |||||||||||
| Investment securities | |||||||||||
Loans held for sale ($ | |||||||||||
| Loans held for investment, mortgage finance | |||||||||||
| Loans held for investment (net of unearned income) | |||||||||||
| Less: Allowance for credit losses on loans | |||||||||||
| Loans held for investment, net | |||||||||||
| Mortgage servicing rights, net | |||||||||||
| Premises and equipment, net | |||||||||||
| Accrued interest receivable and other assets | |||||||||||
| Goodwill and intangible assets, net | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Liabilities: | |||||||||||
| Deposits: | |||||||||||
| Non-interest-bearing | $ | $ | |||||||||
| Interest-bearing | |||||||||||
| Total deposits | |||||||||||
| Accrued interest payable | |||||||||||
| Other liabilities | |||||||||||
| Federal funds purchased and repurchase agreements | |||||||||||
| Other borrowings | |||||||||||
| Long-term debt | |||||||||||
| Total liabilities | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, $ | |||||||||||
Authorized shares— | |||||||||||
Issued shares— | |||||||||||
Common stock, $ | |||||||||||
Authorized shares— | |||||||||||
Issued shares— | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
Treasury stock (shares at cost: | ( | ( | |||||||||
| Accumulated other comprehensive income/(loss), net of taxes | ( | ||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See accompanying notes to consolidated financial statements.
4
Table of Contents
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND OTHER
COMPREHENSIVE INCOME/(LOSS) - UNAUDITED
| Three months ended March 31, | |||||||||||||||||||||||
| (in thousands except per share data) | 2021 | 2020 | |||||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Interest and fees on loans | $ | $ | |||||||||||||||||||||
| Investment securities | |||||||||||||||||||||||
| Federal funds sold and securities purchased under resale agreements | |||||||||||||||||||||||
| Interest-bearing deposits in other banks | |||||||||||||||||||||||
| Total interest income | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Deposits | |||||||||||||||||||||||
| Federal funds purchased | |||||||||||||||||||||||
| Other borrowings | |||||||||||||||||||||||
| Long-term debt | |||||||||||||||||||||||
| Total interest expense | |||||||||||||||||||||||
| Net interest income | |||||||||||||||||||||||
| Provision for credit losses | ( | ||||||||||||||||||||||
| Net interest income after provision for credit losses | |||||||||||||||||||||||
| Non-interest income | |||||||||||||||||||||||
| Service charges on deposit accounts | |||||||||||||||||||||||
| Wealth management and trust fee income | |||||||||||||||||||||||
| Brokered loan fees | |||||||||||||||||||||||
| Servicing income | |||||||||||||||||||||||
| Swap fees | |||||||||||||||||||||||
| Net gain/(loss) on sale of loans held for sale | ( | ||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total non-interest income | |||||||||||||||||||||||
| Non-interest expense | |||||||||||||||||||||||
| Salaries and employee benefits | |||||||||||||||||||||||
| Net occupancy expense | |||||||||||||||||||||||
| Marketing | |||||||||||||||||||||||
| Legal and professional | |||||||||||||||||||||||
| Communications and technology | |||||||||||||||||||||||
| FDIC insurance assessment | |||||||||||||||||||||||
| Servicing-related expenses | |||||||||||||||||||||||
| Merger-related expenses | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total non-interest expense | |||||||||||||||||||||||
| Income/(loss) before income taxes | ( | ||||||||||||||||||||||
| Income tax expense/(benefit) | ( | ||||||||||||||||||||||
| Net income/(loss) | ( | ||||||||||||||||||||||
| Preferred stock dividends | |||||||||||||||||||||||
| Net income/(loss) available to common stockholders | $ | $ | ( | ||||||||||||||||||||
| Other comprehensive loss | |||||||||||||||||||||||
| Change in unrealized gain/(loss) on available-for-sale debt securities arising during period, before tax | $ | ( | $ | ( | |||||||||||||||||||
| Income tax expense/(benefit) | ( | ( | |||||||||||||||||||||
| Other comprehensive loss, net of tax | ( | ( | |||||||||||||||||||||
| Comprehensive loss | $ | ( | $ | ( | |||||||||||||||||||
| Basic earnings/(loss) per common share | $ | $ | ( | ||||||||||||||||||||
| Diluted earnings/(loss) per common share | $ | $ | ( | ||||||||||||||||||||
See accompanying notes to consolidated financial statements.
5
Table of Contents
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED
| Preferred Stock | Common Stock | Additional | Treasury Stock | Accumulated Other | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Paid-in | Retained | Comprehensive | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands except share data) | Shares | Amount | Shares | Amount | Capital | Earnings | Shares | Amount | Income/(Loss) | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 (audited) | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Impact of adoption of new accounting standards, net of taxes (1) | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive loss: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Change in unrealized gain/(loss) on available-for-sale securities, net of taxes | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total comprehensive loss | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense recognized in earnings | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividend | — | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of stock related to stock-based awards | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 (audited) | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive loss: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in unrealized gain/(loss) on available-for-sale securities, net of taxes | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total comprehensive loss | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense recognized in earnings | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of preferred stock | — | — | ( | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividend | — | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of stock related to stock-based awards | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
(1) Represents the impact of adopting Accounting Standard Update ("ASU") 2016-13. See Note 1 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020 for more information.
See accompanying notes to consolidated financial statements.
6
Table of Contents
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
| Three months ended March 31, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| Operating activities | |||||||||||
| Net income | $ | $ | ( | ||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Provision for credit losses | ( | ||||||||||
| Depreciation and amortization | |||||||||||
| Net (gain)/loss on sale of loans held for sale | ( | ||||||||||
| Increase/(decrease) in valuation allowance on mortgage servicing rights | ( | ||||||||||
| Stock-based compensation expense | |||||||||||
| Purchases and originations of loans held for sale | ( | ( | |||||||||
| Proceeds from sales and repayments of loans held for sale | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accrued interest receivable and other assets | ( | ||||||||||
| Accrued interest payable and other liabilities | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Investing activities | |||||||||||
| Purchases of investment securities | ( | ( | |||||||||
| Principal payments received on investment securities | |||||||||||
| Originations of mortgage finance loans | ( | ( | |||||||||
| Proceeds from pay-offs of mortgage finance loans | |||||||||||
| Net increase in loans held for investment, excluding mortgage finance loans | ( | ( | |||||||||
| Purchase of premises and equipment, net | ( | ( | |||||||||
| Net cash provided by/(used in) investing activities | ( | ||||||||||
| Financing activities | |||||||||||
| Net increase in deposits | |||||||||||
| Costs from issuance of stock related to stock-based awards and warrants | ( | ( | |||||||||
| Net proceeds from issuance of preferred stock | |||||||||||
| Preferred dividends paid | ( | ( | |||||||||
| Net increase/(decrease) in other borrowings | ( | ||||||||||
| Net increase in federal funds purchased and repurchase agreements | |||||||||||
| Net proceeds from issuance of long-term debt | |||||||||||
| Net cash provided by financing activities | |||||||||||
| Net increase in cash and cash equivalents | |||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Cash paid during the period for interest | $ | $ | |||||||||
| Cash paid during the period for income taxes | |||||||||||
See accompanying notes to consolidated financial statements.
7
Table of Contents
(1) Operations and Summary of Significant Accounting Policies
Organization and Nature of Business
Texas Capital Bancshares, Inc. (the "Company” or "TCBI"), a Delaware corporation, was incorporated in November 1996 and commenced banking operations in December 1998. The consolidated financial statements of the Company include the accounts of Texas Capital Bancshares, Inc. and its wholly owned subsidiary, Texas Capital Bank, National Association (the "Bank”). We serve the needs of commercial businesses and successful professionals and entrepreneurs located in Texas as well as operate several lines of business serving a regional or national clientele of commercial borrowers. We are primarily a secured lender, with the majority of our loans held for investment, excluding mortgage finance loans and other national lines of business, being made to businesses headquartered or with operations in Texas. Our national lines of business provide specialized lending products to businesses throughout the United States.
Basis of Presentation
Our accounting and reporting policies conform to accounting principles generally accepted in the United States ("GAAP") and to generally accepted practices within the banking industry. Certain prior period balances have been reclassified to conform to the current period presentation.
The consolidated interim financial statements are unaudited and certain information and footnote disclosures presented in accordance with GAAP 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 the interim financial information not misleading. The consolidated financial statements have been prepared in accordance with GAAP for interim financial information and 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, 2020, included in our Annual Report on Form 10-K for the year ended December 31, 2020 (the "2020 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.
Subsequent Event
On April 20, 2021, we entered into an agreement to sell our portfolio of mortgage servicing rights to a third party. The third party has also, in a separate letter of intent, agreed to extend employment opportunities to many of the Company’s Mortgage Correspondent Aggregation (“MCA”) employees and the Company has agreed to make best efforts to cooperate in transitioning its MCA client base to the third party, resulting in the wind-down of the Company’s MCA program. The sale and transition of employees and clients is expected to be completed in the second quarter of 2021, subject to customary closing conditions, and will result in the Company recording an expected gain on sale of mortgage servicing rights ("MSRs") and severance costs in the second quarter of 2021, both of which are not expected to be material.
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 credit losses, the fair value of financial instruments and the status of contingencies are particularly susceptible to significant change.
8
Table of Contents
(2) Earnings Per Share
The following table presents the computation of basic and diluted earnings per share:
| Three months ended March 31, | |||||||||||||||||||||||
| (in thousands except share and per share data) | 2021 | 2020 | |||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income/(loss) | $ | $ | ( | ||||||||||||||||||||
| Preferred stock dividends | |||||||||||||||||||||||
| Net income/(loss) available to common stockholders | $ | $ | ( | ||||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Denominator for basic earnings per share—weighted average shares | |||||||||||||||||||||||
| Effect of employee stock-based awards(1) | |||||||||||||||||||||||
Denominator for dilutive earnings per share—adjusted weighted average shares and assumed conversions | |||||||||||||||||||||||
| Basic earnings/(loss) per common share | $ | $ | ( | ||||||||||||||||||||
| Diluted earnings/(loss) per common share | $ | $ | ( | ||||||||||||||||||||
(1)SARs and RSUs outstanding of 80,263 at March 31, 2021 and 428,007 at March 31, 2020 have not been included in diluted earnings/(loss) per share because to do so would have been antidilutive for the periods presented.
(3) Investment Securities
Available-for-Sale Debt Securities
The following is a summary of available-for-sale debt securities:
| (in thousands) | Amortized Cost(1) | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||||||||
| March 31, 2021 | |||||||||||||||||||||||
| Available-for-sale debt securities: | |||||||||||||||||||||||
| U.S. government agency securities | $ | $ | $ | ( | $ | ||||||||||||||||||
| Residential mortgage-backed securities | ( | ||||||||||||||||||||||
| Tax-exempt asset-backed securities | |||||||||||||||||||||||
| Credit risk transfer securities | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| Available-for-sale debt securities: | |||||||||||||||||||||||
| U.S. government agency securities | $ | $ | $ | ( | $ | ||||||||||||||||||
| Residential mortgage-backed securities | ( | ||||||||||||||||||||||
| Tax-exempt asset-backed securities | |||||||||||||||||||||||
| Credit risk transfer securities | ( | ||||||||||||||||||||||
Total | $ | $ | $ | ( | $ | ||||||||||||||||||
(1)Excludes accrued interest receivable of $6.3 million and $6.0 million at March 31, 2021 and December 31, 2020, respectively, that is recorded in accrued interest receivable and other assets on the consolidated balance sheets.
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The amortized cost and estimated fair value, excluding accrued interest receivable, and weighted average yield of available-for-sale debt securities are presented below by contractual maturity:
| (in thousands, except percentage data) | Less Than One Year | After One Through Five Years | After Five Through Ten Years | After Ten Years | Total | ||||||||||||||||||||||||
| March 31, 2021 | |||||||||||||||||||||||||||||
| Available-for-sale: | |||||||||||||||||||||||||||||
| U.S. government agency securities:(1) | |||||||||||||||||||||||||||||
| Amortized cost | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Estimated fair value | |||||||||||||||||||||||||||||
| Weighted average yield(3) | % | % | % | % | % | ||||||||||||||||||||||||
| Residential mortgage-backed securities:(1) | |||||||||||||||||||||||||||||
| Amortized cost | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Estimated fair value | |||||||||||||||||||||||||||||
| Weighted average yield(3) | % | % | % | % | % | ||||||||||||||||||||||||
| Tax-exempt asset-backed securities:(1) | |||||||||||||||||||||||||||||
| Amortized Cost | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Estimated fair value | |||||||||||||||||||||||||||||
| Weighted average yield(2)(3) | % | % | % | % | % | ||||||||||||||||||||||||
| CRT securities:(1) | |||||||||||||||||||||||||||||
| Amortized Cost | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Estimated fair value | |||||||||||||||||||||||||||||
| Weighted average yield(3) | % | % | % | % | % | ||||||||||||||||||||||||
| Total available-for-sale debt securities: | |||||||||||||||||||||||||||||
| Amortized cost | $ | ||||||||||||||||||||||||||||
| Estimated fair value | $ | ||||||||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||
| Available-for-sale: | |||||||||||||||||||||||||||||
| U.S. government agency securities:(1) | |||||||||||||||||||||||||||||
| Amortized cost | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Estimated fair value | |||||||||||||||||||||||||||||
| Weighted average yield(3) | % | % | % | % | % | ||||||||||||||||||||||||
| Residential mortgage-backed securities:(1) | |||||||||||||||||||||||||||||
| Amortized cost | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Estimated fair value | |||||||||||||||||||||||||||||
| Weighted average yield(3) | % | % | % | % | % | ||||||||||||||||||||||||
| Tax-exempt asset-backed securities:(1) | |||||||||||||||||||||||||||||
| Amortized Cost | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Estimated fair value | |||||||||||||||||||||||||||||
| Weighted average yield(2)(3) | % | % | % | % | % | ||||||||||||||||||||||||
| CRT securities:(1) | |||||||||||||||||||||||||||||
| Amortized Cost | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Estimated fair value | |||||||||||||||||||||||||||||
| Weighted average yield(3) | % | % | % | % | % | ||||||||||||||||||||||||
| Total available-for-sale debt securities: | |||||||||||||||||||||||||||||
| Amortized cost | $ | ||||||||||||||||||||||||||||
| Estimated fair value | $ | ||||||||||||||||||||||||||||
(1)Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
(2)Yields have been adjusted to a tax equivalent basis assuming a 21 % federal tax rate.
(3)Yields are calculated based on amortized cost.
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The following table discloses our available-for-sale debt securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months:
| Less Than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||||||||||||||
| (in thousands) | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | |||||||||||||||||||||||||||||
| March 31, 2021 | |||||||||||||||||||||||||||||||||||
| U.S. government agency securities | $ | $ | ( | $ | $ | $ | $ | ( | |||||||||||||||||||||||||||
| Residential mortgage-backed securities | ( | ( | |||||||||||||||||||||||||||||||||
| CRT securities | ( | ( | |||||||||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||||||||
| U.S. government agency securities | $ | $ | ( | $ | $ | $ | $ | ( | |||||||||||||||||||||||||||
| Residential mortgage-backed securities | ( | ( | |||||||||||||||||||||||||||||||||
| CRT securities | ( | ( | |||||||||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||
At March 31, 2021, we had 108 securities in an unrealized loss position, comprised of 5 U.S. government agency securities, 2 CRT securities and 101 residential mortgage-backed securities. Based upon our March 31, 2021 review of securities with unrealized losses we have determined that all losses resulted from factors not deemed credit-related. We have evaluated the near-term prospects of each securities portfolio in relation to the severity of the unrealized losses and adverse conditions related to the securities among other factors. Based on that evaluation management has determined that we have the ability and intent to hold the securities until recovery of fair value and have recorded the unrealized losses in accumulated other comprehensive income ("AOCI").
Available-for-sale debt securities with carrying values of approximately $28.1 million and $1.6 million were pledged to secure certain customer repurchase agreements and deposits, respectively, at March 31, 2021. The comparative amounts at December 31, 2020 were $31.7 million and $1.9 million, respectively.
Equity Securities
Equity securities consist of Community Reinvestment Act funds and investments related to our non-qualified deferred compensation plan. At March 31, 2021 and December 31, 2020, we had $34.4 million and $33.8 million, respectively, in equity securities recorded at fair value. The following is a summary of unrealized and realized gains/(losses) recognized on equity securities included in other non-interest income in the consolidated statements of income and other comprehensive income:
| Three months ended March 31, | |||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | |||||||||||||||||||||
| Net gains/(losses) recognized during the period | $ | $ | ( | ||||||||||||||||||||
Less: Realized net gains/(losses) recognized during the period on equity securities sold | ( | ||||||||||||||||||||||
Unrealized net gains/(losses) recognized during the period on equity securities still held | $ | ( | $ | ( | |||||||||||||||||||
(4) Loans Held for Investment and Allowance for Credit Losses on Loans
Loans held for investment are summarized by portfolio segment as follows:
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Commercial | $ | $ | |||||||||
| Energy | |||||||||||
| Mortgage finance(1) | |||||||||||
| Real estate | |||||||||||
| Gross loans held for investment(2) | |||||||||||
| Unearned income (net of direct origination costs) | ( | ( | |||||||||
| Allowance for credit losses on loans | ( | ( | |||||||||
| Total loans held for investment, net(2) | $ | $ | |||||||||
(1) Balances at March 31, 2021 and December 31, 2020 are stated net of $1.0 billion and $1.2 billion of participations sold, respectively.
(2) Excludes accrued interest receivable of $55.9 million and $56.5 million at March 31, 2021 and December 31, 2020, respectively, that is recorded in accrued interest receivable and other assets on the consolidated balance sheets.
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The following table summarizes our gross loans held for investment by year of origination and internally assigned credit grades:
| (in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 and prior | Revolving lines of credit | Revolving lines of credit converted to term loans | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1-7) Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| (8) Special mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (9) Substandard - accruing | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (9+) Non-accrual | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Energy | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1-7) Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| (8) Special mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (9) Substandard - accruing | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (9+) Non-accrual | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total energy | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Mortgage finance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1-7) Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| (8) Special mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (9) Substandard - accruing | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (9+) Non-accrual | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total mortgage finance | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Real estate | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CRE | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1-7) Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| (8) Special mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (9) Substandard - accruing | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (9+) Non-accrual | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| RBF | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1-7) Pass | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (8) Special mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (9) Substandard - accruing | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (9+) Non-accrual | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1-7) Pass | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (8) Special mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (9) Substandard - accruing | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (9+) Non-accrual | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Secured by 1-4 family | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1-7) Pass | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (8) Special mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (9) Substandard - accruing | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (9+) Non-accrual | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total real estate | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Total loans held for investment | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
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The following table details activity in the allowance for credit losses on loans. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
| (in thousands) | Commercial | Energy | Mortgage Finance | Real Estate | Total | ||||||||||||||||||||||||
| Three months ended March 31, 2021 | |||||||||||||||||||||||||||||
| Allowance for credit losses on loans: | |||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Provision for credit losses on loans | ( | ( | ( | ||||||||||||||||||||||||||
| Charge-offs | |||||||||||||||||||||||||||||
| Recoveries | |||||||||||||||||||||||||||||
| Net charge-offs (recoveries) | |||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Three months ended March 31, 2020 | |||||||||||||||||||||||||||||
| Allowance for credit losses on loans: | |||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Impact of Current Expected Credit Loss ("CECL") adoption | ( | ( | |||||||||||||||||||||||||||
| Provision for credit losses on loans | |||||||||||||||||||||||||||||
| Charge-offs | |||||||||||||||||||||||||||||
| Recoveries | |||||||||||||||||||||||||||||
| Net charge-offs (recoveries) | |||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table summarizes collateral-dependent gross loans held for investment by collateral type as follows:
| Collateral Type | ||||||||||||||||||||||||||||||||||||||
| (in thousands) | Real Property | Rolling Stock | Total | |||||||||||||||||||||||||||||||||||
| March 31, 2021 | ||||||||||||||||||||||||||||||||||||||
| Commercial | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Real estate | ||||||||||||||||||||||||||||||||||||||
| CRE | ||||||||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||||||||
Total collateral-dependent loans held for investment | $ | $ | $ | |||||||||||||||||||||||||||||||||||
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The table below provides an age analysis of our loans held for investment:
| (in thousands) | 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or More Past Due(1) | Total Past Due | Non-accrual loans as of March 31, 2021 (2) | Current | Total | Non-accrual With No Allowance | |||||||||||||||||||||||||||||||||||||||
| March 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Energy | |||||||||||||||||||||||||||||||||||||||||||||||
Mortgage finance loans | |||||||||||||||||||||||||||||||||||||||||||||||
| Real estate | |||||||||||||||||||||||||||||||||||||||||||||||
CRE | |||||||||||||||||||||||||||||||||||||||||||||||
RBF | |||||||||||||||||||||||||||||||||||||||||||||||
Other | |||||||||||||||||||||||||||||||||||||||||||||||
Secured by 1-4 family | |||||||||||||||||||||||||||||||||||||||||||||||
Total loans held for investment | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
(1)Loans past due 90 days and still accruing includes premium finance loans of $3.1 million. These loans are generally secured by obligations of insurance carriers to refund premiums on canceled insurance policies. The receipt of the refund of premiums from the insurance carriers can take 180 days or longer from the cancellation date.
(2)As of March 31, 2021 and December 31, 2020, none of our non-accrual loans were earning interest income on a cash basis. Additionally, no interest income was recognized on non-accrual loans for the three months ended March 31, 2021. Accrued interest of $339,000 was reversed during the three months ended March 31, 2021.
As of March 31, 2021 and December 31, 2020, we did not have any loans considered restructured that were not on non-accrual. Of the non-accrual loans at March 31, 2021 and December 31, 2020, $33.7 million and $45.4 million, respectively, met the criteria for restructured. These loans had no unfunded commitments at their respective balance sheet dates.
We did not have any loans that were restructured during the three months ended March 31, 2021 or 2020. As of March 31, 2021 and 2020, we did not have any loans that were restructured within the last 12 months that subsequently defaulted.
(5) Certain Transfers of Financial Assets
The table below presents a reconciliation of the changes in loans held for sale:
| Three Months Ended March 31, | ||||||||||||||
| (in thousands) | 2021 | 2020 | ||||||||||||
| Outstanding balance(1): | ||||||||||||||
| Beginning balance | $ | $ | ||||||||||||
| Loans purchased and originated | ||||||||||||||
| Payments and loans sold | ( | ( | ||||||||||||
| Ending balance | ||||||||||||||
| Fair value adjustment: | ||||||||||||||
| Beginning balance | ||||||||||||||
| Increase/(decrease) to fair value | ( | |||||||||||||
| Ending balance | ( | |||||||||||||
| Loans held for sale at fair value | $ | $ | ||||||||||||
(1) Includes $44.1 million of loans held for sale that are carried at lower of cost or market as of December 31, 2020, as well as $5.8 million as of December 31, 2019.
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million in loans held for sale that were 90 days or more past due were loans guaranteed by U.S. government agencies that were purchased out of Ginnie Mae securities and recorded as loans held for sale, at fair value, on the balance sheet and $13.4 million were loans that we have the unilateral right, but not the obligation, to repurchase if defined delinquent loan criteria are met.
From time to time we retain the right to service the loans sold through our MCA program, creating MSRs which are recorded as assets on our consolidated balance sheets. A summary of MSR activity is as follows:
| Three months ended March 31, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| MSRs: | |||||||||||
| Balance, beginning of year | $ | $ | |||||||||
| Capitalized servicing rights | |||||||||||
| Amortization | ( | ( | |||||||||
| Balance, end of period | $ | $ | |||||||||
| Valuation allowance: | |||||||||||
| Balance, beginning of year | $ | $ | |||||||||
| Change in valuation allowance | ( | ||||||||||
| Balance, end of period | $ | $ | |||||||||
| MSRs, net | $ | $ | |||||||||
| MSRs, fair value | $ | $ | |||||||||
At March 31, 2021 and December 31, 2020, our servicing portfolio of residential mortgage loans had outstanding principal balances of $13.6 billion and $13.8 billion, respectively.
In connection with the servicing of these loans, we hold deposits in the name of investors representing escrow funds for taxes and insurance, as well as collections in transit to the investors. These escrow funds are segregated and held in separate non-interest-bearing deposit accounts at the Bank. These deposits, included in total non-interest-bearing deposits on the consolidated balance sheets, were $153.8 million at March 31, 2021 and $152.6 million at December 31, 2020.
At March 31, 2021, the estimated fair value of MSRs were positively impacted by decreased prepayment speeds as compared to December 31, 2020, which resulted in a $16.4 million release of impairment being recorded for the three months ended March 31, 2021, compared to a $10.0 million impairment charge for the first three months of 2020. To mitigate exposure to potential impairment charges from adverse changes in the fair value of our residential MSR portfolio, we enter into certain derivative contracts, as is further discussed in Note 11 - Derivative Financial Instruments. The following summarizes the assumptions used by management to determine the fair value of MSRs:
| March 31, 2021 | December 31, 2020 | ||||||||||
| Average discount rates | % | % | |||||||||
| Expected prepayment speeds | % | % | |||||||||
| Weighted-average life, in years | |||||||||||
A sensitivity analysis of changes in the fair value of our MSR portfolio resulting from certain key assumptions is presented in the following table:
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| 50 bp adverse change in prepayment speed | $ | ( | $ | ( | |||||||
| 100 bp adverse change in prepayment speed | ( | ( | |||||||||
These sensitivities are hypothetical and actual results may differ materially due to a number of factors. The effect on fair value of a 10% variation in assumptions generally cannot be determined with confidence because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may be correlated with changes in other factors, which could impact the sensitivity analysis as presented.
In conjunction with the sale and securitization of loans held for sale, we may be exposed to liability resulting from repurchase, indemnification and make-whole agreements. Our estimated exposure related to those agreements totaled $648,000 and $621,000 at March 31, 2021 and December 31, 2020, respectively, and is recorded in other liabilities on the consolidated balance sheets. $30,000 in make-whole obligation payments were made during the three months ended March 31, 2021 compared to $2.1 million during the three months ended March 31, 2020.
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(6) Long-term Debt
From November 2002 to September 2006 various Texas Capital Statutory Trusts were created and subsequently issued floating rate trust preferred securities in various private offerings totaling $113.4 million. For the three months ended March 31, 2021, the combined weighted-average interest rate on the trust preferred subordinated debentures was 2.19 % compared to 3.80 % for the same period in 2020. As of December 31, 2020, the details of the trust preferred subordinated debentures are summarized below:
| (dollar amounts in thousands) | Texas Capital Bancshares Statutory Trust I | Texas Capital Statutory Trust II | Texas Capital Statutory Trust III | Texas Capital Statutory Trust IV | Texas Capital Statutory Trust V | ||||||||||||||||||||||||
| Date issued | November 19, 2002 | April 10, 2003 | October 6, 2005 | April 28, 2006 | September 29, 2006 | ||||||||||||||||||||||||
| Trust preferred securities issued | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Floating or fixed rate securities | Floating | Floating | Floating | Floating | Floating | ||||||||||||||||||||||||
| Interest rate on subordinated debentures | 3 month LIBOR + | 3 month LIBOR + | 3 month LIBOR + | 3 month LIBOR + | 3 month LIBOR + | ||||||||||||||||||||||||
| Maturity date | November 2032 | April 2033 | December 2035 | June 2036 | December 2036 | ||||||||||||||||||||||||
On September 21, 2012, the Company issued $111.0 million of subordinated notes. The notes mature in September 2042 and bear interest at a rate of 6.50 % per annum, payable quarterly. The indenture governing the notes contains customary covenants and restrictions.
On January 31, 2014, the Bank issued $175.0 million of subordinated notes in an offering to institutional investors exempt from registration under Section 3(a)(2) of the Securities Act of 1933 and 12 C.F.R. Part 16. The notes mature in January 2026 and bear interest at a rate of 5.25 % per annum, payable semi-annually. The notes are unsecured and are subordinate to the Bank’s obligations to its depositors, its obligations under banker’s acceptances and letters of credit, certain obligations to Federal Reserve Banks and the FDIC and the Bank’s obligations to its other creditors, except any obligations which expressly rank on a parity with or junior to the notes. The notes qualify as Tier 2 capital for regulatory capital purposes, subject to applicable limitations. At the beginning of each of the last five years of the life of the notes, the amount that is eligible to be included in Tier 2 capital is reduced by 20% of the original amount of the notes (net of redemptions). In 2021, the amount of the notes that qualify as Tier 2 capital has been reduced by 20%.
On March 9, 2021, the Bank issued and sold $275 million of senior unsecured credit-linked notes. The notes mature on September 30, 2024, and accrue interest at a rate equal to the higher of LIBOR plus 4.50 % or 4.25 %, payable quarterly on each of March 31, June 30, September 30 and December 31. For the three months ended March 31, 2021, the weighted-average interest rate on the notes was 5.54 %. The notes effectively transfer the risk of first losses on a $2.2 billion reference pool of the Bank’s mortgage warehouse loans to the purchasers of the notes in an amount up to $275.0 million. In the event of a failure to pay by the relevant mortgage originator, insolvency of the relevant mortgage originator, or restructuring of such loans that results in a loss on a loan included in the reference pool, the principal balance of the notes will be reduced to the extent of such loss and recognized as a debt extinguishment gain within non-interest income on our consolidated statements of income and other comprehensive income. The purchasers of the notes have the option to acquire the underlying mortgage loan collateralizing the reference warehouse line of credit in lieu of a principal reduction on the notes. Losses on our warehouse lines of credit have not generally been significant. The notes are recorded in long-term debt on our consolidated balance sheets and accounted for at amortized cost. The fair value of the credit-linked note is based on observable inputs, when available, and as such are categorized as Level 2 liabilities. Because the notes are variable rate debt, the fair value approximates carrying value.
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(7) Financial Instruments with Off-Balance Sheet Risk
| Three months ended March 31, | |||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | |||||||||||||||||||||
Beginning balance of allowance for off-balance sheet credit losses | $ | $ | |||||||||||||||||||||
Impact of CECL adoption | |||||||||||||||||||||||
Provision for off-balance sheet credit losses | ( | ||||||||||||||||||||||
Ending balance of allowance for off-balance sheet credit losses | $ | $ | |||||||||||||||||||||
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||||||||||||||
| Commitments to extend credit - period end balance | $ | $ | |||||||||||||||||||||
| Standby letters of credit - period end balance | $ | $ | |||||||||||||||||||||
(8) Regulatory Restrictions
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The Basel III regulatory capital framework (the "Basel III Capital Rules") adopted by U.S. federal regulatory authorities, among other things, (i) establishes the capital measure called "Common Equity Tier 1" ("CET1"), (ii) specifies that Tier 1 capital consist of CET1 and "Additional Tier 1 Capital" instruments meeting stated requirements, (iii) requires that most deductions/adjustments to regulatory capital measures be made to CET1 and not to other components of capital and (iv) defines the scope of the deductions/adjustments to the capital measures.
Additionally, the Basel III Capital Rules require that we maintain a 2.5 % capital conservation buffer with respect to each of CET1, Tier 1 and total capital to risk-weighted assets, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers.
In February 2019, the federal bank regulatory agencies issued a final rule (the "2019 CECL Rule") that revised certain capital regulations to account for changes to credit loss accounting under GAAP. The 2019 CECL Rule included a transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of adopting the new accounting standard related to the measurement of current expected credit losses on their regulatory capital ratios (three-year transition option). In March 2020, the federal bank regulatory agencies issued an interim final rule that maintains the three-year transition option of the 2019 CECL Rule and also provides banking organizations that were required under GAAP to implement CECL before the end of 2020 the option to delay for two years an estimate of the effect of CECL on regulatory capital, relative to the incurred loss methodology's effect on regulatory capital, followed by a three-year transition period (five-year transition option). We adopted CECL on January 1, 2020 and have elected to utilize the five-year transition option.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of CET1, Tier 1 and total capital to risk-weighted assets, and of Tier 1 capital to average assets, each as defined in the regulations. Management believes, as of March 31, 2021, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
Financial institutions are categorized as well capitalized or adequately capitalized, based on minimum total risk-based, Tier 1 risk-based, CET1 and Tier 1 leverage ratios. As shown in the table below, the Company’s capital ratios exceeded the regulatory definition of adequately capitalized as of March 31, 2021 and December 31, 2020. Based upon the information in its most recently filed call report, the Bank met the capital ratios necessary to be well capitalized. The regulatory authorities can apply changes in classification of assets and such changes may retroactively subject the Company to changes in capital ratios. Any such change could reduce one or more capital ratios below well-capitalized status. In addition, a change may result in
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imposition of additional assessments by the FDIC or could result in regulatory actions that could have a material effect on our condition and results of operations.
Because our Bank had less than $15.0 billion in total consolidated assets as of December 31, 2009, we are allowed to continue to classify our trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1 capital.
The table below summarizes our actual and required capital ratios under the Basel III Capital Rules. The ratios presented below include the effects of our election to utilize the five-year CECL transition described above.
| Actual | Minimum Capital Required - Basel III Fully Phased-In | Required to be Considered Well Capitalized | ||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Capital Amount | Ratio | Capital Amount | Ratio | Capital Amount | Ratio | ||||||||||||||||||||||||||||||||
| March 31, 2021 | ||||||||||||||||||||||||||||||||||||||
| CET1 | ||||||||||||||||||||||||||||||||||||||
| Company | $ | % | $ | % | N/A | N/A | ||||||||||||||||||||||||||||||||
| Bank | % | % | % | |||||||||||||||||||||||||||||||||||
| Total capital (to risk-weighted assets) | ||||||||||||||||||||||||||||||||||||||
| Company | % | % | N/A | N/A | ||||||||||||||||||||||||||||||||||
| Bank | % | % | % | |||||||||||||||||||||||||||||||||||
| Tier 1 capital (to risk-weighted assets) | ||||||||||||||||||||||||||||||||||||||
| Company | % | % | N/A | N/A | ||||||||||||||||||||||||||||||||||
| Bank | % | % | % | |||||||||||||||||||||||||||||||||||
| Tier 1 capital (to average assets)(1) | ||||||||||||||||||||||||||||||||||||||
| Company | % | % | N/A | N/A | ||||||||||||||||||||||||||||||||||
| Bank | % | % | % | |||||||||||||||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||||||||||||||
| CET1 | ||||||||||||||||||||||||||||||||||||||
| Company | $ | % | $ | % | N/A | N/A | ||||||||||||||||||||||||||||||||
| Bank | % | % | % | |||||||||||||||||||||||||||||||||||
| Total capital (to risk-weighted assets) | ||||||||||||||||||||||||||||||||||||||
| Company | % | % | N/A | N/A | ||||||||||||||||||||||||||||||||||
| Bank | % | % | % | |||||||||||||||||||||||||||||||||||
| Tier 1 capital (to risk-weighted assets) | ||||||||||||||||||||||||||||||||||||||
| Company | % | % | N/A | N/A | ||||||||||||||||||||||||||||||||||
| Bank | % | % | % | |||||||||||||||||||||||||||||||||||
| Tier 1 capital (to average assets)(1) | ||||||||||||||||||||||||||||||||||||||
| Company | % | % | N/A | N/A | ||||||||||||||||||||||||||||||||||
| Bank | % | % | % | |||||||||||||||||||||||||||||||||||
(1) The Tier 1 capital ratio (to average assets) is not impacted by the Basel III Capital Rules; however, the Federal Reserve Board and the FDIC may require the Company and the Bank, respectively, to maintain a Tier 1 capital ratio (to average assets) above the required minimum.
Our mortgage finance loan volumes can increase significantly at month-end, causing a meaningful difference between ending balance and average balance for any period. As CET1, Tier 1 and total capital ratios are calculated using quarter-end risk-weighted assets and our mortgage finance loans are 100% risk-weighted (excluding MCA mortgage loans held for sale, which receive lower risk weights), the period-end fluctuation in these balances can significantly impact our reported ratios. Due to the actual risk profile and liquidity of this asset class, we do not believe that the period-end balance is representative of risk characteristics that would justify higher allocations, and while we manage capital allocated to mortgage finance loans based on changing trends in average balances, we do monitor our capital allocation to confirm that all capital levels remain above well-capitalized levels. To better align the actual risk profile of this asset class to its required capital allocation, the Bank issued and sold senior unsecured credit-linked notes in the first quarter of 2021 that effectively transfer the risk of first losses on a $2.2 billion reference pool of the Bank's mortgage warehouse loans to the purchasers of the notes in an amount up to $275.0 million. The issuance of these notes decreases the required risk-weight on the $2.2 billion reference pool, which significantly improves our reported ratios.
Dividends that may be paid by banks are routinely restricted by various regulatory authorities. The amount that can be paid in any calendar year without prior approval of our Bank’s regulatory agencies cannot exceed the lesser of the net profits (as defined) for that year plus the net profits for the preceding two calendar years, or retained earnings. The Basel III Capital Rules further limit the amount of dividends that may be paid by our Bank. No dividends were declared or paid on our common stock during the three months ended March 31, 2021, or 2020.
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(9) Stock-based Compensation
We have long-term incentive plans under which stock-based compensation awards are granted to employees and directors by the board of directors, or its designated committee. Grants are subject to vesting requirements and may include, among other things, nonqualified stock options, stock appreciation rights ("SARs"), restricted stock units ("RSUs"), restricted stock and performance units, or any combination thereof. There are 2,550,000 total shares authorized for grant under the plans.
The table below summarizes our stock-based compensation expense:
| Three months ended March 31, | |||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | |||||||||||||||||||||
| Stock-settled awards: | |||||||||||||||||||||||
| RSUs | $ | $ | |||||||||||||||||||||
| Restricted stock | |||||||||||||||||||||||
| Cash-settled units | |||||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||
| (in thousands except period data) | March 31, 2021 | ||||
| Unrecognized compensation expense related to unvested stock-settled awards | $ | ||||
| Weighted average period over which expense is expected to be recognized, in years | |||||
(10) Fair Value Disclosures
We determine the fair market values of our assets and liabilities measured at fair value on a recurring and nonrecurring basis using the fair value hierarchy as prescribed in ASC 820. See Note 1 - Operations and Summary of Significant Accounting Policies in our 2020 Form 10-K for information regarding the fair value hierarchy and a description of the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial instruments.
Assets and liabilities measured at fair value are as follows:
| Fair Value Measurements Using | |||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | ||||||||||||||
| March 31, 2021 | |||||||||||||||||
| Available-for-sale debt securities:(1) | |||||||||||||||||
| U.S. government agency securities | $ | $ | $ | ||||||||||||||
| Residential mortgage-backed securities | |||||||||||||||||
| Tax-exempt asset-backed securities | |||||||||||||||||
| CRT securities | |||||||||||||||||
| Equity securities(1)(2) | |||||||||||||||||
| Loans held for sale(3) | |||||||||||||||||
| Loans held for investment(4) | |||||||||||||||||
| Derivative assets(5) | |||||||||||||||||
| Derivative liabilities(5) | |||||||||||||||||
| Non-qualified deferred compensation plan liabilities(6) | |||||||||||||||||
| December 31, 2020 | |||||||||||||||||
| Available-for-sale debt securities:(1) | |||||||||||||||||
| U.S. government agency securities | $ | $ | $ | ||||||||||||||
| Residential mortgage-backed securities | |||||||||||||||||
| Tax-exempt asset-backed securities | |||||||||||||||||
| CRT securities | |||||||||||||||||
| Equity securities(1)(2) | |||||||||||||||||
| Loans held for sale(3) | |||||||||||||||||
| Loans held for investment(4) | |||||||||||||||||
| Derivative assets(5) | |||||||||||||||||
| Derivative liabilities(5) | |||||||||||||||||
| Non-qualified deferred compensation plan liabilities(6) | |||||||||||||||||
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(1)Securities are measured at fair value on a recurring basis, generally monthly, except for tax-exempt asset-backed securities and CRT securities which are measured quarterly.
(2)Equity securities consist of Community Reinvestment Act funds and investments related to our non-qualified deferred compensation plan.
(3)Loans held for sale purchased through our MCA program are measured at fair value on a recurring basis, generally monthly.
(4)Includes certain collateral-dependent loans held for investment for which a specific allocation of the allowance for credit losses is based upon the fair value of the loan’s underlying collateral. These loans held for investment are measured on a nonrecurring basis, generally annually or more often as warranted by market and economic conditions.
(5)Derivative assets and liabilities are measured at fair value on a recurring basis, generally quarterly.
(6)Non-qualified deferred compensation plan liabilities represent the fair value of the obligation to the employee, which generally corresponds to the fair value of the invested assets, and are measured at fair value on a recurring basis, generally monthly.
Level 3 Valuations
The following table presents a reconciliation of the level 3 fair value category measured at fair value on a recurring basis:
| Net Realized/Unrealized Gains (Losses) | |||||||||||||||||||||||||||||||||||
| (in thousands) | Balance at Beginning of Period | Purchases / Additions | Sales / Reductions | Realized | Unrealized | Balance at End of Period | |||||||||||||||||||||||||||||
| Three months ended March 31, 2021 | |||||||||||||||||||||||||||||||||||
| Available-for-sale debt securities:(1) | |||||||||||||||||||||||||||||||||||
| Tax-exempt asset-backed securities | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
| CRT securities | |||||||||||||||||||||||||||||||||||
| Loans held for sale(2) | ( | ||||||||||||||||||||||||||||||||||
| Three months ended March 31, 2020 | |||||||||||||||||||||||||||||||||||
| Available-for-sale debt securities:(1) | |||||||||||||||||||||||||||||||||||
| Tax-exempt asset-backed securities | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
| CRT securities | ( | ||||||||||||||||||||||||||||||||||
| Loans held for sale(2) | ( | ||||||||||||||||||||||||||||||||||
(1)Unrealized gains/(losses) on available-for-sale debt securities are recorded in AOCI and relate to assets that remain outstanding at period end. Realized gains/(losses) are recorded in other non-interest income.
(2)Realized and unrealized gains/(losses) on loans held for sale are recorded in gain/(loss) on sale of loans held for sale.
Tax-exempt asset-backed securities
The fair value of tax-exempt asset-backed securities is based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs, the most significant of which were a discount rate and weighted-average life. At March 31, 2021, the discount rates utilized ranged from 2.95 % to 3.03 % and the weighted-average life ranged from 5.28 years to 5.30 years. On a combined amortized cost weighted-average basis a discount rate of 2.99 % and weighted-average life of 5.29 years were utilized to determine the fair value of these securities at March 31, 2021. At December 31, 2020, the combined weighted-average discount rate and weighted-average life utilized were 2.49 % and 5.53 years, respectively.
CRT securities
The fair value of CRT securities is based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs, the most significant of which were a discount rate and weighted-average life. At March 31, 2021, the discount rates utilized ranged from 3.32 % to 8.27 % and the weighted-average life ranged from 6.4 years to 10.3 years. On a combined amortized cost weighted-average basis a discount rate of 4.97 % and a weighted-average life of 7.7 years were utilized to determine the fair value of these securities at March 31, 2021. At December 31, 2020, the combined weighted-average discount rate and combined weighted-average life utilized were 4.36 % and 7.49 years, respectively.
Loans held for sale
The fair value of loans held for sale using Level 3 inputs include loans that cannot be sold through normal sale channels and thus require significant management judgment or estimation when determining the fair value. The fair value of such loans is generally based upon quoted prices of comparable loans with a liquidity discount applied. At March 31, 2021, the fair value of these loans was calculated using a weighted-average discounted price of 98.4 %, compared to 97.2 % at December 31, 2020.
Loans held for investment
Certain collateral-dependent loans held for investment are reported at fair value when, based upon an individual evaluation, the specific allocation of the allowance for credit losses that is deducted from the loan's amortized cost is based upon the fair value of the loan's underlying collateral. The $9.1 million fair value of loans held for investment at March 31, 2021 reported above
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includes loans held for investment with a carrying value of $11.4 million that were reduced by specific allowance allocations totaling $2.3 million based on collateral valuations utilizing Level 3 inputs. The $21.2 million fair value of loans held for investment at December 31, 2020 reported above includes loans with a carrying value of $25.3 million that were reduced by specific allowance allocations totaling $4.1 million based on collateral valuations utilizing Level 3 inputs.
Fair Value of Financial Instruments
A summary of the carrying amounts and estimated fair values of financial instruments is as follows:
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||
| (in thousands) | Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||
| Level 1 inputs: | |||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | |||||||||||||||||||
| Investment securities | |||||||||||||||||||||||
| Level 2 inputs: | |||||||||||||||||||||||
| Investment securities | |||||||||||||||||||||||
| Loans held for sale | |||||||||||||||||||||||
| Derivative assets | |||||||||||||||||||||||
| Level 3 inputs: | |||||||||||||||||||||||
| Investment securities | |||||||||||||||||||||||
| Loans held for sale | |||||||||||||||||||||||
| Loans held for investment, net | |||||||||||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||
| Level 2 inputs: | |||||||||||||||||||||||
| Federal funds purchased and repurchase agreements | |||||||||||||||||||||||
| Other borrowings | |||||||||||||||||||||||
| Long-term debt | |||||||||||||||||||||||
| Derivative liabilities | |||||||||||||||||||||||
| Level 3 inputs: | |||||||||||||||||||||||
| Deposits | |||||||||||||||||||||||
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(11) Derivative Financial Instruments
The notional amounts and estimated fair values of derivative positions outstanding are presented in the following table:
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||
| Estimated Fair Value | Estimated Fair Value | ||||||||||||||||||||||||||||
| (in thousands) | Notional Amount | Asset Derivative | Liability Derivative | Notional Amount | Asset Derivative | Liability Derivative | |||||||||||||||||||||||
| Non-hedging derivatives: | |||||||||||||||||||||||||||||
| Financial institution counterparties: | |||||||||||||||||||||||||||||
Commercial loan/lease interest rate swaps | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
Commercial loan/lease interest rate caps | |||||||||||||||||||||||||||||
Foreign currency forward contracts | |||||||||||||||||||||||||||||
| Customer counterparties: | |||||||||||||||||||||||||||||
Commercial loan/lease interest rate swaps | |||||||||||||||||||||||||||||
Commercial loan/lease interest rate caps | |||||||||||||||||||||||||||||
Foreign currency forward contracts | |||||||||||||||||||||||||||||
| Economic hedging derivatives to hedge: | |||||||||||||||||||||||||||||
| Residential MSRs: | |||||||||||||||||||||||||||||
| Interest rate swap futures | |||||||||||||||||||||||||||||
| Forward sale commitments | |||||||||||||||||||||||||||||
| Loans held for sale: | |||||||||||||||||||||||||||||
| Loan purchase commitments | |||||||||||||||||||||||||||||
| Forward sale commitments | |||||||||||||||||||||||||||||
| Gross derivatives | |||||||||||||||||||||||||||||
| Offsetting derivative assets/liabilities | ( | ( | ( | ( | |||||||||||||||||||||||||
Net derivatives included in the consolidated balance sheets | $ | $ | $ | $ | |||||||||||||||||||||||||
The weighted-average received and paid interest rates for interest rate swaps outstanding were as follows:
| March 31, 2021 Weighted-Average Interest Rate | December 31, 2020 Weighted-Average Interest Rate | ||||||||||||||||||||||
| Received | Paid | Received | Paid | ||||||||||||||||||||
| Non-hedging interest rate swaps | % | % | % | % | |||||||||||||||||||
The weighted-average strike rate for outstanding interest rate caps was 3.07 % at March 31, 2021 and 3.41 % at December 31, 2020.
Our credit exposure on derivative instruments is limited to the net favorable value and interest payments by each counterparty. In some cases collateral may be required from the counterparties involved if the net value of the derivative instruments exceeds a nominal amount. Our credit exposure associated with these instruments, net of any collateral pledged, was approximately $70.4 million at March 31, 2021, and approximately $102.7 million at December 31, 2020. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap and cap values, as well as for changes in the value of forward sale commitments. At March 31, 2021, we had $74.5 million in cash collateral pledged for these derivatives, of which $73.5 million was included in interest-bearing deposits in other banks and $1.0 million was included in accrued interest receivable and other assets. At December 31, 2020, we had $108.3 million in cash collateral pledged for these derivatives, of which $104.4 million was included in interest-bearing deposits in other banks and $3.9 million was included in accrued interest receivable and other assets.
We also enter into credit risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are either a participant or a lead bank. The risk participation agreements entered into by us as a participant bank provide credit protection to the financial institution counterparty should the borrower fail to perform on its interest rate derivative contract with that financial institution. We are party to 9 risk participation agreements where we are a participant bank with a notional amount of $119.0 million at March 31, 2021, compared to 9 risk participation agreements having a notional amount of $119.5 million at December 31, 2020. The maximum estimated exposure to these agreements, assuming 100% default by all obligors, was approximately $4.9 million at March 31, 2021 and $6.0 million at December 31, 2020. The fair value of these exposures was insignificant to the consolidated financial statements at both March 31, 2021 and December 31, 2020. Risk participation agreements entered into by us as the lead bank provide credit protection to us should the borrower fail to perform on its interest rate derivative contract with us. We are party to 15 risk participation agreements where
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(12) Material Transactions Affecting Stockholders' Equity
(13) New Accounting Standards
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition as of March 31, 2021 and December 31, 2020 and results of operations for the three month periods ended March 31, 2021 and March 31, 2020 should be read in conjunction with our consolidated financial statements and notes to the financial statements for the year ended December 31, 2020, and the other information included in our Annual Report on Form 10-K for the year ended December 31, 2020 (the "2020 Form 10-K"). Certain risks, uncertainties and other factors, including those set forth under "Risk Factors" in Part I, Item 1A of the 2020 Form 10-K may cause actual results to differ materially from the results discussed in the forward-looking statements appearing in this discussion and analysis.
Forward-Looking Statements
Certain statements and financial analysis contained in this report that are not historical facts may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may also be contained in our future filings with SEC, in press releases and in oral and written statements made by us or with our approval that are not statements of historical fact and constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our beliefs, assumptions and expectations of our future performance taking into account all information available to us at the time such statements are made. Words such as “believes,” “expects,” “estimates,” “anticipates,” “plans,” “goals,” “objectives,” “expects,” “intends,” “seeks,” “likely,” “targeted,” “continue,” “remain,” “will,” “should,” “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
Forward-looking statements may include, among other things, statements about the credit quality of our loan portfolio, general economic conditions in the United States and in our markets, including the continued impact on our customers from volatility in oil and gas prices, the material risks and uncertainties for the U.S. and world economies, and for our business, resulting from the COVID-19 pandemic, expectations regarding rates of default and loan losses, volatility in the mortgage industry, our business strategies and our expectations about future financial performance, future growth and earnings, the appropriateness of our allowance for credit losses and provision for credit losses, the impact of changing regulatory requirements and legislative changes on our business, increased competition, interest rate risk, new lines of business, new product or service offerings and new technologies.
Forward-looking statements are subject to various risks and uncertainties, which change over time, are based on management’s expectations and assumptions at the time the statements are made and are not guarantees of future results. Important factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to, the following:
•Deterioration of the credit quality of our loan portfolio or declines in the value of collateral related to external factors such as commodity prices, real estate values or interest rates, increased default rates and loan losses or adverse changes in the industry concentrations of our loan portfolio.
•The COVID-19 pandemic is adversely affecting us and our customers, employees and third-party service providers; the adverse impacts of the pandemic on our business, financial position, operations and prospects have been material. It is not possible to accurately predicts the extent, severity or duration of the pandemic or when normal economic and operational conditions will return.
•Operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent.
•Changes in interest rates, which may affect our net income and other future cash flows, or the market value of our assets, including the market value of investment securities.
•Changes in our ability to access the capital markets, including changes in our credit ratings.
•Changes in the value of commercial and residential real estate securing our loans or in the demand for credit to support the purchase and ownership of such assets.
•Changing economic conditions or other developments adversely affecting our commercial, entrepreneurial and professional customers.
•Adverse economic conditions and other factors affecting our middle market customers and their ability to continue to meet their loan obligations.
•The failure to correctly assess and model the assumptions supporting our allowance for credit losses, causing it to become inadequate in the event of deteriorations in loan quality and increases in charge-offs, or increases or decreases to our allowance for credit losses as a result of the implementation of CECL.
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•Changes in the U.S. economy in general or the Texas economy specifically resulting in deterioration of credit quality, increases in non-performing assets or charge-offs or reduced demand for credit or other financial services we offer, including the effects from declines in the level of drilling and production related to volatility in oil and gas prices and the effects of the COVID-19 pandemic.
•Adverse changes in economic or market conditions, in Texas, the United States or internationally, that could affect the credit quality of our loan portfolio or our operating performance.
•Unanticipated effects from the Tax Cuts and Jobs Act of 2017 may limit its benefits or adversely impact our business, which could include decreased demand for borrowing by our middle market customers or increased price competition that offsets the benefits of decreased federal income tax expense.
•Unexpected market conditions or regulatory changes that could cause access to capital market transactions and other sources of funding to become more difficult to obtain on terms and conditions that are acceptable to us.
•The inadequacy of our available funds to meet our deposit, debt and other obligations as they become due, or our failure to maintain our capital ratios as a result of adverse changes in our operating performance or financial condition, or changes in applicable regulations or regulator interpretation of regulations impacting our business or the characterization or risk weight of our assets.
•The failure to effectively balance our funding sources with cash demands by depositors and borrowers.
•The failure to manage information systems risk or to prevent cyber-incidents against us, our customers or our third party vendors, or to manage risks from failures, disruptions or security breaches affecting us, our customers or our third party vendors, which risks have been materially enhanced by our increased reliance on technology to support associates working outside our offices.
•The costs and effects of cyber-incidents or other failures, disruptions or security breaches of our systems or those our third-party providers.
•The failure to effectively manage our interest rate risk resulting from unexpectedly large or sudden changes in interest rates, maturity imbalances in our assets and liabilities, potential adverse effects to our borrowers including their inability to repay loans with increased interest rates and the impact to our net interest income from the increasing cost of interest-bearing deposits.
•The failure of our enterprise risk management framework, our compliance program, or our corporate governance and supervisory oversight functions to timely identify and address emerging risks adequately, which may result in unexpected losses.
•Uncertainty regarding the future of the London Interbank Offered Rate LIBOR, and the expected transition away from LIBOR toward new interest rate benchmarks.
•Legislative and regulatory changes imposing further restrictions and costs on our business, a failure to maintain well capitalized or well managed status or regulatory enforcement actions against us, and uncertainty related to future implementation and enforcement of regulatory requirements resulting from the current political environment.
•Changes in the monetary and fiscal policies of the U.S. Government, including policies of the U.S. Department of Treasury and the Federal Reserve.
•The effect of changes in laws, regulations, policies and guidelines (including, among others, laws, regulations, policies and guidelines concerning taxes, banking, securities and monetary and fiscal policies) with which we and our subsidiaries must comply under the new Biden Administration and the effects of any such changes on our business and results of operations;
•The failure to successfully execute our business strategy, which may include expanding into new markets, developing and launching new lines of business or new products and services within the expected timeframes and budgets or to successfully manage the risks related to the development and implementation of these new businesses, products or services.
•The failure to identify, attract and retain key personnel or the loss of key individuals or groups of employees.
•Increased or more effective competition from banks and other financial service providers in our markets.
•Structural changes in the markets for origination, sale and servicing of residential mortgages.
•Uncertainty in the pricing of mortgage loans that we purchase, and later sell or securitize, as well as competition for the MSRs related to these loans and related interest rate risk or price risk resulting from retaining MSRs, and the potential effects of higher interest rates on our MCA loan volumes.
•Changes in accounting principles, policies, practices or guidelines.
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•Volatility in the market price of our common stock.
•Material failures of our accounting estimates and risk management processes based on management judgment, or the supporting analytical and forecasting models.
•Failure of our risk management strategies and procedures, including failure or circumvention of our controls.
•Credit risk resulting from our exposure to counterparties.
•An increase in the incidence or severity of fraud, illegal payments, security breaches and other illegal acts impacting our Bank and our customers.
•The failure to maintain adequate regulatory capital to support our business.
•Unavailability of funds obtained from borrowing or capital transactions or from our Bank to fund our obligations.
•Incurrence of material costs and liabilities associated with legal and regulatory proceedings, investigations, inquiries and related matters with respect to the financial services industry, including those directly involving us or our Bank and arising from our participation in government stimulus programs responding to the economic impact of the COVID-19 pandemic.
•Environmental liability associated with properties related to our lending activities.
•Severe weather, natural disasters, acts of war or terrorism and other external events.
Actual outcomes and results may differ materially from what is expressed in our forward-looking statements and from our historical financial results due to the factors discussed elsewhere in this report or disclosed in our other SEC filings. Forward-looking statements included herein speak only as of the date hereof and should not be relied upon as representing our expectations or beliefs as of any date subsequent to the date of this report. Except as required by law, we undertake no obligation to revise any forward-looking statements contained in this report, whether as a result of new information, future events or otherwise. The factors discussed herein are not intended to be a complete summary of all risks and uncertainties that may affect our businesses. Though we strive to monitor and mitigate risk, we cannot anticipate all potential economic, operational and financial developments that may adversely impact our operations and our financial results. Forward-looking statements should not be viewed as predictions and should not be the primary basis upon which investors evaluate an investment in our securities.
Overview of Our Business Operations
We commenced our banking operations in December 1998. An important aspect of our growth strategy has been our ability to effectively service and manage a large number of loans and deposit accounts in multiple markets in Texas, as well as several lines of business serving a regional or national clientele of commercial borrowers. Accordingly, we have created an operations infrastructure sufficient to support our lending and banking operations that we continue to build out as needed to serve a larger customer base and specialized industries.
Significant transactions affecting our financial statements during the three months ended March 31, 2021 included:
•Issuance of 5.75% fixed rate non-cumulative perpetual preferred stock, Series B (the "Series B Preferred Stock") and issuance and sale of 12,000,000 depositary shares, each representing a 1/40th interest in a share of the Series B Preferred Stock. Net proceeds from the sale totaled $289.7 million. The additional equity is being used for general corporate purchases, including funding regulatory capital infusions into the Bank, and may be used to redeem, in whole or in part and subject to receipt of all applicable regulatory approvals, our 6.5% non-cumulative perpetual preferred stock Series A, par value $0.01 per share, in accordance with its terms.
•Issuance of $275.0 million in senior unsecured credit-linked notes that mature on September 30, 2024. The net proceeds of the offering will be used to expand the Bank's warehouse lending program and better serve our clients in all market environments.
Impact of COVID-19 Pandemic
The COVID-19 pandemic and related restrictive measures taken by governments, businesses and individuals caused unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve. As the restrictive measures have been eased during 2020 and into 2021, the U.S. economy has begun to recover and with the availability and distribution of a COVID-19 vaccine, we anticipate continued improvements in commercial and consumer activity and the U.S. economy. As of March 31, 2021, governor of Texas removed all restrictions initially set in place which has allowed businesses to reopen at full capacities.
While positive headwinds exist, we recognize that our business and consumer customers are experiencing varying degrees of financial distress, which is expected to continue into the second quarter of 2021, especially if new COVID-19 variant infections
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increase and new economic restrictions are mandated. Commercial activity has improved, but has not returned to the levels existing prior to the outbreak of the pandemic, which may result in our customers’ inability to meet their loan obligations to us. In addition, the economic pressures and uncertainties related to the COVID-19 pandemic have resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer. Our borrowing base includes customers in industries such as energy, hotel/lodging, restaurants, entertainment, retail and commercial real estate, all of which have been significantly impacted by the COVID-19 pandemic. We recognize that these industries may take longer to recover as consumers may be hesitant to return to full social interaction or may change their spending habits on a more permanent basis as a result of the pandemic. We continue to monitor these customers closely.
We have taken deliberate actions to ensure that we have the balance sheet strength to serve our clients and communities, including increases in liquidity and managing our assets and liabilities in order to maintain a strong capital position, however, future economic conditions are subject to significant uncertainty. Uncertainties associated with the pandemic include the duration of the COVID-19 outbreak and any related variant infections, the availability and effectiveness of COVID-19 vaccines, the impact to our customers, employees and vendors and the impact to the economy as a whole. COVID-19 had a significant adverse impact on our business, financial position and operating results for the year ended December 31, 2020 and while uncertainty still exists, we believe we are well-positioned to operate effectively through the present economic environment and do expect to experience improvements in our financial results during 2021.
While we are still operating under our business continuity plan, we have begun to bring certain employees back into the office. Our branch locations are currently open and operating during normal business hours, although customers are admitted into the branches only between the hours of 10:00 a.m. and 2:00 p.m. We continue to take additional precautions within our branch locations, including enhanced cleaning procedures, to ensure the safety of our customers and our employees.
Results of Operations
Summary of Performance
We reported net income of $71.9 million and net income available to common stockholders of $68.2 million for the first quarter of 2021 compared to a net loss of $16.7 million and net loss available to common stockholders of $19.1 million for the first quarter of 2020. On a fully diluted basis, earnings per common share were $1.33 for the first quarter of 2021, compared to a loss per common share of $0.38 for the first quarter of 2020. Return on average common equity (“ROE”) was 10.08% and return on average assets ("ROA") was 0.73% for the first quarter of 2021, compared to a negative 2.85% and negative 0.20%, respectively, for the first quarter of 2020. The increase in net income, ROE and ROA for the first quarter of 2021 resulted primarily from a $102.0 million decrease in provision for credit losses.
Details of the changes in the various components of net income are discussed below.
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QUARTERLY FINANCIAL SUMMARIES – UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
| Three months ended March 31, 2021 | Three months ended March 31, 2020 | ||||||||||||||||||||||||||||||||||
| (in thousands except percentages) | Average Balance | Revenue/ Expense | Yield/ Rate | Average Balance | Revenue/ Expense | Yield/ Rate | |||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||
| Investment securities – taxable | $ | 3,225,786 | $ | 8,112 | 1.02 | % | $ | 42,799 | $ | 274 | 2.57 | % | |||||||||||||||||||||||
Investment securities – non-taxable(2) | 196,785 | 2,247 | 4.63 | % | 195,578 | 2,417 | 4.97 | % | |||||||||||||||||||||||||||
Federal funds sold and securities purchased under resale agreements | 4,605 | 1 | 0.07 | % | 199,727 | 614 | 1.24 | % | |||||||||||||||||||||||||||
Interest-bearing deposits in other banks | 11,840,942 | 2,932 | 0.10 | % | 6,225,948 | 19,586 | 1.27 | % | |||||||||||||||||||||||||||
| Loans held for sale | 243,326 | 1,595 | 2.66 | % | 3,136,381 | 27,480 | 3.52 | % | |||||||||||||||||||||||||||
Loans held for investment, mortgage finance | 8,177,759 | 64,942 | 3.22 | % | 7,054,682 | 55,324 | 3.15 | % | |||||||||||||||||||||||||||
| Loans held for investment(1)(2) | 15,457,888 | 149,196 | 3.91 | % | 16,598,775 | 201,781 | 4.89 | % | |||||||||||||||||||||||||||
| Less reserve for credit losses on loans | 254,697 | — | — | 201,837 | — | — | |||||||||||||||||||||||||||||
| Loans held for investment, net | 23,380,950 | 214,138 | 3.71 | % | 23,451,620 | 257,105 | 4.41 | % | |||||||||||||||||||||||||||
| Total earning assets | 38,892,394 | 229,025 | 2.39 | % | 33,252,053 | 307,476 | 3.72 | % | |||||||||||||||||||||||||||
| Cash and other assets | 1,064,679 | 976,520 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 39,957,073 | $ | 34,228,573 | |||||||||||||||||||||||||||||||
| Liabilities and Stockholders’ Equity | |||||||||||||||||||||||||||||||||||
| Transaction deposits | $ | 3,991,966 | $ | 5,861 | 0.60 | % | $ | 3,773,067 | $ | 13,582 | 1.45 | % | |||||||||||||||||||||||
| Savings deposits | 12,889,974 | 10,788 | 0.34 | % | 11,069,429 | 35,961 | 1.31 | % | |||||||||||||||||||||||||||
| Time deposits | 2,204,242 | 3,355 | 0.62 | % | 2,842,535 | 12,631 | 1.79 | % | |||||||||||||||||||||||||||
| Total interest-bearing deposits | 19,086,182 | 20,004 | 0.43 | % | 17,685,031 | 62,174 | 1.41 | % | |||||||||||||||||||||||||||
| Other borrowings | 2,686,398 | 2,592 | 0.39 | % | 3,020,255 | 10,251 | 1.37 | % | |||||||||||||||||||||||||||
| Long-term debt | 464,731 | 5,743 | 5.01 | % | 395,571 | 5,264 | 5.35 | % | |||||||||||||||||||||||||||
| Total interest-bearing liabilities | 22,237,311 | 28,339 | 0.52 | % | 21,100,857 | 77,689 | 1.48 | % | |||||||||||||||||||||||||||
| Demand deposits | 14,421,505 | 10,003,495 | |||||||||||||||||||||||||||||||||
| Other liabilities | 309,644 | 270,868 | |||||||||||||||||||||||||||||||||
| Stockholders’ equity | 2,988,613 | 2,853,353 | |||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 39,957,073 | $ | 34,228,573 | |||||||||||||||||||||||||||||||
| Net interest income(2) | $ | 200,686 | $ | 229,787 | |||||||||||||||||||||||||||||||
| Net interest margin | 2.09 | % | 2.78 | % | |||||||||||||||||||||||||||||||
| Net interest spread | 1.87 | % | 2.24 | % | |||||||||||||||||||||||||||||||
| Loan spread(3) | 3.45 | % | 3.35 | % | |||||||||||||||||||||||||||||||
(1)The loan averages include non-accrual loans and are stated net of unearned income.
(2)Taxable equivalent rates used where applicable.
(3)Yield on loans, net of reserves, less funding cost including all deposits and borrowed funds.
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Volume/Rate Analysis
The following table presents the changes in taxable-equivalent net interest income and identifies the changes due to differences in the average volume of earning assets and interest-bearing liabilities and the changes due to differences in the average interest rate on those assets and liabilities.
| Three months ended March 31, 2021/2020 | |||||||||||||||||||||||||||||||||||
| Net Change | Change due to(1) | ||||||||||||||||||||||||||||||||||
| (in thousands) | Volume | Yield/Rate(2) | |||||||||||||||||||||||||||||||||
| Interest income: | |||||||||||||||||||||||||||||||||||
| Investment securities | $ | 7,668 | $ | 35,943 | $ | (28,275) | |||||||||||||||||||||||||||||
| Loans held for sale | (25,885) | (25,320) | (565) | ||||||||||||||||||||||||||||||||
| Loans held for investment, mortgage finance loans | 9,618 | 8,796 | 822 | ||||||||||||||||||||||||||||||||
| Loans held for investment | (52,585) | (13,871) | (38,714) | ||||||||||||||||||||||||||||||||
| Federal funds sold and securities purchased under resale agreements | (613) | (602) | (11) | ||||||||||||||||||||||||||||||||
| Interest-bearing deposits in other banks | (16,654) | 17,730 | (34,384) | ||||||||||||||||||||||||||||||||
| Total | (78,451) | 22,676 | (101,127) | ||||||||||||||||||||||||||||||||
| Interest expense: | |||||||||||||||||||||||||||||||||||
| Transaction deposits | (7,721) | 789 | (8,510) | ||||||||||||||||||||||||||||||||
| Savings deposits | (25,173) | 5,930 | (31,103) | ||||||||||||||||||||||||||||||||
| Time deposits | (9,276) | (2,841) | (6,435) | ||||||||||||||||||||||||||||||||
| Other borrowings | (7,659) | (1,137) | (6,522) | ||||||||||||||||||||||||||||||||
| Long-term debt | 479 | 920 | (441) | ||||||||||||||||||||||||||||||||
| Total | (49,350) | 3,661 | (53,011) | ||||||||||||||||||||||||||||||||
| Net interest income | $ | (29,101) | $ | 19,015 | $ | (48,116) | |||||||||||||||||||||||||||||
(1)Yield/rate and volume variances are allocated to yield/rate.
(2)Taxable equivalent rates used where applicable assuming a 21% tax rate.
Net Interest Income
Net interest income was $200.1 million for the three months ended March 31, 2021, compared to $228.3 million for the same period in 2020. The decrease was primarily due to decreases in yields on earning assets and a shift in earning asset composition, offset by a decrease in funding costs.
Average earning assets for the three months ended March 31, 2021 increased by $5.6 billion compared to the same period in 2020, and included a $3.2 billion increase in average total investment securities, reflecting the deployment of excess liquidity into higher-yielding investment securities and a $5.4 billion increase in average liquidity assets, partially offset by a $2.9 billion decrease in average loans held for sale. Throughout 2020, management took deliberate actions to increase liquidity balances to ensure we had the balance sheet strength to serve our clients during the COVID-19 pandemic and through the first three months of 2021 these balances have remained high. The decrease in average loans held for sale compared to the first quarter of 2020 resulted from holding purchased loans for shorter durations than in prior periods in order to limit exposure to forbearance risk caused by economic uncertainties. The decline in net interest income on loans held for sale resulting from shorter hold times was offset by an increase in non-interest income. Average interest-bearing liabilities increased for the three months ended March 31, 2021 compared to the same period in 2020, primarily due to a $1.4 billion increase in average interest-bearing deposits and a $69.2 million increase in long-term debt, partially offset by a $333.9 million decrease in average other borrowings. Average demand deposits for the three months ended March 31, 2021 increased to $14.4 billion from $10.0 billion for the three months ended March 31, 2020.
Net interest margin for the three months ended March 31, 2021 was 2.09% compared to 2.78% for the same period in 2020. The decrease was primarily due to the effect of declining interest rates on earning asset yields and a shift in earning asset composition, primarily increases in lower-yielding investment securities and liquidity assets, as well as declines in loans held for sale and loans held for investment, excluding mortgage finance, partially offset by lower funding costs compared to the first quarter of 2020.
The yield on total loans held for investment decreased to 3.71% for the three months ended March 31, 2021 compared to 4.41% for the same period in 2020, and the yield on earning assets decreased to 2.39% for the three months ended March 31, 2021 compared to 3.72% for the same period in 2020. The average cost of total deposits decreased to 0.24% for the first quarter of 2021 from 0.90% for the first quarter of 2020 and total funding costs, including all deposits, long-term debt and stockholders' equity decreased to 0.29% for the first quarter of 2021 compared to 0.92% for the first quarter of 2020.
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Non-interest Income
| Three months ended March 31, | ||||||||||||||||||||
| (in thousands) | 2021 | 2020 | ||||||||||||||||||
| Service charges on deposit accounts | $ | 4,716 | $ | 3,293 | ||||||||||||||||
| Wealth management and trust fee income | 2,855 | 2,467 | ||||||||||||||||||
| Brokered loan fees | 9,311 | 8,015 | ||||||||||||||||||
| Servicing income | 9,009 | 4,746 | ||||||||||||||||||
| Swap fees | 526 | 2,757 | ||||||||||||||||||
| Net gain/(loss) on sale of loans held for sale | 5,572 | (13,000) | ||||||||||||||||||
| Other(1) | 7,103 | 3,502 | ||||||||||||||||||
| Total non-interest income | $ | 39,092 | $ | 11,780 | ||||||||||||||||
(1)Other non-interest income includes such items as letter of credit fees, bank owned life insurance ("BOLI") income, dividends on FHLB and FRB stock, income from legal settlements and other general operating income.
Non-interest income increased by $27.3 million during the three months ended March 31, 2021 to $39.1 million, compared to $11.8 million for the same period in 2020. This increase was primarily due to a $18.6 million increase in net gain/(loss) on sale of loans held for sale, a $4.3 million increase in servicing income and a $3.6 million increase in other non-interest income. The increase in net gain/(loss) on sale of loans held for sale was due to lower hedge costs in the first quarter of 2021 as a result of holding purchased loans for shorter durations than in prior periods, which was offset by the decline in net interest income on loans held for sale noted above. The increase in servicing income was due to an increase in the outstanding balance of our servicing portfolio.
Non-interest Expense
| Three months ended March 31, | |||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | |||||||||||||||||||||
| Salaries and employee benefits | $ | 87,522 | $ | 77,193 | |||||||||||||||||||
| Net occupancy expense | 8,274 | 8,712 | |||||||||||||||||||||
| Marketing | 1,697 | 8,522 | |||||||||||||||||||||
| Legal and professional | 8,277 | 17,466 | |||||||||||||||||||||
| Communications and technology | 15,969 | 13,791 | |||||||||||||||||||||
| FDIC insurance assessment | 6,613 | 5,849 | |||||||||||||||||||||
| Servicing-related expenses | 12,989 | 16,354 | |||||||||||||||||||||
| Merger-related expenses | — | 7,270 | |||||||||||||||||||||
| Other(1) | 8,975 | 10,260 | |||||||||||||||||||||
| Total non-interest expense | $ | 150,316 | $ | 165,417 | |||||||||||||||||||
(1)Other expense includes such items as courier expenses, regulatory assessments other than FDIC insurance, insurance expenses and other general operating expenses.
Non-interest expense for the three months ended March 31, 2021 decreased $15.1 million compared to the same period in 2020. The decrease was primarily due to decreases in marketing expense, legal and professional expense, servicing-related expenses and merger-related expenses, partially offset by increases in salaries and employee benefits and communication and technology expense.
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Analysis of Financial Condition
Loans Held for Investment
The following table summarizes our loans held for investment on a gross basis by portfolio segment:
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Commercial | $ | 8,969,224 | $ | 8,861,580 | |||||||||||||||||||||||||
| Energy | 691,806 | 766,217 | |||||||||||||||||||||||||||
| Mortgage finance | 9,009,081 | 9,079,409 | |||||||||||||||||||||||||||
| Real estate | 5,810,590 | 5,794,624 | |||||||||||||||||||||||||||
| Gross loans held for investment | $ | 24,480,701 | $ | 24,501,830 | |||||||||||||||||||||||||
| Deferred income (net of direct origination costs) | (72,446) | (70,970) | |||||||||||||||||||||||||||
| Allowance for credit losses on loans | (242,484) | (254,615) | |||||||||||||||||||||||||||
| Total loans held for investment, net | $ | 24,165,771 | $ | 24,176,245 | |||||||||||||||||||||||||
Total gross loans held for investment were $24.5 billion at March 31, 2021, a decline of $21.1 million from December 31, 2020 primarily due to declines in our energy and mortgage finance portfolios, partially offset by an increase in commercial loans, primarily due to the continued funding of loans under the Paycheck Protection Plan during the first quarter of 2021. The decline in the energy portfolio is consistent with our strategy of planned reductions in this portfolio as it has experienced higher historic losses. Mortgage finance loans relate to our mortgage warehouse lending operations in which we purchase mortgage loan ownership interests that are typically sold within 10 to 20 days. Volumes fluctuate based on the level of market demand for the product and the number of days between purchase and sale of the loans, which can be affected by changes in overall market interest rates, and tend to peak at the end of each month. Despite the decline in the first quarter of 2021, balances in this portfolio remain elevated related to increases in volumes driven by continued lower long-term interest rates.
We originate a substantial majority of all loans held for investment. We also participate in syndicated loan relationships, both as a participant and as an agent. As of March 31, 2021, we had $1.8 billion in syndicated loans, $475.9 million of which we administer as agent. All syndicated loans, whether we act as agent or participant, are underwritten to the same standards as all other loans we originate. As of March 31, 2021, none of our syndicated loans were on non-accrual.
Portfolio Geographic and Industry Concentrations
Although more than 50% of our total loan exposure is outside of Texas and more than 50% of our deposits are sourced outside of Texas, our Texas concentration remains significant. As of March 31, 2021, a majority of our loans held for investment, excluding mortgage finance loans and other national lines of business, were to businesses with headquarters or operations in Texas. This geographic concentration subjects the loan portfolio to the general economic conditions within this state. We also make loans to customers that are secured by assets located outside of Texas. The risks created by this concentration have been considered by management in the determination of the appropriateness of the allowance for credit losses.
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Non-performing Assets
Non-performing assets include non-accrual loans and leases and repossessed assets. The table below summarizes our non-performing assets by type and by type of property securing the credit:
| (in thousands) | March 31, 2021 | December 31, 2020 | March 31, 2020 | ||||||||||||||
| Non-accrual loans(1) | |||||||||||||||||
| Commercial | |||||||||||||||||
| Assets of the borrowers | $ | 20,264 | $ | 18,776 | $ | 37,040 | |||||||||||
| Inventory | 6,633 | 3,547 | 17,561 | ||||||||||||||
| Other | 11,297 | 9,773 | 7,352 | ||||||||||||||
| Total commercial | 38,194 | 32,096 | 61,953 | ||||||||||||||
| Energy | |||||||||||||||||
| Oil and gas properties | 29,368 | 51,724 | 151,858 | ||||||||||||||
| Total energy | 29,368 | 51,724 | 151,858 | ||||||||||||||
| Real estate | |||||||||||||||||
| Assets of the borrowers | 14,289 | 14,496 | — | ||||||||||||||
| Commercial property | 9,543 | 13,569 | 1,099 | ||||||||||||||
| Hotel/motel | 4,619 | 4,619 | — | ||||||||||||||
| Single family residences | 1,717 | 218 | 1,421 | ||||||||||||||
| Other | — | 5,267 | 2,834 | ||||||||||||||
| Total real estate | 30,168 | 38,169 | 5,354 | ||||||||||||||
| Total non-performing assets | $ | 97,730 | $ | 121,989 | $ | 219,165 | |||||||||||
| Restructured loans - accruing | $ | — | $ | — | $ | — | |||||||||||
| Loans held for investment past due 90 days and accruing(2) | 6,187 | 12,541 | 21,274 | ||||||||||||||
| Loans held for sale non-accrual (3) | — | 6,966 | — | ||||||||||||||
| Loans held for sale past due 90 days and accruing(4) | 16,359 | 16,667 | 9,014 | ||||||||||||||
(1)As of March 31, 2021, December 31, 2020 and March 31, 2020, non-accrual loans included $33.7 million, $45.4 million and $22.3 million, respectively, in loans that met the criteria for restructured.
(2)At March 31, 2021, December 31, 2020 and March 31, 2020, loans past due 90 days and still accruing includes premium finance loans of $3.1 million, $6.4 million and $8.6 million, respectively.
(3)Includes one non-accrual loan previously reported in loans HFI that was transferred to loans HFS as of December 31, 2020 and subsequently sold at carrying value.
(4)Includes loans guaranteed by U.S. government agencies that were repurchased out of Ginnie Mae securities. Loans are recorded as loans held for sale and carried at fair value on the balance sheet. Interest on these past due loans accrues at the debenture rate guaranteed by the U.S. government. Also includes loans that, pursuant to Ginnie Mae servicing guidelines, we have the unilateral right, but not the obligation, to repurchase if defined delinquent loan criteria are met and therefore must record as loans held for sale on our balance sheet regardless of whether the repurchase option has been exercised.
Total non-performing assets at March 31, 2021 decreased $24.3 million from December 31, 2020 and decreased $121.4 million compared to March 31, 2020. The decrease from both December 31, 2020 and March 31, 2020 was primarily due to a decline in non-accrual energy loans.
Potential problem loans consist of loans that are performing in accordance with contractual terms, but for which we have concerns about the borrower’s ability to comply with repayment terms because of the borrower’s potential financial difficulties. We monitor these loans closely and review their performance on a regular basis. At March 31, 2021, we had $145.1 million in loans of this type, compared to $193.2 million at December 31, 2020 and $98.2 million at March 31, 2020.
Summary of Credit Loss Experience
The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the allowance for credit losses at a level consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date. We recorded a $6.0 million negative provision for credit losses for the first quarter of 2021, compared to provisions of $32.0 million in the fourth quarter of 2020 and $96.0 million in the first quarter of 2020. The decrease from the fourth quarter of 2020 resulted primarily from a decrease in charge-offs and improvement in the economic outlook as the economy begins to recover from the impacts of the COVID-19 pandemic. We recorded $6.4 million in net charge-offs during the first quarter of 2021, compared to $65.4 million during the fourth quarter of 2020 and $57.7 million during the first quarter of 2020. Criticized loans totaled $945.1 million at March 31, 2021, compared to $918.4 million at December 31, 2020 and $675.9 million at March 31, 2020. Criticized loan levels remain elevated when compared to pre-pandemic levels due to the downgrade of loans to borrowers that have been impacted by the COVID-19 pandemic.
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The table below presents a summary of our loan loss experience:
| Three months ended March 31, 2021 | Year ended December 31, 2020 | Three months ended March 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||
| (in thousands except percentage and multiple data) | ||||||||||||||||||||||||||||||||||||||||||||
| Allowance for credit losses on loans: | ||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 254,615 | $ | 195,047 | $ | 195,047 | ||||||||||||||||||||||||||||||||||||||
| Impact of CECL adoption | — | 8,585 | 8,585 | |||||||||||||||||||||||||||||||||||||||||
| Loans charged-off: | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial | 2,451 | 73,360 | 20,653 | |||||||||||||||||||||||||||||||||||||||||
| Energy | 5,732 | 133,522 | 37,730 | |||||||||||||||||||||||||||||||||||||||||
| Real estate | — | 180 | — | |||||||||||||||||||||||||||||||||||||||||
| Total charge-offs | 8,183 | 207,062 | 58,383 | |||||||||||||||||||||||||||||||||||||||||
| Recoveries: | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial | 1,050 | 1,277 | 257 | |||||||||||||||||||||||||||||||||||||||||
| Energy | 715 | 6,999 | 423 | |||||||||||||||||||||||||||||||||||||||||
| Total recoveries | 1,765 | 8,276 | 680 | |||||||||||||||||||||||||||||||||||||||||
| Net charge-offs | 6,418 | 198,786 | 57,703 | |||||||||||||||||||||||||||||||||||||||||
| Provision for credit losses on loans | (5,713) | 249,769 | 95,029 | |||||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | 242,484 | $ | 254,615 | $ | 240,958 | ||||||||||||||||||||||||||||||||||||||
| Allowance for off-balance sheet credit losses: | ||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 17,434 | 8,640 | $ | 8,640 | |||||||||||||||||||||||||||||||||||||||
| Impact of CECL adoption | — | 563 | 563 | |||||||||||||||||||||||||||||||||||||||||
| Provision for off-balance sheet credit losses | (287) | 8,231 | 971 | |||||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | 17,147 | $ | 17,434 | $ | 10,174 | ||||||||||||||||||||||||||||||||||||||
| Total allowance for credit losses | $ | 259,631 | $ | 272,049 | $ | 251,132 | ||||||||||||||||||||||||||||||||||||||
| Total provision for credit losses | $ | (6,000) | $ | 258,000 | $ | 96,000 | ||||||||||||||||||||||||||||||||||||||
| Allowance for credit losses on loans to LHI | 0.99 | % | 1.04 | % | 0.99 | % | ||||||||||||||||||||||||||||||||||||||
| Net charge-offs to average LHI | 0.11 | % | 0.80 | % | 0.98 | % | ||||||||||||||||||||||||||||||||||||||
| Total provision for credit losses to average LHI | (0.10) | % | 1.03 | % | 1.63 | % | ||||||||||||||||||||||||||||||||||||||
| Recoveries to total charge-offs | 21.57 | % | 4.00 | % | 1.17 | % | ||||||||||||||||||||||||||||||||||||||
Allowance for off-balance sheet credit losses to off-balance sheet credit commitments | 0.20 | % | 0.20 | % | 0.13 | % | ||||||||||||||||||||||||||||||||||||||
| Total allowance for credit losses to LHI | 1.06 | % | 1.11 | % | 1.03 | % | ||||||||||||||||||||||||||||||||||||||
| Allowance as a multiple of non-performing loans | 2.5 | x | 2.1 | x | 1.1 | x | ||||||||||||||||||||||||||||||||||||||
The allowance for credit losses, including the allowance for losses on unfunded commitments reported on the consolidated balance sheets in other liabilities, totaled $259.6 million at March 31, 2021, $272.0 million at December 31, 2020 and $251.1 million at March 31, 2020. The total allowance for credit losses as a percentage of loans held for investment was 1.06% at March 31, 2021, compared to 1.11% at December 31, 2020 and 1.03% at March 31, 2020. The total allowance for credit losses as a percentage of loans held for investment, excluding mortgage finance, was 1.69% at March 31, 2021, compared to 1.77% at December 31, 2020 and 1.49% at March 31, 2020. The increase in the total allowance as a percentage of loans held for investment at March 31, 2021, compared to March 31, 2020, is due primarily to an increase in the allowance for credit losses, resulting from reserve build related to higher criticized loan levels and continued economic uncertainty related to the COVID-19 pandemic.
Loans Held for Sale
Through our MCA program we commit to purchase residential mortgage loans from independent correspondent lenders and deliver those loans into the secondary market via whole loan sales to independent third parties or in securitization transactions to Ginnie Mae and GSEs such as Fannie Mae and Freddie Mac. For additional information on our loans held for sale portfolio, see Note 5 - Certain Transfers of Financial Assets in the accompanying notes to the consolidated financial statements included elsewhere in this report.
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Liquidity and Capital Resources
In general terms, liquidity is a measurement of our ability to meet our cash needs. Our objectives in managing our liquidity are to maintain our ability to meet loan commitments, repurchase investment securities and repay deposits and other liabilities in accordance with their terms, without an adverse impact on our current or future earnings. Our liquidity strategy is guided by policies, formulated and monitored by our senior management and our Asset and Liability Management Committee (“ALCO”), which take into account the demonstrated marketability of our assets, the sources and stability of our funding and the level of unfunded commitments. We regularly evaluate all of our various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness. For the year ended December 31, 2020 and the three months ended March 31, 2021, our principal source of funding has been our customer deposits, supplemented by our short-term and long-term borrowings, primarily from federal funds purchased and FHLB borrowings, which are generally used to fund mortgage finance assets. We also rely on the availability of the mortgage secondary market provided by Ginnie Mae and the GSEs to support the liquidity of our mortgage finance assets.
In accordance with our liquidity strategy, deposit growth and increases in borrowing capacity related to our mortgage finance loans have resulted in accumulating liquidity assets in recent periods. Throughout 2020 we significantly increased our liquidity assets to ensure that we had the balance sheet strength to serve our clients during the COVID-19 pandemic, and through the first quarter of 2021 these balances have remained high. The following table summarizes the composition of liquidity assets:
| (in thousands except percentage data) | March 31, 2021 | December 31, 2020 | March 31, 2020 | |||||||||||||||||||||||
| Federal funds sold and securities purchased under resale agreements | $ | — | $ | — | $ | 30,000 | ||||||||||||||||||||
| Interest-bearing deposits | 11,212,276 | 9,032,807 | 9,468,189 | |||||||||||||||||||||||
| Total liquidity assets | $ | 11,212,276 | $ | 9,032,807 | $ | 9,498,189 | ||||||||||||||||||||
| Total liquidity assets as a percent of: | ||||||||||||||||||||||||||
| Total loans held for investment | 45.9 | % | 37.0 | % | 38.9 | % | ||||||||||||||||||||
| Total earning assets | 28.8 | % | 24.6 | % | 27.3 | % | ||||||||||||||||||||
| Total deposits | 33.6 | % | 29.1 | % | 35.0 | % | ||||||||||||||||||||
Our liquidity needs to support growth in loans held for investment have been fulfilled primarily through growth in our core customer deposits. Our goal is to obtain as much of our funding for loans held for investment and other earning assets as possible from deposits of these core customers. These deposits are generated principally through development of long-term customer relationships, with a significant focus on treasury management products. In addition to deposits from our core customers, we also have access to deposits through brokered customer relationships. For regulatory purposes, these relationship brokered deposits are categorized as brokered deposits; however, since these deposits arise from a customer relationship, which involves extensive treasury services, we consider these deposits to be core deposits for our reporting purposes.
We also have access to incremental deposits through brokered retail certificates of deposit, or CDs. These traditional brokered deposits are generally of short maturities and are used to fund temporary differences in the growth in loan balances, including growth in loans held for sale or other specific categories of loans as compared to customer deposits. The following table summarizes our period-end and average core customer deposits, relationship brokered deposits and traditional brokered deposits:
| (in thousands) | March 31, 2021 | December 31, 2020 | March 31, 2020 | ||||||||||||||
| Deposits from core customers | $ | 30,102,156 | $ | 27,581,532 | $ | 22,368,584 | |||||||||||
| Deposits from core customers as a percent of total deposits | 90.1 | % | 89.0 | % | 82.4 | % | |||||||||||
| Relationship brokered deposits | $ | 1,933,376 | $ | 1,771,883 | $ | 2,101,329 | |||||||||||
| Relationship brokered deposits as a percent of average total deposits | 5.8 | % | 5.7 | % | 7.7 | % | |||||||||||
| Traditional brokered deposits | $ | 1,356,438 | $ | 1,643,174 | $ | 2,664,350 | |||||||||||
| Traditional brokered deposits as a percent of total deposits | 4.1 | % | 5.3 | % | 9.8 | % | |||||||||||
| Average deposits from core customers(1) | $ | 29,980,945 | $ | 26,537,612 | $ | 23,642,481 | |||||||||||
| Average deposits from core customers as a percent of average total deposits | 89.5 | % | 86.0 | % | 85.4 | % | |||||||||||
| Average relationship brokered deposits(1) | $ | 1,912,099 | $ | 2,099,652 | $ | 1,745,144 | |||||||||||
| Average relationship brokered deposits as a percent of average total deposits | 5.7 | % | 6.8 | % | 6.3 | % | |||||||||||
| Average traditional brokered deposits(1) | $ | 1,614,643 | $ | 2,235,359 | $ | 2,300,901 | |||||||||||
| Average traditional brokered deposits as a percent of average total deposits | 4.8 | % | 7.2 | % | 8.3 | % | |||||||||||
(1) Annual averages presented for December 31, 2020.
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We have access to sources of traditional brokered deposits that we estimate to be $7.5 billion. Based on our internal guidelines, we have chosen to limit our use of these sources to a lesser amount.
We have short-term borrowing sources available to supplement deposits and meet our funding needs. Such borrowings are generally used to fund our mortgage finance loans, due to their liquidity, short duration and interest spreads available. These borrowing sources include federal funds purchased from our downstream correspondent bank relationships (which consist of banks that are smaller than our Bank) and from our upstream correspondent bank relationships (which consist of banks that are larger than our Bank), customer repurchase agreements and advances from the FHLB and the Federal Reserve. The following table summarizes our short-term and other borrowings:
| (in thousands) | March 31, 2021 | |||||||||||||
| Federal funds purchased | $ | 110,100 | ||||||||||||
| Repurchase agreements | 5,487 | |||||||||||||
| FHLB borrowings | 2,400,000 | |||||||||||||
| Line of credit | — | |||||||||||||
| Total short-term borrowings | $ | 2,515,587 | ||||||||||||
| Maximum short-term borrowings outstanding at any month-end during 2021 | $ | 2,907,202 | ||||||||||||
The following table summarizes our other borrowing capacities net of balances outstanding. As of March 31, 2021, all are scheduled to mature within one year.
| (in thousands) | March 31, 2021 | |||||||||||||
| FHLB borrowing capacity relating to loans | $ | 7,369,068 | ||||||||||||
| FHLB borrowing capacity relating to securities | 3,222,022 | |||||||||||||
| Total FHLB borrowing capacity(1) | $ | 10,591,090 | ||||||||||||
| Unused federal funds lines available from commercial banks | $ | 1,055,000 | ||||||||||||
| Unused Federal Reserve borrowings capacity | $ | 2,238,623 | ||||||||||||
| Unused revolving line of credit(2) | $ | 130,000 | ||||||||||||
(1) FHLB borrowings are collateralized by a blanket floating lien on certain real estate secured loans, mortgage finance assets and also certain pledged securities.
(2) Unsecured revolving, non-amortizing line of credit with maturity date of December 14, 2021. Proceeds may be used for general corporate purposes, including funding regulatory capital infusions into the Bank. The loan agreement contains customary financial covenants and restrictions. No borrowings were made against this line of credit during the three months ended March 31, 2021.
Our equity capital averaged $3.0 billion for the three months ended March 31, 2021 as compared to $2.9 billion for the same period in 2020. We have not paid any cash dividends on our common stock since we commenced operations and have no plans to do so in the foreseeable future.
Periodically, based on market conditions and other factors, and subject to compliance with applicable laws and regulations and the terms of our existing indebtedness, we or the Bank may repay, repurchase, exchange or redeem outstanding indebtedness, or otherwise enter into transactions regarding our debt or capital structure. For example, we and the Bank periodically evaluate and may engage in liability management transactions, including repurchases or redemptions of outstanding subordinated notes, which may be funded by the issuance of, or exchanges of, newly issued unsecured borrowings, as we seek to actively manage our debt maturity profile and interest cost.
For additional information regarding our capital and stockholders' equity, see Note 7 - Regulatory Restrictions in the accompanying notes to the consolidated financial statements included elsewhere in this report.
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Commitments and Contractual Obligations
The following table presents, as of March 31, 2021, significant fixed and determinable contractual obligations to third parties by payment date. Amounts in the table do not include accrued or accruing interest.
| (in thousands) | Within One Year | After One But Within Three Years | After Three But Within Five Years | After Five Years | Total | ||||||||||||||||||||||||||||||
| Deposits without a stated maturity | $ | 31,429,041 | $ | — | $ | — | $ | — | $ | 31,429,041 | |||||||||||||||||||||||||
| Time deposits | 1,348,814 | 609,610 | 4,500 | 5 | 1,962,929 | ||||||||||||||||||||||||||||||
| Federal funds purchased and customer repurchase agreements | 115,587 | — | — | — | 115,587 | ||||||||||||||||||||||||||||||
| FHLB borrowings | 2,400,000 | — | — | — | 2,400,000 | ||||||||||||||||||||||||||||||
| Operating lease obligations | 17,221 | 33,169 | 14,546 | 21,497 | 86,433 | ||||||||||||||||||||||||||||||
| Long-term debt | — | — | 442,722 | 222,246 | 664,968 | ||||||||||||||||||||||||||||||
| Total contractual obligations | $ | 35,310,663 | $ | 642,779 | $ | 461,768 | $ | 243,748 | $ | 36,658,958 | |||||||||||||||||||||||||
Critical Accounting Policies
SEC guidance requires disclosure of “critical accounting policies.” The SEC defines “critical accounting policies” as those that are most important to the presentation of a company’s financial condition and results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
We follow financial accounting and reporting policies that are in accordance with accounting principles generally accepted in the United States. The more significant of these policies are summarized in Note 1 - Operations and Summary of Significant Accounting Policies in the notes to the consolidated financial statements included elsewhere in this report and in our 2020 Form 10-K. Not all significant accounting policies require management to make difficult, subjective or complex judgments. However, the policy noted below could be deemed to meet the SEC’s definition of a critical accounting policy.
Allowance for Credit Losses
Management considers the policies related to the allowance for credit losses as the most critical to the financial statement presentation. The total allowance for credit losses includes activity related to allowances calculated in accordance with Accounting Standards Codification (“ASC”) 326, Credit Losses. The allowance for credit losses is established through a provision for credit losses charged to current earnings. The amount maintained in the allowance reflects management’s continuing evaluation of the credit losses expected to be recognized over the life of the loans in our portfolio. The allowance for credit losses on loans is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. For purposes of determining the allowance for credit losses, the loan portfolio is segregated by product types in order to recognize differing risk profiles among categories, and then further segregated by credit grades. Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. Management estimates the allowance balance using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts. Adjustments to historical loss information are made to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments using a Portfolio Level Qualitative Factor ("PLQF") and/or a Portfolio Segment Level Qualitative Factor ("SLQF"). The PLQF and SLQF are utilized to address factors that are not present in historical loss rates and are otherwise unaccounted for in the quantitative process. A reserve is recorded upon origination or purchase of a loan. See “Summary of Credit Loss Experience” above and Note 4 – Loans Held for Investment and Allowance for Credit Losses on Loans in the accompanying notes to the consolidated financial statements included elsewhere in this report for further discussion of the risk factors considered by management in establishing the allowance for credit losses.
Impact of Inflation and Changing Prices
The preparation of financial statements in conformity with GAAP requires management to measure the company’s financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due to inflation or recession are generally not considered. The primary effect of inflation on our operations is reflected in increased operating expenses. Management considers changes in interest rates to impact our financial condition and results of operations to a far greater degree than changes in prices due to inflation. Although interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. We manage our interest rate risk in several ways. Refer to “Interest Rate Risk Management” in Item 7A for further discussion. There can be no assurance that we will not be materially adversely affected by future changes in interest rates, as interest rates are highly sensitive to many factors that are beyond our control.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange rates, commodity prices, or equity prices. Additionally, the financial instruments subject to market risk can be classified either as held for trading purposes or held for other than trading.
We are subject to market risk primarily through the effect of changes in interest rates on our portfolio of assets held for purposes other than trading. Additionally, we have some market risk relative to commodity prices through our energy lending activities. Declines and volatility in commodity prices negatively impacted our energy clients' ability to perform on their loan obligations in recent years, and further uncertainty and volatility could have a negative impact on our customers and our loan portfolio in future periods. Foreign exchange rates, commodity prices (other than energy) and equity prices are not expected to pose significant market risk to us.
The responsibility for managing market risk rests with the ALCO, which operates under policy guidelines established by our board of directors. The acceptable negative variation in net interest revenue due to a 100 basis point increase or decrease in interest rates is generally limited by these guidelines to plus or minus 10-12%. These guidelines establish maximum levels for short-term borrowings, short-term assets and public and brokered deposits and minimum levels for liquidity, among other things. Oversight of our compliance with these guidelines is the ongoing responsibility of the ALCO, with exceptions reported to the Executive Risk Committee, and to our board of directors if deemed necessary, on a quarterly basis. Additionally, the Credit Policy Committee ("CPC") specifically manages risk relative to commodity price market risks. The CPC establishes maximum portfolio concentration levels for energy loans as well as maximum advance rates for energy collateral.
Interest Rate Risk Management
Our interest rate sensitivity is illustrated in the following table. The table reflects rate-sensitive positions as of March 31, 2021, and is not necessarily indicative of positions on other dates. The balances of interest rate sensitive assets and liabilities are presented in the periods in which they next reprice to market rates or mature and are aggregated to show the interest rate sensitivity gap. The mismatch between repricings or maturities within a time period is commonly referred to as the “gap” for that period. A positive gap (asset sensitive), where interest rate-sensitive assets exceed interest rate sensitive liabilities, generally will result in the net interest margin increasing in a rising rate environment and decreasing in a falling rate environment. A negative gap (liability sensitive) will generally have the opposite results on the net interest margin. To reflect anticipated prepayments, certain asset and liability categories are shown in the table using estimated cash flows rather than contractual cash flows. The Company employs interest rate floors in certain variable rate loans to enhance the yield on those loans at times when market interest rates are extraordinarily low. The degree of asset sensitivity, spreads on loans and net interest margin may be reduced until rates increase by an amount sufficient to eliminate the effects of floors. The adverse effect of floors as market rates increase may also be offset by the positive gap, the extent to which rates on deposits and other funding sources lag increasing market rates for loans and changes in composition of funding.
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Interest Rate Sensitivity Gap Analysis
March 31, 2021
| (in thousands) | 0-3 mo Balance | 4-12 mo Balance | 1-3 yr Balance | 3+ yr Balance | Total Balance | ||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||
Interest-bearing deposits in other banks, federal funds sold and securities purchased under resale agreements | $ | 11,428,111 | $ | — | $ | — | $ | — | $ | 11,428,111 | |||||||||||||||||||
| Investment securities(1) | 46,621 | 1,898 | 23,642 | 3,370,897 | 3,443,058 | ||||||||||||||||||||||||
| Total variable loans | $ | 20,942,858 | $ | 78,427 | $ | 27,267 | $ | 271,848 | $ | 21,320,400 | |||||||||||||||||||
| Total fixed loans | 223,984 | 1,362,443 | 782,238 | 967,922 | 3,336,587 | ||||||||||||||||||||||||
| Total loans(2) | 21,166,842 | 1,440,870 | 809,505 | 1,239,770 | 24,656,987 | ||||||||||||||||||||||||
| Total interest sensitive assets | $ | 32,641,574 | $ | 1,442,768 | $ | 833,147 | $ | 4,610,667 | $ | 39,528,156 | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||
| Interest-bearing customer deposits | $ | 16,254,399 | $ | — | $ | — | $ | — | $ | 16,254,399 | |||||||||||||||||||
| CDs & IRAs | 156,801 | 381,762 | 63,423 | 4,505 | 606,491 | ||||||||||||||||||||||||
| Traditional brokered deposits | 200,000 | 610,251 | 546,187 | — | 1,356,438 | ||||||||||||||||||||||||
| Total interest-bearing deposits | 16,611,200 | 992,013 | 609,610 | 4,505 | 18,217,328 | ||||||||||||||||||||||||
Repurchase agreements, federal funds purchased, FHLB borrowings | 2,515,587 | — | — | — | 2,515,587 | ||||||||||||||||||||||||
| Long-term debt | 268,982 | — | — | 395,986 | 664,968 | ||||||||||||||||||||||||
| Total borrowings | 2,784,569 | — | — | 395,986 | 3,180,555 | ||||||||||||||||||||||||
| Total interest sensitive liabilities | $ | 19,395,769 | $ | 992,013 | $ | 609,610 | $ | 400,491 | $ | 21,397,883 | |||||||||||||||||||
| GAP | $ | 13,245,805 | $ | 450,755 | $ | 223,537 | $ | 4,210,176 | $ | — | |||||||||||||||||||
| Cumulative GAP | $ | 13,245,805 | $ | 13,696,560 | $ | 13,920,097 | $ | 18,130,273 | $ | 18,130,273 | |||||||||||||||||||
| Demand deposits | 15,174,642 | ||||||||||||||||||||||||||||
| Stockholders’ equity | 3,159,482 | ||||||||||||||||||||||||||||
| Total | $ | 18,334,124 | |||||||||||||||||||||||||||
(1)Investment securities based on fair market value.
(2)Total loans includes loans held for investments, stated at gross, and loans held for sale.
While a gap interest table is useful in analyzing interest rate sensitivity, an interest rate sensitivity simulation provides a better illustration of the sensitivity of earnings to changes in interest rates. Earnings are also affected by the effects of changing interest rates on the value of funding derived from demand deposits and stockholders’ equity. We perform a sensitivity analysis to identify interest rate risk exposure on net interest income. We quantify and measure interest rate risk exposure using a model to dynamically simulate the effect of changes in net interest income relative to changes in interest rates over the next twelve months based on three interest rate scenarios. These are a static rate scenario and two “shock test” scenarios.
These scenarios are based on interest rates as of the last day of a reporting period published by independent sources and incorporate relevant spreads of instruments that are actively traded in the open market. The Federal Reserve’s federal funds target affects short-term borrowing; the prime lending rate and LIBOR are the basis for most of our variable-rate loan pricing. The 10-year treasury rate is also monitored because of its effect on prepayment speeds for mortgage-backed securities and MSRs. These are our primary interest rate exposures. We are currently not using derivatives to manage our interest rate exposure, except for MSRs, although we may do so in the future if that appears advisable.
For modeling purposes, the “shock test” scenarios as of March 31, 2021 and 2020 assume immediate, sustained 100 and 200 basis point increases in interest rates. As short-term rates declined during 2020 and remain low through the first three months of 2021, we do not believe that analysis of an assumed decrease in interest rates would provide meaningful results. We will continue to evaluate these scenarios as interest rates change, until short-term rates rise above 3.0%, at which point we will resume evaluations of shock scenarios in which interest rates decrease.
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Our interest rate risk exposure model incorporates assumptions regarding the level of interest rate on indeterminable maturity deposits (demand deposits, interest-bearing transaction accounts and savings accounts) for a given level of market rate change. In the current environment of decreasing short-term rates, deposit pricing can vary by product and customer. These assumptions have been developed through a combination of historical analysis and projection of future expected pricing behavior. Changes in prepayment behavior of mortgage-backed securities, residential and commercial mortgage loans in each rate environment are captured using industry estimates of prepayment speeds for various coupon segments of the portfolio. The impact of these changes is factored into the simulation model. This modeling indicated interest rate sensitivity as follows:
| Anticipated Impact Over the Next Twelve Months as Compared to Most Likely Scenario | |||||||||||||||||||||||||||||||||||
| March 31, 2021 | March 31, 2020 | ||||||||||||||||||||||||||||||||||
| (in thousands) | 100 bps Increase | 200 bps Increase | 100 bps Increase | 200 bps Increase | |||||||||||||||||||||||||||||||
| Change in net interest income | $ | 38,809 | $ | 93,622 | $ | 77,720 | $ | 161,553 | |||||||||||||||||||||||||||
The simulations used to manage market risk are based on numerous assumptions regarding the effect of changes in interest rates on the timing and extent of repricing characteristics, future cash flows and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions, customer behavior and management strategies, among other factors.
Our business relies upon a large volume of loans, derivative contracts and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR to establish their interest rate and/or value. In 2017, the U.K. Financial Conduct Authority announced that it would no longer compel banks to submit rates for the calculation of LIBOR after 2021. The administrator of LIBOR has proposed to extend publication of the most commonly used U.S. Dollar LIBOR settings to June 30, 2023 and to cease publishing other LIBOR settings on December 31, 2021. The U.S. federal banking agencies issued guidance strongly encouraging banking organizations to cease using U.S. dollar LIBOR as a reference rate in new contracts as soon as practicable and in any event by December 31, 2021. It is not possible to know whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR or what the effect of any such changes in views or alternatives may have on the financial markets for LIBOR-linked financial instruments. The full impact of alternatives to LIBOR on the valuations, pricing and operation of our financial instruments is not yet known; however, the primary instruments that may be impacted include loans, securities, borrowings and derivatives indexed to LIBOR that mature after December 31, 2021. We have established a working group, consisting of key stakeholders from throughout the company, to monitor developments relating to LIBOR uncertainty and changes and to guide the Bank's response. This team is currently working to ensure that our technology systems are prepared for the transition, our loan documents that reference LIBOR-based rates have been appropriately amended to reference other methods of interest rate determinations and internal and external stakeholders are apprised of the transition.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the supervision and participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based upon that evaluation, we have concluded that, as of the end of such period, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to the Company's management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to various claims and legal actions that may arise in the ordinary course of conducting its business. Management does not expect the disposition of any of these matters to have a material adverse impact on the Company’s financial statements or results of operations.
ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors previously disclosed in the December 31, 2020 Form 10-K.
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ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
| 10.1 | |||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 32.2 | |||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | ||||
| 101.SCH | XBRL Taxonomy Extension Schema Document* | ||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document* | ||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document* | ||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document* | ||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document* | ||||
* Filed herewith
** Furnished herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TEXAS CAPITAL BANCSHARES, INC.
Date: April 22, 2021
| /s/ Julie L. Anderson | ||
| Julie L. Anderson | ||
| Chief Financial Officer | ||
| (Duly authorized officer and principal financial officer) | ||
42
AMENDMENT NO. ONE TO THE
TEXAS CAPITAL BANCSHARES, INC.
AMENDED AND RESTATED 2015 LONG-TERM INCENTIVE PLAN
WHEREAS, Texas Capital Bancshares, Inc., a Delaware corporation (the “Company”), adopted the Texas Capital Bancshares, Inc. Amended and Restated 2015 Long-Term Incentive Plan (the “Plan”), effective as of April 17, 2018, to attract and retain the services of key employees, key contractors, and outside directors of the Company and its subsidiaries;
WHEREAS, pursuant to Article 9 of the Plan, the Board of Directors of the Company (the “Board”) may, at any time, and in its discretion, amend the Plan; and
WHEREAS, the Board approved the amendment of the Plan to remove certain limits that were included in the Plan to comply with Section 162(m) of the Internal Revenue Code of 1986, as amended (“Section 162(m)”), which are no longer needed because Section 162(m) is no longer in effect.
NOW THEREFORE, the Company hereby amends the Plan, effective January 19, 2021, as follows:
1.Section 5.1 of the Plan is amended by deleting said Section in its entirety and substituting in lieu thereof the following new Section 5.1:
5.1 Number Available for Awards. Subject to adjustment as provided in Articles 11 and 12 and subject to increase by any Prior Plan Awards eligible for reuse pursuant to Section 5.2, the maximum number of shares of Common Stock that may be delivered pursuant to Awards granted under the Plan is two million five hundred fifty thousand (2,550,000) shares (the “Shares Available”). One hundred percent (100%) of the Shares Available may be delivered pursuant to Incentive Stock Options. Shares to be issued may be made available from authorized but unissued Common Stock, Common Stock held by the Company in its treasury, or Common Stock purchased by the Company on the open market or otherwise. During the term of this Plan, the Company will at all times reserve and keep available the number of shares of Common Stock that shall be sufficient to satisfy the requirements of this Plan.
2.Section 6.7(c) of the Plan is amended by deleting said Section in its entirety, and replacing it with “(c) [RESERVED].”
3.Except as expressly amended by this Amendment, the Plan shall continue in full force and effect in accordance with the provisions thereof.
IN WITNESS WHEREOF, the Company has caused this Amendment No. One to be executed in its name and on its behalf by its duly authorized representative as of this 19 day of January, 2021.
TEXAS CAPITAL BANCSHARES, INC.
By:
Signature:
Title:
EXHIBIT 31.1
CERTIFICATION
I, Rob C. Holmes, certify that:
1.I have reviewed this report on Form 10-Q of Texas Capital Bancshares, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures, (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: April 22, 2021 | ||
| /S/ Rob C. Holmes | ||
| Rob C. Holmes | ||
| President and Chief Executive Officer | ||
EXHIBIT 31.2
CERTIFICATION
I, Julie L. Anderson, certify that:
1. I have reviewed this report on Form 10-Q of Texas Capital Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures, (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: April 22, 2021 | ||
| /S/ Julie L. Anderson | ||
| Julie L. Anderson | ||
| Chief Financial Officer | ||
EXHIBIT 32.1
CERTIFICATION
In connection with the Quarterly Report on Form 10-Q of Texas Capital Bancshares, Inc. (the “Company”) for the period ending March 31, 2021 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Rob C. Holmes, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report, fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /S/ Rob C. Holmes | ||
| Rob C. Holmes | ||
| Executive Chairman and Chief Executive Officer | ||
| Date: April 22, 2021 | ||
EXHIBIT 32.2
CERTIFICATION
In connection with the Quarterly Report on Form 10-Q of Texas Capital Bancshares, Inc. (the “Company”) for the period ending March 31, 2021 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Julie L. Anderson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report, fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /S/ Julie L. Anderson | ||
| Julie L. Anderson | ||
| Chief Financial Officer | ||
| Date: April 22, 2021 | ||