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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 June 30, 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.

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 July 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 45,956,858

Table of Contents

Texas Capital Bancshares, Inc.

Form 10-Q

Quarter Ended June 30, 2016

Index



Part I. Financial Information

Item 1.	Financial Statements
	Consolidated Balance Sheets—Unaudited	3
	Consolidated Statements of Income and Other Comprehensive Income—Unaudited	4
	Consolidated Statements of Stockholders’ Equity—Unaudited	5
	Consolidated Statements of Cash Flows—Unaudited	6
	Notes to Consolidated Financial Statements—Unaudited	7
	Financial Summaries—Unaudited	29
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	45

Item 4.	Controls and Procedures	48

Part II. Other Information

Item 1.	Legal Proceedings	48

Item 1A.	Risk Factors	48

Item 6.	Exhibits	49
Signatures		50

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands except share data)



	June 30, 2016			December 31, 2015
	(Unaudited)
Assets
Cash and due from banks	$	98,807		$	109,496
Interest-bearing deposits	2,594,170			1,626,374
Federal funds sold and securities purchased under resale agreements	30,000			55,000
Securities, available-for-sale	27,372			29,992
Loans held for sale, at fair value	221,347			86,075
Loans held for investment, mortgage finance	5,260,027			4,966,276
Loans held for investment (net of unearned income)	12,502,513			11,745,674
Less: Allowance for loan losses	167,397			141,111
Loans held for investment, net	17,595,143			16,570,839
Mortgage servicing rights, net	8,543			423
Premises and equipment, net	21,766			23,561
Accrued interest receivable and other assets	464,098			382,101
Goodwill and intangible assets, net	19,748			19,960
Total assets	$	21,080,994		$	18,903,821
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest-bearing	$	7,984,208		$	6,386,911
Interest-bearing	8,719,357			8,697,708
Total deposits	16,703,565			15,084,619
Accrued interest payable	5,339			5,097
Other liabilities	177,641			153,433
Federal funds purchased and repurchase agreements	95,982			143,051
Other borrowings	2,019,463			1,500,000
Subordinated notes	280,863			280,682
Trust preferred subordinated debentures	113,406			113,406
Total liabilities	19,396,259			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 June 30, 2016 and December 31, 2015	150,000			150,000
Common stock, $.01 par value:
Authorized shares – 100,000,000
Issued shares – 45,953,328 and 45,874,224 at June 30, 2016 and December 31, 2015, respectively	460			459
Additional paid-in capital	716,652			714,546
Retained earnings	816,951			757,818
Treasury stock (shares at cost: 417 at June 30, 2016 and December 31, 2015)	(8		)	(8		)
Accumulated other comprehensive income, net of taxes	680			718
Total stockholders’ equity	1,684,735			1,623,533
Total liabilities and stockholders’ equity	$	21,080,994		$	18,903,821

See accompanying notes to consolidated financial statements.

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME – UNAUDITED

(In thousands except per share data)



	Three months ended June 30,						Six months ended June 30,
	2016			2015			2016			2015
Interest income
Interest and fees on loans	$	168,064		$	151,606		$	323,949		$	290,780
Securities	246			323			507			681
Federal funds sold and securities purchased under resale agreements	382			118			754			234
Deposits in other banks	3,750			1,327			7,035			2,587
Total interest income	172,442			153,374			332,245			294,282
Interest expense
Deposits	8,971			5,642			17,793			11,270
Federal funds purchased	110			93			236			161
Repurchase agreements	2			4			5			8
Other borrowings	1,365			528			2,527			918
Subordinated notes	4,191			4,191			8,382			8,382
Trust preferred subordinated debentures	734			631			1,450			1,249
Total interest expense	15,373			11,089			30,393			21,988
Net interest income	157,069			142,285			301,852			272,294
Provision for credit losses	16,000			14,500			46,000			25,500
Net interest income after provision for credit losses	141,069			127,785			255,852			246,794
Non-interest income
Service charges on deposit accounts	2,411			2,149			4,521			4,243
Trust fee income	1,098			1,287			1,911			2,487
Bank owned life insurance (BOLI) income	536			476			1,072			960
Brokered loan fees	5,864			5,277			10,509			9,509
Swap fees	1,105			1,035			1,412			3,021
Other	2,918			2,547			5,804			4,818
Total non-interest income	13,932			12,771			25,229			25,038
Non-interest expense
Salaries and employee benefits	54,810			48,200			106,182			94,028
Net occupancy expense	5,838			5,808			11,650			11,499
Marketing	4,486			3,925			8,394			8,143
Legal and professional	6,226			5,618			11,550			9,666
Communications and technology	6,391			5,647			12,608			10,725
FDIC insurance assessment	6,043			4,211			11,512			8,001
Allowance and other carrying costs for OREO	260			6			496			15
Other	10,201			7,861			18,683			15,716
Total non-interest expense	94,255			81,276			181,075			157,793
Income before income taxes	60,746			59,280			100,006			114,039
Income tax expense	21,866			21,343			35,998			41,052
Net income	38,880			37,937			64,008			72,987
Preferred stock dividends	2,437			2,437			4,875			4,875
Net income available to common stockholders	$	36,443		$	35,500		$	59,133		$	68,112
Other comprehensive income (loss)
Change in net unrealized gain on available-for-sale securities arising during period, before-tax	$	(22	)	$	(321	)	$	(58	)	$	(397	)
Income tax benefit related to net unrealized gain on available-for-sale securities	(8		)	(112		)	(20		)	(139		)
Other comprehensive loss, net of tax	(14		)	(209		)	(38		)	(258		)
Comprehensive income	$	38,866		$	37,728		$	63,970		$	72,729

Basic earnings per common share	$	0.79		$	0.78		$	1.29		$	1.49
Diluted earnings per common share	$	0.78		$	0.76		$	1.27		$	1.47

See accompanying notes to consolidated financial statements.

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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	—	—		—	—		—			72,987			—		—			—			72,987
Change in unrealized gain on available-for-sale securities, net of taxes of $139	—	—		—	—		—			—			—		—			(258		)	(258		)
Total comprehensive income																					72,729
Tax benefit related to exercise of stock-based awards	—	—		—	—		736			—			—		—			—			736
Stock-based compensation expense recognized in earnings	—	—		—	—		2,103			—			—		—			—			2,103
Issuance of preferred stock	—	—		—	—		—			—			—		—			—			—
Preferred stock dividend	—	—		—	—		—			(4,875		)	—		—			—			(4,875		)
Issuance of stock related to stock-based awards	—	—		77,964	1		(355		)	—			—		—			—			(354		)
Balance at June 30, 2015	6,000,000	$	150,000	45,813,388	$	458	$	712,222		$	690,826		(417	)	$	(8	)	$	1,031		$	1,554,529

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	—	—		—	—		—			64,008			—		—			—			64,008
Change in unrealized gain on available-for-sale securities, net of taxes of $20	—	—		—	—		—			—			—		—			(38		)	(38		)
Total comprehensive income																					63,970
Tax benefit related to exercise of stock-based awards	—	—		—	—		450			—			—		—			—			450
Stock-based compensation expense recognized in earnings	—	—		—	—		2,243			—			—		—			—			2,243
Preferred stock dividend	—	—		—	—		—			(4,875		)	—		—			—			(4,875		)
Issuance of stock related to stock-based awards	—	—		79,104	1		(587		)	—			—		—			—			(586		)
Balance at June 30, 2016	6,000,000	$	150,000	45,953,328	$	460	$	716,652		$	816,951		(417	)	$	(8	)	$	680		$	1,684,735

See accompanying notes to consolidated financial statements.

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TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS—UNAUDITED

(In thousands)



	Six months ended June 30,
	2016			2015
Operating activities
Net income	$	64,008		$	72,987
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	46,000			25,500
Depreciation and amortization	10,446			8,289
Addition to valuation allowance on mortgage servicing rights	414			—
Bank owned life insurance (BOLI) income	(1,072		)	(960		)
Stock-based compensation expense	3,725			6,641
Excess tax benefits from stock-based compensation arrangements	(553		)	(779		)
Purchases of loans held for sale	(876,516		)
Proceeds from sales and repayments of loans held for sale	743,769
Capitalization of mortgage servicing rights	(8,805		)
Loss on sale of assets	12			24
Changes in operating assets and liabilities:
Accrued interest receivable and other assets	(71,805		)	(50,485		)
Accrued interest payable and other liabilities	23,094			12,090
Net cash provided by (used in) operating activities	(67,283		)	73,307
Investing activities
Purchases of available-for-sale securities	(783		)	—
Maturities and calls of available-for-sale securities	265			1,950
Principal payments received on available-for-sale securities	3,080			4,011
Originations of mortgage finance loans	(45,811,787		)	(45,359,254		)
Proceeds from pay-offs of mortgage finance loans	45,518,036			44,554,964
Net increase in loans held for investment, excluding mortgage finance loans	(794,749		)	(976,122		)
Purchase of premises and equipment, net	(1,166		)	(2,635		)
Proceeds from sale of foreclosed assets	62			1,164
Net cash used in investing activities	(1,087,042		)	(1,775,922		)
Financing activities
Net increase in deposits	1,618,946			1,514,976
Costs from issuance of stock related to stock-based awards and warrants	(586		)	(354		)
Preferred dividends paid	(4,875		)	(4,875		)
Net increase in other borrowings	519,463			299,995
Excess tax benefits from stock-based compensation arrangements	553			779
Net increase (decrease) in Federal funds purchased and repurchase agreements	(47,069		)	16,331
Net cash provided by financing activities	2,086,432			1,826,852
Net increase in cash and cash equivalents	932,107			124,237
Cash and cash equivalents at beginning of period	1,790,870			1,330,514
Cash and cash equivalents at end of period	$	2,722,977		$	1,454,751
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	30,151		$	21,830
Cash paid during the period for income taxes	43,309			42,934
Transfers from loans/leases to OREO and other repossessed assets	18,540			1,177

See accompanying notes to consolidated financial statements.

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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 certain assets and liabilities and the status of contingencies are particularly susceptible to significant change in the near term.

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(2) EARNINGS PER COMMON SHARE

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



	Three months ended June 30,				Six months ended June 30,
	2016		2015		2016		2015
Numerator:
Net income	$	38,880	$	37,937	$	64,008	$	72,987
Preferred stock dividends	2,437		2,437		4,875		4,875
Net income available to common stockholders	36,443		35,500		$	59,133	68,112
Denominator:
Denominator for basic earnings per share— weighted average shares	45,924,281		45,790,093		45,906,508		45,774,461
Effect of employee stock-based awards(1)	124,974		229,378		121,524		219,448
Effect of warrants to purchase common stock	388,877		423,942		368,574		411,281
Denominator for dilutive earnings per share—adjusted weighted average shares and assumed conversions	46,438,132		46,443,413		46,396,606		46,405,190
Basic earnings per common share	$	0.79	$	0.78	$	1.29	$	1.49
Diluted earnings per common share	$	0.78	$	0.76	$	1.27	$	1.47


(1)	Stock options, SARs and RSUs outstanding of 252,754 at June 30, 2016 and 173,382 at June 30, 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 June 30, 2016, our net unrealized gain on the available-for-sale securities portfolio was $1.0 million compared to $1.1 million at December 31, 2015. As a percent of outstanding balances, the unrealized gain was 3.98% and 3.83% at June 30, 2016, and December 31, 2015, respectively. The increase in the unrealized gain percentage at June 30, 2016 results from the reduction in the portfolio balance due to paydowns and maturities.

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



	June 30, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-sale securities:
Residential mortgage-backed securities	$	17,456	$	1,177	$	—		$	18,633
Municipals	564		2		—			566
Equity securities(1)	8,304		60		(191		)	8,173
	$	26,324	$	1,239	$	(191	)	$	27,372

	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):



	June 30, 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	$	132		$	3,196		$	3,696		$	10,432		$	17,456
Estimated fair value	133			3,303			4,147			11,050			18,633
Weighted average yield(3)	5.54		%	4.70		%	5.54		%	2.69		%	3.68		%
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	8,304			—			—			—			8,304
Estimated fair value	8,173			—			—			—			8,173
Total available-for-sale securities:
Amortized cost													$	26,324
Estimated fair value													$	27,372

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	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 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 $15.8 million were pledged to secure certain borrowings and deposits at June 30, 2016. Of the pledged securities at June 30, 2016, approximately $3.8 million were pledged for certain deposits, and approximately $12.0 million were pledged for repurchase agreements.

The following table discloses, as of June 30, 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):



June 30, 2016	Less Than 12 Months				12 Months or Longer					Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Equity securities	$	—	$	—	$	6,309	$	(191	)	$	6,309	$	(191	)

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 June 30, 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.

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(4) LOANS HELD FOR INVESTMENT AND ALLOWANCE FOR LOAN LOSSES

At June 30, 2016 and December 31, 2015, loans held for investment were as follows (in thousands):



	June 30, 2016			December 31, 2015
Commercial	$	7,178,364		$	6,672,631
Mortgage finance	5,260,027			4,966,276
Construction	2,023,725			1,851,717
Real estate	3,228,853			3,139,197
Consumer	26,283			25,323
Leases	103,565			113,996
Gross loans held for investment	17,820,817			16,769,140
Deferred income (net of direct origination costs)	(58,277		)	(57,190		)
Allowance for loan losses	(167,397		)	(141,111		)
Total loans held for investment	$	17,595,143		$	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. June 30, 2016 and December 31, 2015 balances are stated net of $844.2 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 June 30, 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 additional qualitative reserve based on our estimate of losses inherent in the portfolio at the balance sheet date, but not yet identified with specified loans. We consider the allowance at June 30, 2016 to be appropriate, given management's assessment of 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 June 30, 2016 and December 31, 2015 (in thousands):

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June 30, 2016
	Commercial		Mortgage Finance		Construction		Real Estate		Consumer		Leases		Total
Grade:
Pass	$	6,775,659	$	5,260,027	$	2,010,421	$	3,182,419	$	26,018	$	99,169	$	17,353,713
Special mention	87,456		—		1,525		35,056		—		—		124,037
Substandard-accruing	152,624		—		11,779		8,574		265		4,396		177,638
Non-accrual	162,625		—		—		2,804		—		—		165,429
Total loans held for investment	$	7,178,364	$	5,260,027	$	2,023,725	$	3,228,853	$	26,283	$	103,565	$	17,820,817

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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The following table details activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2016 and June 30, 2015. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.



June 30, 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	44,324		—		758			1,423			(28		)	(2,531		)	1,710			45,656
Charge-offs	24,287		—		—			528			—			—			—			24,815
Recoveries	5,334		—		34			21			11			45			—			5,445
Net charge-offs (recoveries)	18,953		—		(34		)	507			(11		)	(45		)	—			19,370
Ending balance	$	137,817	$	—	$	7,628		$	14,297		$	321		$	1,445		$	5,889		$	167,397
Period end amount allocated to:
Loans individually evaluated for impairment	$	30,775	$	—	$	—		$	196		$	—		$	—		$	—		$	30,971
Loans collectively evaluated for impairment	107,042		—		7,628			14,101			321			1,445			5,889			136,426
Ending balance	$	137,817	$	—	$	7,628		$	14,297		$	321		$	1,445		$	5,889		$	167,397

June 30, 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	37,666		—		(4,066		)	(6,509		)	144			(831		)	(1,778		)	24,626
Charge-offs	8,520		—		—			346			62			—			—			8,928
Recoveries	1,710		—		355			20			10			23			—			2,118
Net charge-offs (recoveries)	6,810		—		(355		)	326			52			(23		)	—			6,810
Ending balance	$	101,510	$	—	$	4,224		$	8,747		$	332		$	333		$	3,624		$	118,770
Period end amount allocated to:
Loans individually evaluated for impairment	$	13,717	$	—	$	—		$	337		$	—		$	1		$	—		$	14,055
Loans collectively evaluated for impairment	87,793		—		4,224			8,410			332			332			3,624			104,715
Ending balance	$	101,510	$	—	$	4,224		$	8,747		$	332		$	333		$	3,624		$	118,770

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 reserve at June 30, 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.

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Our recorded investment in loans as of June 30, 2016, December 31, 2015 and June 30, 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):



June 30, 2016
	Commercial		Mortgage Finance		Construction		Real Estate		Consumer		Leases		Total
Loans individually evaluated for impairment	$	164,339	$	—	$	—	$	4,210	$	—	$	—	$	168,549
Loans collectively evaluated for impairment	7,014,025		5,260,027		2,023,725		3,224,643		26,283		103,565		17,652,268
Total	$	7,178,364	$	5,260,027	$	2,023,725	$	3,228,853	$	26,283	$	103,565	$	17,820,817

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

June 30, 2015
	Commercial		Mortgage Finance		Construction		Real Estate		Consumer		Leases		Total
Loans individually evaluated for impairment	$	93,944	$	—	$	16,749	$	10,565	$	—	$	6,437	$	127,695
Loans collectively evaluated for impairment	6,294,763		4,906,415		1,820,783		2,823,440		23,789		90,588		15,959,778
Total	$	6,388,707	$	4,906,415	$	1,837,532	$	2,834,005	$	23,789	$	97,025	$	16,087,473

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 June 30, 2016, $820,000 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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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 June 30, 2016 and December 31, 2015 (in thousands):



June 30, 2016
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial
Business loans	$	11,979	$	14,228	$	—	$	8,943	$	—
Energy	72,834		81,014		—		45,410		—
Construction
Market risk	—		—		—		5,556		—
Real estate
Market risk	—		—		—		—		—
Commercial	2,091		2,091		—		6,879		18
Secured by 1-4 family	—		—		—		—		—
Consumer	—		—		—		—		—
Leases	—		—		—		806		—
Total impaired loans with no allowance recorded	$	86,904	$	97,333	$	—	$	67,594	$	18
With an allowance recorded:
Commercial