10-Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
ý
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended March 31, 2016

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

For the transition period from                      to                     
Commission file number 001-34657
 
 
TEXAS CAPITAL BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
 
 
Delaware
 
75-2679109
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
2000 McKinney Avenue, Suite 700, Dallas, Texas, U.S.A.
 
75201
(Address of principal executive officers)
 
(Zip Code)

214/932-6600
(Registrant’s telephone number,
including area code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “large accelerated filer” and “accelerated filer” Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
 
ý
  
Accelerated Filer
 
¨
 
 
 
 
Non-Accelerated Filer
 
¨
  
Smaller Reporting Company
 
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨    No ý

APPLICABLE ONLY TO CORPORATE ISSUERS:

On April 20, 2016, 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 45,904,763
 


Table of Contents

Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended March 31, 2016
Index
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 6.


2

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,
2016
 
December 31,
2015
 
(Unaudited)
 
 
Assets
 
 
 
Cash and due from banks
$
89,277

 
$
109,496

Interest-bearing deposits
2,614,418

 
1,626,374

Federal funds sold and securities purchased under resale agreements
30,000

 
55,000

Securities, available-for-sale
28,461

 
29,992

Loans held for sale, at fair value
94,702

 
86,075

Loans held for investment, mortgage finance
4,981,304

 
4,966,276

Loans held for investment (net of unearned income)
12,059,849

 
11,745,674

Less: Allowance for loan losses
162,510

 
141,111

Loans held for investment, net
16,878,643

 
16,570,839

Mortgage servicing rights, net
4,253

 
423

Premises and equipment, net
22,924

 
23,561

Accrued interest receivable and other assets
428,344

 
382,101

Goodwill and intangible assets, net
19,871

 
19,960

Total assets
$
20,210,893

 
$
18,903,821

Liabilities and Stockholders’ Equity
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
7,455,107

 
$
6,386,911

Interest-bearing
8,843,740

 
8,697,708

Total deposits
16,298,847

 
15,084,619

Accrued interest payable
2,880

 
5,097

Other liabilities
163,040

 
153,433

Federal funds purchased and repurchase agreements
100,859

 
143,051

Other borrowings
1,604,000

 
1,500,000

Subordinated notes
280,773

 
280,682

Trust preferred subordinated debentures
113,406

 
113,406

Total liabilities
18,563,805

 
17,280,288

Stockholders’ equity:
 
 
 
Preferred stock, $.01 par value, $1,000 liquidation value:
 
 
 
Authorized shares – 10,000,000
 
 
 
Issued shares – 6,000,000 shares issued at March 31, 2016 and December 31, 2015
150,000

 
150,000

Common stock, $.01 par value:
 
 
 
Authorized shares – 100,000,000
 
 
 
Issued shares – 45,902,906 and 45,874,224 at March 31, 2016 and December 31, 2015, respectively
459

 
459

Additional paid-in capital
715,435

 
714,546

Retained earnings
780,508

 
757,818

Treasury stock (shares at cost: 417 at March 31, 2016 and December 31, 2015)
(8
)
 
(8
)
Accumulated other comprehensive income, net of taxes
694

 
718

Total stockholders’ equity
1,647,088

 
1,623,533

Total liabilities and stockholders’ equity
$
20,210,893

 
$
18,903,821

See accompanying notes to consolidated financial statements.

3



TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME – UNAUDITED
(In thousands except per share data)
 
Three months ended March 31,
 
2016
 
2015
Interest income
 
 
 
Interest and fees on loans
$
155,885

 
$
139,174

Securities
261

 
358

Federal funds sold and securities purchased under resale agreements
372

 
116

Deposits in other banks
3,285

 
1,260

Total interest income
159,803

 
140,908

Interest expense
 
 
 
Deposits
8,822

 
5,628

Federal funds purchased
126

 
68

Repurchase agreements
3

 
4

Other borrowings
1,162

 
390

Subordinated notes
4,191

 
4,191

Trust preferred subordinated debentures
716

 
618

Total interest expense
15,020

 
10,899

Net interest income
144,783

 
130,009

Provision for credit losses
30,000

 
11,000

Net interest income after provision for credit losses
114,783

 
119,009

Non-interest income
 
 
 
Service charges on deposit accounts
2,110

 
2,094

Trust fee income
813

 
1,200

Bank owned life insurance (BOLI) income
536

 
484

Brokered loan fees
4,645

 
4,232

Swap fees
307

 
1,986

Other
2,886

 
2,271

Total non-interest income
11,297

 
12,267

Non-interest expense
 
 
 
Salaries and employee benefits
51,372

 
45,828

Net occupancy expense
5,812

 
5,691

Marketing
3,908

 
4,218

Legal and professional
5,324

 
4,048

Communications and technology
6,217

 
5,078

FDIC insurance assessment
5,469

 
3,790

Allowance and other carrying costs for OREO
236

 
9

Other
8,482

 
7,855

Total non-interest expense
86,820

 
76,517

Income before income taxes
39,260

 
54,759

Income tax expense
14,132

 
19,709

Net income
25,128

 
35,050

Preferred stock dividends
2,438

 
2,438

Net income available to common stockholders
$
22,690

 
$
32,612

Other comprehensive income (loss)
 
 
 
Change in net unrealized gain on available-for-sale securities arising during period, before-tax
$
(38
)
 
$
(76
)
Income tax benefit related to net unrealized gain on available-for-sale securities
(14
)
 
(27
)
Other comprehensive loss, net of tax
(24
)
 
(49
)
Comprehensive income
$
25,104

 
$
35,001

 
 
 
 
Basic earnings per common share
$
0.49

 
$
0.71

Diluted earnings per common share
$
0.49

 
$
0.70

See accompanying notes to consolidated financial statements.

4

Table of Contents

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED
(In thousands except share data)
 
Preferred Stock
 
Common Stock
 
 
 
 
 
Treasury Stock
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Shares
 
Amount
 
Accumulated
Other
Comprehensive
Income (Loss),
Net of Taxes
 
Total
Balance at December 31, 2014
6,000,000

 
$
150,000

 
45,735,424

 
$
457

 
$
709,738

 
$
622,714

 
(417
)
 
$
(8
)
 
$
1,289

 
$
1,484,190

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 
35,050

 

 

 

 
35,050

Change in unrealized gain on available-for-sale securities, net of taxes of $27

 

 

 

 

 

 

 

 
(49
)
 
(49
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
35,001

Tax benefit related to exercise of stock-based awards

 

 

 

 
263

 

 

 

 

 
263

Stock-based compensation expense recognized in earnings

 

 

 

 
991

 

 

 

 

 
991

Issuance of preferred stock

 

 

 

 

 

 

 

 

 

Preferred stock dividend

 

 

 

 

 
(2,438
)
 

 

 

 
(2,438
)
Issuance of stock related to stock-based awards

 

 
37,238

 

 
(49
)
 

 

 

 

 
(49
)
Balance at March 31, 2015
6,000,000

 
$
150,000

 
45,772,662

 
$
457

 
$
710,943

 
$
655,326

 
(417
)
 
$
(8
)
 
$
1,240

 
$
1,517,958

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
6,000,000

 
$
150,000

 
45,874,224

 
$
459

 
$
714,546

 
$
757,818

 
(417
)
 
$
(8
)
 
$
718

 
$
1,623,533

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 
25,128

 

 

 

 
25,128

Change in unrealized gain on available-for-sale securities, net of taxes of $14

 

 

 

 

 

 

 

 
(24
)
 
(24
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
25,104

Tax benefit related to exercise of stock-based awards

 

 

 

 
40

 

 

 

 

 
40

Stock-based compensation expense recognized in earnings

 

 

 

 
1,132

 

 

 

 

 
1,132

Preferred stock dividend

 

 

 

 

 
(2,438
)
 

 

 

 
(2,438
)
Issuance of stock related to stock-based awards

 

 
28,682

 

 
(283
)
 

 

 

 

 
(283
)
Balance at March 31, 2016
6,000,000

 
$
150,000

 
45,902,906

 
$
459

 
$
715,435

 
$
780,508

 
(417
)
 
$
(8
)
 
$
694

 
$
1,647,088

See accompanying notes to consolidated financial statements.

5

Table of Contents

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS—UNAUDITED
(In thousands) 
 
Three months ended March 31,
 
2016
 
2015
Operating activities
 
 
 
Net income
$
25,128

 
$
35,050

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
30,000

 
11,000

Depreciation and amortization
5,124

 
4,060

Bank owned life insurance (BOLI) income
(536
)
 
(484
)
Stock-based compensation expense
459

 
2,357

Excess tax benefits from stock-based compensation arrangements
(109
)
 
(305
)
Purchases of loans held for sale
(365,645
)
 

Proceeds from sales and repayments of loans held for sale
357,018

 

Capitalization of mortgage servicing rights
(3,903
)
 

Loss on sale of assets
33

 

Changes in operating assets and liabilities:
 
 
 
Accrued interest receivable and other assets
(31,778
)
 
(25,890
)
Accrued interest payable and other liabilities
6,911

 
9,926

Net cash provided by operating activities
22,702

 
35,714

Investing activities
 
 
 
Purchases of available-for-sale securities
(391
)
 

Maturities and calls of available-for-sale securities
265

 
1,950

Principal payments received on available-for-sale securities
1,619

 
2,044

Originations of mortgage finance loans
(19,706,715
)
 
(21,276,920
)
Proceeds from pay-offs of mortgage finance loans
19,691,687

 
19,970,295

Net increase in loans held for investment, excluding mortgage finance loans
(338,969
)
 
(609,967
)
Purchase (disposal) of premises and equipment, net
(859
)
 
251

Proceeds from sale of foreclosed assets
62

 
1,065

Net cash used in investing activities
(353,301
)
 
(1,911,282
)
Financing activities
 
 
 
Net increase in deposits
1,214,228

 
1,449,006

Costs from issuance of stock related to stock-based awards and warrants
(283
)
 
(49
)
Net proceeds from issuance of common stock

 

Preferred dividends paid
(2,438
)
 
(2,438
)
Net increase (decrease) in other borrowings
104,000

 
(100,005
)
Excess tax benefits from stock-based compensation arrangements
109

 
305

Net increase (decrease) in Federal funds purchased and repurchase agreements
(42,192
)
 
32,782

Net proceeds from issuance of subordinated notes

 

Net cash provided by financing activities
1,273,424

 
1,379,601

Net increase (decrease) in cash and cash equivalents
942,825

 
(495,967
)
Cash and cash equivalents at beginning of period
1,790,870

 
1,330,514

Cash and cash equivalents at end of period
$
2,733,695

 
$
834,547

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
17,237

 
$
13,101

Cash paid during the period for income taxes
333

 
891

Transfers from loans/leases to OREO and other repossessed assets
17,398

 
1,092

See accompanying notes to consolidated financial statements.

6

Table of Contents

TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED
(1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
Texas Capital Bancshares, Inc. (the “Company”), a Delaware 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 and national clientele of commercial borrowers. We are primarily a secured lender, with our greatest concentration of loans in Texas.
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 have been prepared without audit. 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, 2015, included in our Annual Report on Form 10-K filed with the SEC on February 18, 2016 (the “2015 Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for loan losses, the fair value of stock-based compensation awards, the fair values of financial instruments and the status of contingencies are particularly susceptible to significant change in the near term.

7

Table of Contents


(2) EARNINGS PER COMMON SHARE

The following table presents the computation of basic and diluted earnings per share (in thousands except per share data):
 
 
Three months ended 
 March 31,
 
2016
 
2015
Numerator:
 
 
 
Net income
$
25,128

 
$
35,050

Preferred stock dividends
2,438

 
2,438

Net income available to common stockholders
$
22,690

 
32,612

Denominator:
 
 
 
Denominator for basic earnings per share— weighted average shares
45,888,735

 
45,758,655

Effect of employee stock-based awards(1)
117,372

 
210,736

Effect of warrants to purchase common stock
348,271

 
398,479

Denominator for dilutive earnings per share—adjusted weighted average shares and assumed conversions
46,354,378

 
46,367,870

Basic earnings per common share
$
0.49

 
$
0.71

Diluted earnings per common share
$
0.49

 
$
0.70

 
(1)
Stock options, SARs and RSUs outstanding of 308,972 at March 31, 2016 and 168,300 at March 31, 2015 have not been included in diluted earnings per share because to do so would have been anti-dilutive for the periods presented.
(3) SECURITIES
At March 31, 2016, our net unrealized gain on the available-for-sale securities portfolio was $1.1 million compared to $1.1 million at December 31, 2015. As a percent of outstanding balances, the unrealized gain was 3.90% and 3.83% at March 31, 2016, and December 31, 2015, respectively. The increase in the unrealized gain percentage at March 31, 2016 is related to the reduction in the portfolio balance due to paydowns and maturities.

8

Table of Contents

The following is a summary of available-for-sale securities (in thousands):
 
March 31, 2016

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair
Value
Available-for-sale securities:







Residential mortgage-backed securities
$
18,916


$
1,246

 
$

 
$
20,162

Municipals
564


2

 

 
566

Equity securities(1)
7,913


25

 
(205
)
 
7,733


$
27,393


$
1,273

 
$
(205
)
 
$
28,461

 
 
 
 
 
 
 
 
 
December 31, 2015
 
Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Estimated
Fair
Value
Available-for-sale securities:







Residential mortgage-backed securities
$
20,536

 
$
1,365

 
$

 
$
21,901

Municipals
828

 
3

 

 
831

Equity securities(1)
7,522

 
11

 
(273
)
 
7,260


$
28,886

 
$
1,379

 
$
(273
)
 
$
29,992

(1)
Equity securities consist of Community Reinvestment Act funds and investments related to our non-qualified deferred compensation plan.
The amortized cost and estimated fair value of available-for-sale securities are presented below by contractual maturity (in thousands, except percentage data): 
 
March 31, 2016

Less Than
One Year

After One
Through
Five Years

After Five
Through
Ten Years

After Ten
Years

Total
Available-for-sale:









Residential mortgage-backed securities:(1)









Amortized cost
$
203

 
$
3,855

 
$
3,986

 
$
10,872

 
$
18,916

Estimated fair value
205

 
4,003

 
4,462

 
11,492

 
20,162

Weighted average yield(3)
5.57
%
 
4.72
%
 
5.54
%
 
2.54
%
 
3.36
%
Municipals:(2)
 
 
 
 
 
 
 
 
 
Amortized cost
275

 
289

 

 

 
564

Estimated fair value
275

 
291

 

 

 
566

Weighted average yield(3)
5.61
%
 
5.76
%
 

 

 
5.69
%
Equity securities:(4)
 
 
 
 
 
 
 
 
 
Amortized cost
7,913

 

 

 

 
7,913

Estimated fair value
7,733

 

 

 

 
7,733

Total available-for-sale securities:
 
 
 
 
 
 
 
 
 
Amortized cost
 
 
 
 
 
 
 
 
$
27,393

Estimated fair value
 
 
 
 
 
 
 
 
$
28,461


9

Table of Contents

 
December 31, 2015

Less Than
One Year

After One
Through
Five Years

After Five
Through
Ten Years

After Ten
Years

Total
Available-for-sale:









Residential mortgage-backed securities:(1)









Amortized cost
$
214

 
$
4,655

 
$
4,265

 
$
11,402

 
$
20,536

Estimated fair value
217

 
4,837

 
4,747

 
12,100

 
21,901

Weighted average yield(3)
5.62
%
 
4.71
%
 
5.54
%
 
2.53
%
 
3.68
%
Municipals:(2)
 
 
 
 
 
 
 
 
 
Amortized cost
265

 
563

 

 

 
828

Estimated fair value
265

 
566

 

 

 
831

Weighted average yield(3)
5.46
%
 
5.69
%
 
%
 
%
 
5.62
%
Equity securities:(4)
 
 
 
 
 
 
 
 
 
Amortized cost
7,522

 

 

 

 
7,522

Estimated fair value
7,260

 

 

 

 
7,260

Total available-for-sale securities:
 
 
 
 
 
 
 
 
 
Amortized cost
 
 
 
 
 
 
 
 
$
28,886

Estimated fair value
 
 
 
 
 
 
 
 
$
29,992

(1)
Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
(2)
Yields have been adjusted to a tax equivalent basis assuming a 35% federal tax rate.
(3)
Yields are calculated based on amortized cost.
(4)
These equity securities do not have a stated maturity.
Securities with carrying values of approximately $18.8 million were pledged to secure certain borrowings and deposits at March 31, 2016. Of the pledged securities at March 31, 2016, approximately $5.8 million were pledged for certain deposits, and approximately $13.0 million were pledged for repurchase agreements.
The following table discloses, as of March 31, 2016 and December 31, 2015, our investment securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months (in thousands): 
March 31, 2016
Less Than 12 Months

12 Months or Longer

Total
 
Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss
Equity securities
$

 
$

 
$
6,295

 
$
(205
)
 
$
6,295

 
$
(205
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
Less Than 12 Months

12 Months or Longer

Total
 
Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss
Equity securities
$

 
$

 
$
6,227

 
$
(273
)
 
$
6,227

 
$
(273
)
At March 31, 2016, we owned one security with an unrealized loss position. This security is a publicly traded equity fund and is subject to market pricing volatility. We do not believe this unrealized loss is “other-than-temporary”. We have evaluated the near-term prospects of the investment in relation to the severity and duration of the impairment and based on that evaluation have the ability and intent to hold the investment until recovery of fair value.

10

Table of Contents

(4) LOANS HELD FOR INVESTMENT AND ALLOWANCE FOR LOAN LOSSES
At March 31, 2016 and December 31, 2015, loans held for investment were as follows (in thousands):
 
 
March 31,
2016
 
December 31,
2015
Commercial
$
6,889,799

 
$
6,672,631

Mortgage finance
4,981,304

 
4,966,276

Construction
1,958,370

 
1,851,717

Real estate
3,136,981

 
3,139,197

Consumer
26,439

 
25,323

Leases
104,460

 
113,996

Gross loans held for investment
17,097,353

 
16,769,140

Deferred income (net of direct origination costs)
(56,200
)
 
(57,190
)
Allowance for loan losses
(162,510
)
 
(141,111
)
Total loans held for investment
$
16,878,643

 
$
16,570,839

Commercial Loans and Leases. Our commercial loan portfolio is comprised of lines of credit for working capital and term loans and leases to finance equipment and other business assets. Our energy production loans are generally collateralized with proven reserves based on appropriate valuation standards and take into account the risk of oil and gas price volatility. Our commercial loans and leases are underwritten after carefully evaluating and understanding the borrower’s ability to operate profitably. Our underwriting standards are designed to promote relationship banking rather than to make loans on a transaction basis. Our lines of credit typically are limited to a percentage of the value of the assets securing the line. Lines of credit and term loans typically are reviewed annually, or more frequently, as needed, and are supported by accounts receivable, inventory, equipment and other assets of our clients’ businesses.
Mortgage Finance Loans. Our mortgage finance loans consist of ownership interests purchased in single-family residential mortgages funded through our mortgage finance group. These loans are typically held on our balance sheet for 10 to 20 days. We have agreements with mortgage lenders and purchase interests in individual loans they originate. All loans are underwritten consistent with established programs for permanent financing with financially sound investors. Substantially all loans are conforming loans. March 31, 2016 and December 31, 2015 balances are stated net of $515.4 million and $454.8 million participations sold, respectively.
Construction Loans. Our construction loan portfolio consists primarily of single- and multi-family residential properties and commercial projects used in manufacturing, warehousing, service or retail businesses. Our construction loans generally have terms of one to three years. We typically make construction loans to developers, builders and contractors that have an established record of successful project completion and loan repayment and have a substantial equity investment in the borrowers. Loan amounts are derived primarily from the Bank's evaluation of expected cash flows available to service debt from stabilized projects under hypothetically stressed conditions. Construction loans are also based in part upon estimates of costs and value associated with the completed project. Sources of repayment for these types of loans may be pre-committed permanent loans from other lenders, sales of developed property, or an interim loan commitment from us until permanent financing is obtained. The nature of these loans makes ultimate repayment sensitive to overall economic conditions. Borrowers may not be able to correct conditions of default in loans, increasing risk of exposure to classification, non-performing status, reserve allocation and actual credit loss and foreclosure. These loans typically have floating rates and commitment fees.
Real Estate Loans. A portion of our real estate loan portfolio is comprised of loans secured by properties other than market risk or investment-type real estate. Market risk loans are real estate loans where the primary source of repayment is expected to come from the sale, permanent financing or lease of the real property collateral. We generally provide temporary financing for commercial and residential property. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Our real estate loans generally have maximum terms of five to seven years, and we provide loans with both floating and fixed rates. We generally avoid long-term loans for commercial real estate held for investment. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. Appraised values may be highly variable due to market conditions and the impact of the inability of potential purchasers and lessees to obtain financing and a lack of transactions at comparable values.

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At March 31, 2016 and December 31, 2015, we had a blanket floating lien on certain real estate-secured loans, mortgage finance loans and certain securities used as collateral for Federal Home Loan Bank (“FHLB”) borrowings.
Summary of Loan Loss Experience
The allowance for loan losses is comprised of specific reserves for impaired loans and an estimate of losses inherent in the portfolio at the balance sheet date, but not yet identified with specified loans. We consider the allowance at March 31, 2016 to be appropriate, given management's assessment of potential losses inherent in the portfolio as of the evaluation date, the significant growth in the loan and lease portfolio, current economic conditions in our market areas and other factors.
The following tables summarize the credit risk profile of our loan portfolio by internally assigned grades and non-accrual status as of March 31, 2016 and December 31, 2015 (in thousands):

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Table of Contents

March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Mortgage
Finance
 
Construction
 
Real Estate
 
Consumer
 
Leases
 
Total
Grade:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
6,527,449

 
$
4,981,304

 
$
1,938,758

 
$
3,086,536

 
$
26,135

 
$
99,275

 
$
16,659,457

Special mention
82,333

 

 
8,047

 
36,281

 
1

 
251

 
126,913

Substandard-accruing
113,920

 

 
11,565

 
7,448

 
303

 
4,591

 
137,827

Non-accrual
166,097

 

 

 
6,716

 

 
343

 
173,156

Total loans held for investment
$
6,889,799

 
$
4,981,304

 
$
1,958,370

 
$
3,136,981

 
$
26,439

 
$
104,460

 
$
17,097,353

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Mortgage
Finance
 
Construction
 
Real Estate
 
Consumer
 
Leases
 
Total
Grade:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
6,375,332

 
$
4,966,276

 
$
1,821,678

 
$
3,085,463

 
$
25,093

 
$
103,560

 
$
16,377,402

Special mention
111,911

 

 
13,090

 
30,585

 
3

 
334

 
155,923

Substandard-accruing
46,731

 

 
281

 
3,837

 
227

 
4,951

 
56,027

Non-accrual
138,657

 

 
16,668

 
19,312

 

 
5,151

 
179,788

Total loans held for investment
$
6,672,631

 
$
4,966,276

 
$
1,851,717

 
$
3,139,197

 
$
25,323

 
$
113,996

 
$
16,769,140



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Table of Contents

The following table details activity in the reserve for loan losses by portfolio segment for the three months ended March 31, 2016 and March 31, 2015. Allocation of a portion of the reserve to one category of loans does not preclude its availability to absorb losses in other categories.
March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Commercial
 
Mortgage
Finance
 
Construction
 
Real
Estate
 
Consumer
 
Leases
 
Additional Qualitative Reserve
 
Total
Beginning balance
$
112,446

 
$

 
$
6,836

 
$
13,381

 
$
338

 
$
3,931

 
$
4,179

 
$
141,111

Provision for loan losses
26,581

 

 
1,050

 
1,134

 
(15
)
 
(2,435
)
 
2,480

 
28,795

Charge-offs
8,496

 

 

 

 

 

 

 
8,496

Recoveries
1,040

 

 

 
8

 
7

 
45

 

 
1,100

Net charge-offs (recoveries)
7,456

 

 

 
(8
)
 
(7
)
 
(45
)
 

 
7,396

Ending balance
$
131,571

 
$

 
$
7,886

 
$
14,523

 
$
330

 
$
1,541

 
$
6,659

 
$
162,510

Period end amount allocated to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
31,415

 
$

 
$

 
$
1,183

 
$

 
$
51

 
$

 
$
32,649

Loans collectively evaluated for impairment
100,156

 

 
7,886

 
13,340

 
330

 
1,490

 
6,659

 
129,861

Ending balance
$
131,571

 
$

 
$
7,886

 
$
14,523

 
$
330

 
$
1,541

 
$
6,659

 
$
162,510

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Commercial
 
Mortgage
Finance
 
Construction
 
Real
Estate
 
Consumer
 
Leases
 
Additional Qualitative Reserve
 
Total
Beginning balance
$
70,654

 
$

 
$
7,935

 
$
15,582

 
$
240

 
$
1,141

 
$
5,402

 
$
100,954

Provision for loan losses
23,375

 

 
(3,472
)
 
(5,601
)
 
149

 
(138
)
 
(4,068
)
 
10,245

Charge-offs
3,102

 

 

 
346

 
62

 

 

 
3,510

Recoveries
286

 

 
83

 
8

 
4

 
8

 

 
389

Net charge-offs (recoveries)
2,816

 

 
(83
)
 
338

 
58

 
(8
)
 

 
3,121

Ending balance
$
91,213

 
$

 
$
4,546

 
$
9,643

 
$
331

 
$
1,011

 
$
1,334

 
$
108,078

Period end amount allocated to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
10,958

 
$

 
$

 
$
248

 
$

 
$
26

 
$

 
$
11,232

Loans collectively evaluated for impairment
80,255

 

 
4,546

 
9,395

 
331

 
985

 
1,334

 
96,846

Ending balance
$
91,213

 
$

 
$
4,546

 
$
9,643

 
$
331

 
$
1,011

 
$
1,334

 
$
108,078

We have traditionally maintained an additional qualitative reserve component to compensate for the uncertainty and complexity in estimating loan and lease losses including factors and conditions that may not be fully reflected in the determination and application of the allowance allocation percentages. We believe the level of additional qualitative reserves at March 31, 2016 is warranted due to the continued uncertain economic environment which has produced losses, including those resulting from borrowers' misstatement of financial information or inaccurate certification of collateral values. Such losses are not necessarily correlated with historical loss trends or general economic conditions. Our methodology used to calculate the allowance considers historical losses; however, the historical loss rates for specific product types or credit risk grades may not fully incorporate the effects of continued weakness in the economy and continued volatility in the energy sector.


14

Table of Contents

Our recorded investment in loans as of March 31, 2016December 31, 2015 and March 31, 2015 related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the basis of our impairment methodology was as follows (in thousands):
March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Mortgage
Finance
 
Construction
 
Real Estate
 
Consumer
 
Leases
 
Total
Loans individually evaluated for impairment
$
167,832

 
$

 
$

 
$
8,397

 
$

 
$
343

 
$
176,572

Loans collectively evaluated for impairment
6,721,967

 
4,981,304

 
1,958,370

 
3,128,584

 
26,439

 
104,117

 
16,920,781

Total
$
6,889,799

 
$
4,981,304

 
$
1,958,370

 
$
3,136,981

 
$
26,439

 
$
104,460

 
$
17,097,353

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Mortgage
Finance
 
Construction
 
Real Estate
 
Consumer
 
Leases
 
Total
Loans individually evaluated for impairment
$
140,479

 
$

 
$
16,668

 
$
21,042

 
$

 
$
5,151

 
$
183,340

Loans collectively evaluated for impairment
6,532,152

 
4,966,276

 
1,835,049

 
3,118,155

 
25,323

 
108,845

 
16,585,800

Total
$
6,672,631

 
$
4,966,276

 
$
1,851,717

 
$
3,139,197

 
$
25,323

 
$
113,996

 
$
16,769,140

 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Mortgage
Finance
 
Construction
 
Real Estate
 
Consumer
 
Leases
 
Total
Loans individually evaluated for impairment
$
61,233

 
$

 
$

 
$
11,910

 
$

 
$
172

 
$
73,315

Loans collectively evaluated for impairment
6,127,725

 
5,408,750

 
1,559,545

 
2,945,876

 
17,868

 
92,879

 
16,152,643

Total
$
6,188,958

 
$
5,408,750

 
$
1,559,545

 
$
2,957,786

 
$
17,868

 
$
93,051

 
$
16,225,958


Generally we place loans on non-accrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining unpaid principal amount of the loan is deemed to be fully collectible. If collectability is questionable, then cash payments are applied to principal. As of March 31, 2016, $824,000 of our non-accrual loans were earning on a cash basis compared to $884,000 at December 31, 2015. A loan is placed back on accrual status when both principal and interest are current and it is probable that we will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.

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Table of Contents

A loan held for investment is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due (both principal and interest) according to the terms of the loan agreement. In accordance with ASC 310 Receivables ("ASC 310"), we have also included all restructured loans in our impaired loan totals. The following tables detail our impaired loans, by portfolio class, as of March 31, 2016 and December 31, 2015 (in thousands):
March 31, 2016
 
 
 
 
 
 
 
 
 
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
Business loans
$
6,494

 
$
8,927

 
$

 
$
9,563

 
$

Energy
41,230

 
41,230

 

 
39,055

 

Construction
 
 
 
 
 
 
 
 
 
Market risk

 

 

 
11,112

 

Real estate
 
 
 
 
 
 
 
 
 
Market risk

 

 

 

 

Commercial
2,825

 
2,825

 

 
11,177

 
8

Secured by 1-4 family

 

 

 

 

Consumer

 

 

 

 

Leases

 

 

 
1,611

 

Total impaired loans with no allowance recorded
$
50,549

 
$
52,982

 
$

 
$
72,518

 
$
8

With an allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
Business loans
$
20,047

 
$
26,803

 
$
3,774

 
$
20,671

 
$

Energy
100,061

 
105,927

 
27,641

 
80,308

 
7

Construction
 
 
 
 
 
 
 
 
 
Market risk

 

 

 

 

Real estate
 
 
 
 
 
 
 
 
 
Market risk
5,225

 
5,225

 
1,061

 
5,298

 

Commercial

 

 

 

 

Secured by 1-4 family
347

 
347

 
122

 
352

 

Consumer

 

 

 

 

Leases
343

 
343

 
51

 
1,937

 

Total impaired loans with an allowance recorded
$
126,023

 
$
138,645

 
$
32,649

 
$
108,566

 
$
7

Combined:
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
Business loans
$
26,541

 
$
35,730

 
$
3,774

 
$
30,234

 
$

Energy
141,291

 
147,157

 
27,641

 
119,363

 
7

Construction
 
 
 
 
 
 
 
 
 
Market risk

 

 

 
11,112

 

Real estate
 
 
 
 
 
 
 
 
 
Market risk
5,225

 
5,225

 
1,061

 
5,298

 

Commercial
2,825

 
2,825

 

 
11,177

 
8

Secured by 1-4 family
347

 
347

 
122

 
352

 

Consumer

 

 

 

 

Leases
343

 
343

 
51

 
3,548

 

Total impaired loans
$
176,572

 
$
191,627

 
$
32,649

 
$
181,084

 
$
15


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December 31, 2015