Edgar Filing: TEXAS CAPITAL BANCSHARES INC/TX

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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 March 31, 2017



¨	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.

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 19, 2017, 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 49,564,933

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Texas Capital Bancshares, Inc.

Form 10-Q

Quarter Ended March 31, 2017

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	30
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44

Item 4.	Controls and Procedures	47

Part II. Other Information

Item 1.	Legal Proceedings	47

Item 1A.	Risk Factors	47

Item 6.	Exhibits	48
Signatures		49

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands except share data)



	March 31, 2017			December 31, 2016
	(Unaudited)
Assets
Cash and due from banks	$	116,013		$	113,707
Interest-bearing deposits	2,779,921			2,700,645
Federal funds sold and securities purchased under resale agreements	25,000			25,000
Securities, available-for-sale	42,203			24,874
Loans held for sale, at fair value	884,647			968,929
Loans held for investment, mortgage finance	3,371,598			4,497,338
Loans held for investment (net of unearned income)	13,298,918			13,001,011
Less: Allowance for loan losses	172,013			168,126
Loans held for investment, net	16,498,503			17,330,223
Mortgage servicing rights, net	45,526			28,536
Premises and equipment, net	20,831			19,775
Accrued interest receivable and other assets	432,835			465,933
Goodwill and intangible assets, net	19,395			19,512
Total assets	$	20,864,874		$	21,697,134
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest-bearing	$	7,094,696		$	7,994,201
Interest-bearing	9,510,684			9,022,630
Total deposits	16,605,380			17,016,831
Accrued interest payable	3,293			5,498
Other liabilities	169,385			161,223
Federal funds purchased and repurchase agreements	141,834			109,575
Other borrowings	1,500,000			2,000,000
Subordinated notes, net	281,134			281,044
Trust preferred subordinated debentures	113,406			113,406
Total liabilities	18,814,432			19,687,577
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, 2017 and December 31, 2016	150,000			150,000
Common stock, $.01 par value:
Authorized shares – 100,000,000
Issued shares – 49,560,517 and 49,504,079 at March 31, 2017 and December 31, 2016, respectively	496			495
Additional paid-in capital	956,246			955,468
Retained earnings	943,291			903,187
Treasury stock (shares at cost: 417 at March 31, 2017 and December 31, 2016)	(8		)	(8		)
Accumulated other comprehensive income, net of taxes	417			415
Total stockholders’ equity	2,050,442			2,009,557
Total liabilities and stockholders’ equity	$	20,864,874		$	21,697,134

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 March 31,
	2017		2016
Interest income
Interest and fees on loans	$	176,624	$	155,885
Securities	225		261
Federal funds sold and securities purchased under resale agreements	530		372
Deposits in other banks	6,567		3,285
Total interest income	183,946		159,803
Interest expense
Deposits	13,293		8,822
Federal funds purchased	252		126
Repurchase agreements	1		3
Other borrowings	2,020		1,162
Subordinated notes	4,191		4,191
Trust preferred subordinated debentures	830		716
Total interest expense	20,587		15,020
Net interest income	163,359		144,783
Provision for credit losses	9,000		30,000
Net interest income after provision for credit losses	154,359		114,783
Non-interest income
Service charges on deposit accounts	3,045		2,110
Wealth management and trust fee income	1,357		813
Bank owned life insurance (BOLI) income	466		536
Brokered loan fees	5,678		4,645
Servicing income	2,201		(55		)
Swap fees	1,803		307
Other	2,560		2,941
Total non-interest income	17,110		11,297
Non-interest expense
Salaries and employee benefits	63,003		51,372
Net occupancy expense	6,111		5,812
Marketing	4,950		3,908
Legal and professional	7,453		5,324
Communications and technology	6,506		6,217
FDIC insurance assessment	5,994		5,469
Servicing related expenses	1,750		73
Other	10,327		8,645
Total non-interest expense	106,094		86,820
Income before income taxes	65,375		39,260
Income tax expense	22,833		14,132
Net income	42,542		25,128
Preferred stock dividends	2,438		2,438
Net income available to common stockholders	$	40,104	$	22,690
Other comprehensive income (loss)
Change in net unrealized gain on available-for-sale securities arising during period, before-tax	$	3	$	(38	)
Income tax expense/(benefit) related to net unrealized gain on available-for-sale securities	1		(14		)
Other comprehensive income/(loss), net of tax	2		(24		)
Comprehensive income	$	42,544	$	25,104

Basic earnings per common share	$	0.81	$	0.49
Diluted earnings per common share	$	0.80	$	0.49

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, 2015 (audited)	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

Balance at December 31, 2016 (audited)	6,000,000	$	150,000	49,504,079	$	495	$	955,468		$	903,187		(417	)	$	(8	)	$	415		$	2,009,557
Comprehensive income:
Net income	—	—		—	—		—			42,542			—		—			—			42,542
Change in unrealized gain on available-for-sale securities, net of taxes of $1	—	—		—	—		—			—			—		—			2			2
Total comprehensive income																					42,544
Stock-based compensation expense recognized in earnings	—	—		—	—		1,669			—			—		—			—			1,669
Preferred stock dividend	—	—		—	—		—			(2,438		)	—		—			—			(2,438		)
Issuance of stock related to stock-based awards	—	—		22,843	1		(891		)	—			—		—			—			(890		)
Issuance of common stock related to warrants	—	—		33,595	—		—			—			—		—			—			—
Balance at March 31, 2017	6,000,000	$	150,000	49,560,517	$	496	$	956,246		$	943,291		(417	)	$	(8	)	$	417		$	2,050,442

See accompanying notes to consolidated financial statements.

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TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS—UNAUDITED

(In thousands)



	Three months ended March 31,
	2017			2016
Operating activities
Net income	$	42,542		$	25,128
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	9,000			30,000
Depreciation and amortization	6,216			5,092
Bank owned life insurance (BOLI) income	(466		)	(536		)
Stock-based compensation expense	4,559			459
Excess tax benefits from stock-based compensation arrangements	—			(109		)
Purchases of loans held for sale	(1,299,542		)	(364,919		)
Proceeds from sales and repayments of loans held for sale	1,379,834			352,668
(Gain) loss on sale of loans held for sale and other assets	988			104
Changes in operating assets and liabilities:
Accrued interest receivable and other assets	19,548			(48,756		)
Accrued interest payable and other liabilities	(927		)	6,173
Net cash provided by operating activities	161,752			5,304
Investing activities
Purchases of available-for-sale securities	(18,832		)	(391		)
Maturities and calls of available-for-sale securities	275			264
Principal payments received on available-for-sale securities	1,231			1,620
Originations of mortgage finance loans	(15,100,024		)	(19,706,715		)
Proceeds from pay-offs of mortgage finance loans	16,225,764			19,691,687
Net increase in loans held for investment, excluding mortgage finance loans	(303,595		)	(321,571		)
Purchase of premises and equipment, net	(2,597		)	(859		)
Proceeds from sale of foreclosed assets	128			62
Net cash provided by (used in) investing activities	802,350			(335,903		)
Financing activities
Net increase (decrease) in deposits	(411,451		)	1,214,228
Costs from issuance of stock related to stock-based awards and warrants	(890		)	(283		)
Preferred dividends paid	(2,438		)	(2,438		)
Net increase in other borrowings	(500,000		)	104,000
Excess tax benefits from stock-based compensation arrangements	—			109
Net increase (decrease) in Federal funds purchased and repurchase agreements	32,259			(42,192		)
Net cash provided by (used in) financing activities	(882,520		)	1,273,424
Net increase in cash and cash equivalents	81,582			942,825
Cash and cash equivalents at beginning of period	2,839,352			1,790,870
Cash and cash equivalents at end of period	$	2,920,934		$	2,733,695
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	22,792		$	17,237
Cash paid during the period for income taxes	482			333
Transfers from loans/leases to OREO and other repossessed assets	—			17,398

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 clientèle 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. In that regard, ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," ("ASU 2016-09") became effective for us on January 1, 2017. ASU 2016-09 requires that excess tax benefits and deficiencies be recognized as a component of income taxes within the income statement. Additionally, ASU 2016-09 requires that all income tax-related cash flows resulting from share-based payments be reported as operating activities in the statement of cash flows. Previously, income tax benefits at award settlement were reported as a reduction to operating cash flows and an increase to financing cash flows to the extent that those benefits exceeded the income tax benefits reported in earnings during the award's vesting period. We have elected to apply that change in cash flow presentation on a prospective basis. ASU 2016-09 also requires that companies make an accounting policy election regarding forfeitures, to either estimate the number of awards that are expected to vest or account for them when they occur. We have elected to recognize forfeitures as they occur. The impact of this change and that of the remaining provisions of ASU 2016-09 did not have a significant impact on our financial statements.

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, 2016, included in our Annual Report on Form 10-K filed with the SEC on February 17, 2017 (the “2016 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.

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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 March 31,
	2017		2016
Numerator:
Net income	$	42,542	$	25,128
Preferred stock dividends	2,438		2,438
Net income available to common stockholders	$	40,104	22,690
Denominator:
Denominator for basic earnings per share— weighted average shares	49,535,959		45,888,735
Effect of employee stock-based awards(1)	260,947		117,372
Effect of warrants to purchase common stock	437,324		348,271
Denominator for dilutive earnings per share—adjusted weighted average shares and assumed conversions	50,234,230		46,354,378
Basic earnings per common share	$	0.81	$	0.49
Diluted earnings per common share	$	0.80	$	0.49


(1)	SARs and RSUs outstanding of 3,000 at March 31, 2017 and 308,972 at March 31, 2016 have not been included in diluted earnings per share because to do so would have been anti-dilutive for the periods presented.

(3) SECURITIES

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



	March 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-sale securities:
U.S. Treasuries	$	16,688	$	—	$	(5	)	$	16,683
Residential mortgage-backed securities	13,449		927		—			14,376
Equity securities(1)	11,424		101		(381		)	11,144
	$	41,561	$	1,028	$	(386	)	$	42,203

	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-sale securities:
Residential mortgage-backed securities	$	14,680	$	972	$	—		$	15,652
Municipals	275		—		—			275
Equity securities(1)	9,280		27		(360		)	8,947
	$	24,235	$	999	$	(360	)	$	24,874


(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):

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	March 31, 2017
	Less Than One Year			After One Through Five Years			After Five Through Ten Years			After Ten Years			Total
Available-for-sale:
U.S. Treasuries:
Amortized cost	$	16,688		$	—		$	—		$	—		$	16,688
Estimated fair value	16,683			—			—			—			16,683
Weighted average yield(3)	0.53		%	—		%	—		%	—		%	0.53		%
Residential mortgage-backed securities:(1)
Amortized cost	47			1,522			2,925			8,955			13,449
Estimated fair value	47			1,572			3,253			9,504			14,376
Weighted average yield(3)	5.25		%	4.69		%	5.55		%	2.85		%	3.65		%
Equity securities:(4)
Amortized cost	11,424			—			—			—			11,424
Estimated fair value	11,144			—			—			—			11,144
Total available-for-sale securities:
Amortized cost													$	41,561
Estimated fair value													$	42,203



	December 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	$	9		$	2,047		$	3,147		$	9,477		$	14,680
Estimated fair value	9			2,104			3,495			10,044			15,652
Weighted average yield(3)	5.50		%	4.70		%	5.55		%	2.84		%	3.68		%
Municipals:(2)
Amortized cost	275			—			—			—			275
Estimated fair value	275			—			—			—			275
Weighted average yield(3)	5.61		%	—		%	—		%	—		%	5.61		%
Equity securities:(4)
Amortized cost	9,280			—			—			—			9,280
Estimated fair value	8,947			—			—			—			8,947
Total available-for-sale securities:
Amortized cost													$	24,235
Estimated fair value													$	24,874


(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.

At March 31, 2017, securities with carrying values of $3.6 million and $9.4 million were pledged to secure certain deposits and repurchase agreements, respectively.

The following table discloses, as of March 31, 2017 and December 31, 2016, 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):

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March 31, 2017	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Treasuries	$	16,683	$	(5	)	$	—	$	—		$	16,683	$	(5	)
Equity securities	1,015		(6		)	6,125		(375		)	7,140		(381		)
	$	17,698	$	(11	)	$	6,125	$	(375	)	$	23,823	$	(386	)

December 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	$	1,015	$	(6	)	$	6,146	$	(354	)	$	7,161	$	(360	)

At March 31, 2017, we owned five securities in an unrealized loss position, three of which are U.S. Treasury securities which are subject to interest rate volatility. We do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost bases. The remaining two are publicly traded equity funds and are subject to market pricing volatility. We do not believe these unrealized losses are “other-than-temporary”. We have evaluated the near-term prospects of the investments in relation to the severity and duration of the impairment and based on that evaluation have the ability and intent to hold the investments until recovery of fair value.

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

At March 31, 2017 and December 31, 2016, loans held for investment were as follows (in thousands):



	March 31, 2017			December 31, 2016
Commercial	$	7,480,485		$	7,291,545
Mortgage finance	3,371,598			4,497,338
Construction	2,108,611			2,098,706
Real estate	3,563,136			3,462,203
Consumer	36,259			34,587
Leases	186,113			185,529
Gross loans held for investment	16,746,202			17,569,908
Deferred income (net of direct origination costs)	(75,686		)	(71,559		)
Allowance for loan losses	(172,013		)	(168,126		)
Total loans held for investment	$	16,498,503		$	17,330,223

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. Balances as of March 31, 2017 and December 31, 2016 are stated net of $230.5 million and $839.0 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, 2017 and December 31, 2016, 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 March 31, 2017 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 March 31, 2017 and December 31, 2016 (in thousands):



March 31, 2017
	Commercial		Mortgage Finance		Construction		Real Estate		Consumer		Leases		Total
Grade:
Pass	$	7,161,580	$	3,371,598	$	2,106,255	$	3,528,210	$	35,554	$	182,869	$	16,386,066
Special mention	51,723		—		2,356		12,904		370		3,161		70,514
Substandard-accruing	125,095		—		—		17,843		135		—		143,073
Non-accrual	142,087		—		—		4,179		200		83		146,549
Total loans held for investment	$	7,480,485	$	3,371,598	$	2,108,611	$	3,563,136	$	36,259	$	186,113	$	16,746,202

December 31, 2016
	Commercial		Mortgage Finance		Construction		Real Estate		Consumer		Leases		Total
Grade:
Pass	$	6,941,310	$	4,497,338	$	2,074,859	$	3,430,346	$	34,249	$	181,914	$	17,160,016
Special mention	69,447		—		10,901		21,932		—		3,532		105,812
Substandard-accruing	115,848		—		12,787		7,516		138		—		136,289
Non-accrual	164,940		—		159		2,409		200		83		167,791
Total loans held for investment	$	7,291,545	$	4,497,338	$	2,098,706	$	3,462,203	$	34,587	$	185,529	$	17,569,908

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The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2017 and 2016. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.



March 31, 2017
(in thousands)	Commercial		Mortgage Finance		Construction			Real Estate			Consumer			Leases			Additional Qualitative Reserve			Total
Beginning balance	$	128,768	$	—	$	13,144		$	19,149		$	241		$	1,124		$	5,700		$	168,126
Provision for loan losses	8,147		—		(124		)	3,270			(31		)	325			(2,012		)	9,575
Charge-offs	9,233		—		—			—			—			—			—			9,233
Recoveries	3,381		—		101			50			5			8			—			3,545
Net charge-offs (recoveries)	5,852		—		(101		)	(50		)	(5		)	(8		)	—			5,688
Ending balance	$	131,063	$	—	$	13,121		$	22,469		$	215		$	1,457		$	3,688		$	172,013
Period end amount allocated to:
Loans individually evaluated for impairment	$	34,595	$	—	$	—		$	195		$	30		$	13		$	—		$	34,833
Loans collectively evaluated for impairment	96,468		—		13,121			22,274			185			1,444			3,688			137,180
Ending balance	$	131,063	$	—	$	13,121		$	22,469		$	215		$	1,457		$	3,688		$	172,013

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

The table below presents the activity in the portion of the allowance for credit losses related to losses on unfunded commitments for the three months ended March 31, 2017 and 2016 (in thousands). This liability is recorded in other liabilities in the consolidated balance sheet.



	Three months ended March 31,
	2017			2016
Beginning balance	$	11,422		$	9,011
Provision for off-balance sheet credit losses	(575		)	1,205
Ending balance	$	10,847		$	10,216

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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 March 31, 2017 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.

Our recorded investment in loans as of March 31, 2017, December 31, 2016 and March 31, 2016 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, 2017
	Commercial		Mortgage Finance		Construction		Real Estate		Consumer		Leases		Total
Loans individually evaluated for impairment	$	143,632	$	—	$	—	$	5,512	$	200	$	83	$	149,427
Loans collectively evaluated for impairment	7,336,853		3,371,598		2,108,611		3,557,624		36,059		186,030		16,596,775
Total	$	7,480,485	$	3,371,598	$	2,108,611	$	3,563,136	$	36,259	$	186,113	$	16,746,202

December 31, 2016
	Commercial		Mortgage Finance		Construction		Real Estate		Consumer		Leases		Total
Loans individually evaluated for impairment	$	166,669	$	—	$	159	$	3,751	$	200	$	83	$	170,862
Loans collectively evaluated for impairment	7,124,876		4,497,338		2,098,547		3,458,452		34,387		185,446		17,399,046
Total	$	7,291,545	$	4,497,338	$	2,098,706	$	3,462,203	$	34,587	$	185,529	$	17,569,908

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

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, 2017, none of our non-accrual loans were earning on a cash basis compared to $811,000 at December 31, 2016. 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 original loan agreement. In accordance with ASC 310 Receivables, we have also included all restructured and formerly restructured loans in our impaired loan totals. The following tables detail our impaired loans, by portfolio class, as of March 31, 2017 and December 31, 2016 (in thousands):



March 31, 2017
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial
Business loans	$	25,149	$	30,093	$	—	$	24,295	$	—
Energy	39,050		39,306		—		44,185		—
Construction
Market risk	—		—		—		—		—
Real estate
Market risk	—		—		—		—		—
Commercial	2,618		2,618		—		2,261		—
Secured by 1-4 family	—		—		—		—		—
Consumer	—		—		—		—		—
Leases	—		—		—		—		—
Total impaired loans with no allowance recorded	$	66,817	$	72,017	$	—	$	70,741	$	—
With an allowance recorded:
Commercial
Business loans	$	26,146	$	26,146	$	8,378	$	22,917	$	—
Energy	53,287		71,555		26,217		67,592		6
Construction
Market risk	—		—		—		106		—
Real estate
Market risk	1,333		1,333		29		1,339		—
Commercial	—		—		—		—		—
Secured by 1-4 family	1,561		1,561		166		738		—
Consumer	200		200		30		200		—
Leases	83		83		13		83		—
Total impaired loans with an allowance recorded	$	82,610	$	100,878	$	34,833	$	92,975	$	6
Combined:
Commercial
Business loans	$	51,295	$	56,239	$	8,378	$	47,212	$	—
Energy	92,337		110,861		26,217		111,777		6
Construction
Market risk	—		—		—		106		—
Real estate
Market risk	1,333		1,333