Document
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 September 30, 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, a non-accelerated filer, smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
 
ý
 
  
Accelerated Filer
 
¨
 
 
 
 
 
Non-Accelerated Filer
 
¨
  (Do not check if a smaller reporting company)
  
Smaller Reporting Company
 
¨
 
 
 
 
 
 
 
 
Emerging Growth Company
 
¨

 
 
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

On October 18, 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 49,626,545
 

Table of Contents

Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended September 30, 2017
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)
 
September 30,
2017
 
December 31,
2016
 
(Unaudited)
 
 
Assets
 
 
 
Cash and due from banks
$
143,616

 
$
113,707

Interest-bearing deposits
2,332,537

 
2,700,645

Federal funds sold and securities purchased under resale agreements
25,000

 
25,000

Securities, available-for-sale
24,224

 
24,874

Loans held for sale, at fair value
955,983

 
968,929

Loans held for investment, mortgage finance
5,642,285

 
4,497,338

Loans held for investment (net of unearned income)
14,828,406

 
13,001,011

Less: Allowance for loan losses
182,929

 
168,126

Loans held for investment, net
20,287,762

 
17,330,223

Mortgage servicing rights, net
77,630

 
28,536

Premises and equipment, net
23,882

 
19,775

Accrued interest receivable and other assets
511,207

 
465,933

Goodwill and intangible assets, net
19,157

 
19,512

Total assets
$
24,400,998

 
$
21,697,134

Liabilities and Stockholders’ Equity
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
8,263,202

 
$
7,994,201

Interest-bearing
10,818,055

 
9,022,630

Total deposits
19,081,257

 
17,016,831

Accrued interest payable
4,562

 
5,498

Other liabilities
178,599

 
161,223

Federal funds purchased and repurchase agreements
83,496

 
109,575

Other borrowings
2,500,000

 
2,000,000

Subordinated notes, net
281,315

 
281,044

Trust preferred subordinated debentures
113,406

 
113,406

Total liabilities
22,242,635

 
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 September 30, 2017 and December 31, 2016
150,000

 
150,000

Common stock, $.01 par value:
 
 
 
Authorized shares – 100,000,000
 
 
 
Issued shares – 49,622,242 and 49,504,079 at September 30, 2017 and December 31, 2016, respectively
496

 
495

Additional paid-in capital
959,251

 
955,468

Retained earnings
1,048,195

 
903,187

Treasury stock (shares at cost: 417 at September 30, 2017 and December 31, 2016)
(8
)
 
(8
)
Accumulated other comprehensive income, net of taxes
429

 
415

Total stockholders’ equity
2,158,363

 
2,009,557

Total liabilities and stockholders’ equity
$
24,400,998

 
$
21,697,134

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 September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Interest income
 
 
 
 
 
 
 
Interest and fees on loans
$
229,116

 
$
177,724

 
$
607,386

 
$
501,673

Securities
341

 
232

 
853

 
739

Federal funds sold and securities purchased under resale agreements
642

 
455

 
1,606

 
1,209

Deposits in other banks
7,544

 
4,081

 
19,935

 
11,116

Total interest income
237,643

 
182,492

 
629,780

 
514,737

Interest expense
 
 
 
 
 
 
 
Deposits
22,435

 
8,950

 
52,261

 
26,743

Federal funds purchased
891

 
126

 
1,869

 
362

Other borrowings
4,835

 
1,733

 
9,757

 
4,265

Subordinated notes
4,191

 
4,191

 
12,573

 
12,573

Trust preferred subordinated debentures
930

 
753

 
2,641

 
2,203

Total interest expense
33,282

 
15,753

 
79,101

 
46,146

Net interest income
204,361

 
166,739

 
550,679

 
468,591

Provision for credit losses
20,000

 
22,000

 
42,000

 
68,000

Net interest income after provision for credit losses
184,361

 
144,739

 
508,679

 
400,591

Non-interest income
 
 
 
 
 
 
 
Service charges on deposit accounts
3,211

 
2,880

 
9,323

 
7,401

Wealth management and trust fee income
1,627

 
1,113

 
4,386

 
3,024

Bank owned life insurance (BOLI) income
615

 
520

 
1,562

 
1,592

Brokered loan fees
6,152

 
7,581

 
17,639

 
18,090

Servicing income
4,486

 
310

 
10,387

 
305

Swap fees
647

 
918

 
3,404

 
2,330

Other
2,265

 
3,394

 
8,181

 
9,203

Total non-interest income
19,003

 
16,716

 
54,882

 
41,945

Non-interest expense
 
 
 
 
 
 
 
Salaries and employee benefits
67,882

 
56,722

 
194,039

 
162,904

Net occupancy expense
6,436

 
5,634

 
19,062

 
17,284

Marketing
7,242

 
4,292

 
18,349

 
12,686

Legal and professional
6,395

 
5,333

 
20,975

 
16,883

Communications and technology
6,002

 
6,620

 
24,414

 
19,228

FDIC insurance assessment
6,203

 
6,355

 
16,800

 
17,867

Servicing related expenses
3,897

 
620

 
8,329

 
1,305

Other
10,773

 
9,223

 
30,770

 
27,717

Total non-interest expense
114,830

 
94,799

 
332,738

 
275,874

Income before income taxes
88,534

 
66,656

 
230,823

 
166,662

Income tax expense
29,850

 
23,931

 
78,502

 
59,929

Net income
58,684

 
42,725

 
152,321

 
106,733

Preferred stock dividends
2,438

 
2,438

 
7,313

 
7,313

Net income available to common stockholders
$
56,246

 
$
40,287

 
$
145,008

 
$
99,420

Other comprehensive income (loss)
 
 
 
 
 
 
 
Change in net unrealized gain on available-for-sale securities arising during period, before-tax
$
52

 
$
(63
)
 
$
22

 
$
(121
)
Income tax benefit related to net unrealized gain on available-for-sale securities
18

 
(23
)
 
8

 
(43
)
Other comprehensive loss, net of tax
34

 
(40
)
 
14

 
(78
)
Comprehensive income
$
58,718

 
$
42,685

 
$
152,335

 
$
106,655

 
 
 
 
 
 
 
 
Basic earnings per common share
$
1.13

 
$
0.88

 
$
2.93

 
$
2.16

Diluted earnings per common share
$
1.12

 
$
0.87

 
$
2.89

 
$
2.14

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, 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
—

 
—

 
—

 
—

 
—

 
106,733

 
—

 
—

 
—

 
106,733

Change in unrealized gain on available-for-sale securities, net of taxes of $43
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(78
)
 
(78
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
106,655

Tax benefit related to exercise of stock-based awards
—

 
—

 
—

 
—

 
1,213

 
—

 
—

 
—

 
—

 
1,213

Stock-based compensation expense recognized in earnings
—

 
—

 
—

 
—

 
3,466

 
—

 
—

 
—

 
—

 
3,466

Preferred stock dividend
—

 
—

 
—

 
—

 
—

 
(7,313
)
 
—

 
—

 
—

 
(7,313
)
Issuance of stock related to stock-based awards
—

 
—

 
135,688

 
1

 
(1,773
)
 
—

 
—

 
—

 
—

 
(1,772
)
Balance at September 30, 2016
6,000,000

 
$
150,000

 
46,009,912

 
$
460

 
$
717,452

 
$
857,238

 
(417
)
 
$
(8
)
 
$
640

 
$
1,725,782

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
—

 
—

 
—

 
—

 
—

 
152,321

 
—

 
—

 
—

 
152,321

Change in unrealized gain on available-for-sale securities, net of taxes of $8
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
14

 
14

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
152,335

Stock-based compensation expense recognized in earnings
—

 
—

 
—

 
—

 
5,717

 
—

 
—

 
—

 
—

 
5,717

Preferred stock dividend
—

 
—

 
—

 
—

 
—

 
(7,313
)
 
—

 
—

 
—

 
(7,313
)
Issuance of stock related to stock-based awards
—

 
—

 
84,568

 
1

 
(1,934
)
 
—

 
—

 
—

 
—

 
(1,933
)
Issuance of common stock related to warrants
—

 
—

 
33,595

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Balance at September 30, 2017
6,000,000

 
$
150,000

 
49,622,242

 
$
496

 
$
959,251

 
$
1,048,195

 
(417
)
 
$
(8
)
 
$
429

 
$
2,158,363

See accompanying notes to consolidated financial statements.

5
Table of Contents

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS—UNAUDITED
(In thousands) 
 
Nine months ended September 30,
 
2017
 
2016
Operating activities
 
 
 
Net income
$
152,321

 
$
106,733

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
42,000

 
68,000

Depreciation and amortization
19,624

 
16,179

Increase in valuation allowance on mortgage servicing rights
216

 
414

Bank owned life insurance (BOLI) income
(1,562
)
 
(1,592
)
Stock-based compensation expense
15,021

 
6,175

Excess tax benefits from stock-based compensation arrangements
—

 
(1,328
)
Purchases and originations of loans held for sale
(4,315,065
)
 
(1,927,702
)
Proceeds from sales and repayments of loans held for sale
4,282,910

 
1,352,322

Net (gain) loss on sale of loans held for sale and other assets
1,005

 
(1,307
)
Technology write-off
5,285

 
—

Changes in operating assets and liabilities:
 
 
 
Accrued interest receivable and other assets
(68,672
)
 
(79,267
)
Accrued interest payable and other liabilities
8,434

 
34,172

Net cash provided by (used in) operating activities
141,517

 
(427,201
)
Investing activities
 
 
 
Purchases of available-for-sale securities
(97,381
)
 
(1,278
)
Maturities and calls of available-for-sale securities
94,775

 
265

Principal payments received on available-for-sale securities
3,278

 
4,528

Originations of mortgage finance loans
(62,284,036
)
 
(74,594,117
)
Proceeds from pay-offs of mortgage finance loans
61,139,089

 
74,599,234

Net increase in loans held for investment, excluding mortgage finance loans
(1,856,253
)
 
(943,534
)
Purchase of premises and equipment, net
(9,056
)
 
(1,526
)
Proceeds from sale of foreclosed assets
767

 
62

Net cash used in investing activities
(3,008,817
)
 
(936,366
)
Financing activities
 
 
 
Net increase in deposits
2,064,426

 
3,060,504

Costs from issuance of stock related to stock-based awards and warrants
(1,933
)
 
(1,772
)
Preferred dividends paid
(7,313
)
 
(7,313
)
Net increase in other borrowings
500,000

 
170,000

Excess tax benefits from stock-based compensation arrangements
—

 
1,328

Decrease in Federal funds purchased and repurchase agreements
(26,079
)
 
(61,631
)
Net cash provided by financing activities
2,529,101

 
3,161,116

Net increase (decrease) in cash and cash equivalents
(338,199
)
 
1,797,549

Cash and cash equivalents at beginning of period
2,839,352

 
1,790,870

Cash and cash equivalents at end of period
$
2,501,153

 
$
3,588,419

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
80,037

 
$
48,119

Cash paid during the period for income taxes
72,485

 
68,716

Transfers from loans/leases to OREO and other repossessed assets
—

 
18,822

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 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 value of mortgage servicing rights ("MSRs") and the status of contingencies are particularly susceptible to significant change.

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 
 September 30,
 
Nine months ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
Net income
$
58,684

 
$
42,725

 
$
152,321

 
$
106,733

Preferred stock dividends
2,438

 
2,438

 
7,313

 
7,313

Net income available to common stockholders
56,246

 
40,287

 
$
145,008

 
99,420

Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share— weighted average shares
49,607,028

 
45,980,517

 
49,573,456

 
45,931,357

Effect of employee stock-based awards(1)
214,468

 
118,885

 
235,011

 
119,021

Effect of warrants to purchase common stock
429,370

 
410,281

 
431,551

 
382,578

Denominator for dilutive earnings per share—adjusted weighted average shares and assumed conversions
50,250,866

 
46,509,683

 
50,240,018

 
46,432,956

Basic earnings per common share
$
1.13

 
$
0.88

 
$
2.93

 
$
2.16

Diluted earnings per common share
$
1.12

 
$
0.87

 
$
2.89

 
$
2.14

 
(1)
SARs and RSUs outstanding of 6,200 at September 30, 2017 and 319,476 at September 30, 2016 have not been included in diluted earnings per share because to do so would have been anti-dilutive for the periods presented.

8
Table of Contents

(3) SECURITIES
The following is a summary of available-for-sale securities (in thousands):
 
September 30, 2017

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair
Value
Available-for-sale securities:







Residential mortgage-backed securities
$
11,402


$
756

 
$
—

 
$
12,158

Equity securities(1)
12,161


266

 
(361
)
 
12,066


$
23,563


$
1,022

 
$
(361
)
 
$
24,224

 
 
 
 
 
 
 
 
 
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): 
 
September 30, 2017

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
689

 
396

 
2,177

 
8,140

 
11,402

Estimated fair value
708

 
440

 
2,405

 
8,605

 
12,158

Weighted average yield(3)
4.53
%
 
5.97
%
 
5.48
%
 
3.01
%
 
3.68
%
Equity securities:(4)
 
 
 
 
 
 
 
 
 
Amortized cost
12,161

 
—

 
—

 
—

 
12,161

Estimated fair value
12,066

 
—

 
—

 
—

 
12,066

Total available-for-sale securities:
 
 
 
 
 
 
 
 
 
Amortized cost
 
 
 
 
 
 
 
 
$
23,563

Estimated fair value
 
 
 
 
 
 
 
 
$
24,224


9
Table of Contents

 
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 September 30, 2017, securities with carrying values of $2.7 million and $8.0 million were pledged to secure certain deposits and repurchase agreements, respectively.
The following table discloses, as of September 30, 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): 
September 30, 2017
Less Than 12 Months

12 Months or Longer

Total
 
Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss
Equity securities
$
—

 
$
—

 
$
6,139

 
$
(361
)
 
$
6,139

 
$
(361
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Less Than 12 Months

12 Months or Longer

Total
December 31, 2016
Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss
Equity securities
$
1,015

 
$
(6
)
 
$
6,146

 
$
(354
)
 
$
7,161

 
$
(360
)
At September 30, 2017, we owned one security in an unrealized loss position. The 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” as of September 30, 2017. 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 we have the ability and intent to hold the investment until recovery of fair value.

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Table of Contents

(4) LOANS HELD FOR INVESTMENT AND ALLOWANCE FOR LOAN LOSSES
At September 30, 2017 and December 31, 2016, loans held for investment were as follows (in thousands):
 
 
September 30,
2017
 
December 31,
2016
Commercial
$
8,810,825

 
$
7,291,545

Mortgage finance
5,642,285

 
4,497,338

Construction
2,099,355

 
2,098,706

Real estate
3,683,564

 
3,462,203

Consumer
70,436

 
34,587

Leases
259,720

 
185,529

Gross loans held for investment
20,566,185

 
17,569,908

Deferred income (net of direct origination costs)
(95,494
)
 
(71,559
)
Allowance for loan losses
(182,929
)
 
(168,126
)
Total loans held for investment
$
20,287,762

 
$
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 September 30, 2017 and December 31, 2016 are stated net of $150.7 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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Table of Contents

At September 30, 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 general reserves, 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 September 30, 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 September 30, 2017 and December 31, 2016 (in thousands):

September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Mortgage
Finance
 
Construction
 
Real Estate
 
Consumer
 
Leases
 
Total
Grade:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
8,541,821

 
$
5,642,285

 
$
2,085,300

 
$
3,611,667

 
$
69,974

 
$
242,335

 
$
20,193,382

Special mention
28,288

 
—

 
14,055

 
34,804

 
369

 
—

 
77,516

Substandard-accruing
124,329

 
—

 
—

 
35,275

 
93

 
17,385

 
177,082

Non-accrual
116,387

 
—

 
—

 
1,818

 
—

 
—

 
118,205

Total loans held for investment
$
8,810,825

 
$
5,642,285

 
$
2,099,355

 
$
3,683,564

 
$
70,436

 
$
259,720

 
$
20,566,185

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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


12
Table of Contents


The following table details activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 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.
September 30, 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
21,388

 
—

 
4,431

 
12,948

 
221

 
2,774

 
1,899

 
43,661

Charge-offs
32,146

 
—

 
59

 
290

 
180

 
—

 
—

 
32,675

Recoveries
3,574

 
—

 
104

 
74

 
56

 
9

 
—

 
3,817

Net charge-offs (recoveries)
28,572

 
—

 
(45
)
 
216

 
124

 
(9
)
 
—

 
28,858

Ending balance
$
121,584

 
$
—

 
$
17,620

 
$
31,881

 
$
338

 
$
3,907

 
$
7,599

 
$
182,929

Period end amount allocated to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
24,410

 
$
—

 
$
—

 
$
26

 
$
—

 
$
—

 
$
—

 
$
24,436

Loans collectively evaluated for impairment
97,174

 
—

 
17,620

 
31,855

 
338

 
3,907

 
7,599

 
158,493

Ending balance
$
121,584

 
$
—

 
$
17,620

 
$
31,881

 
$
338

 
$
3,907

 
$
7,599

 
$
182,929

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 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
65,446

 
—

 
1,607

 
1,981

 
(23
)
 
(2,646
)
 
(226
)
 
66,139

Charge-offs
34,232

 
—

 
—

 
528

 
40

 
—

 
—

 
34,800

Recoveries
7,829

 
—

 
34

 
36

 
16

 
71

 
—

 
7,986

Net charge-offs (recoveries)
26,403

 
—

 
(34
)
 
492

 
24

 
(71
)
 
—

 
26,814

Ending balance
$
151,489

 
$
—

 
$
8,477

 
$
14,870

 
$
291

 
$
1,356

 
$
3,953

 
$
180,436

Period end amount allocated to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
42,674

 
$
—

 
$
24

 
$
136

 
$
30

 
$
—

 
$
—

 
$
42,864

Loans collectively evaluated for impairment
108,815

 
—

 
8,453

 
14,734

 
261

 
1,356

 
3,953

 
137,572

Ending balance
$
151,489

 
$
—

 
$
8,477

 
$
14,870

 
$
291

 
$
1,356

 
$
3,953

 
$
180,436

The table below presents the activity in the portion of the allowance for credit losses related to losses on unfunded commitments for the three and nine months ended September 30, 2017 and 2016 (in thousands). This liability is recorded in other liabilities in the consolidated balance sheet.
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Beginning balance
 
$
9,205

 
$
9,355

 
$
11,422

 
$
9,011

Provision for off-balance sheet credit losses
 
556

 
1,517

 
(1,661
)
 
1,861

Ending balance
 
$
9,761

 
$
10,872

 
$
9,761

 
$
10,872


13
Table of Contents

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. The increase in the additional qualitative reserve at September 30, 2017 was primarily driven by a $4.5 million provision related to the potential impact to our loan portfolio from Hurricanes Harvey and Irma ("Hurricanes"). This qualitative factor serves to measure 1) the impact on incurred credit losses resulting from the Hurricanes and 2) the imprecision in the identification and measurement of loans impacted by the Hurricanes. We believe the level of additional qualitative reserve at September 30, 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 uncertainty regarding the economy or the complete identification of loans impacted by the aforementioned weather events.
Our recorded investment in loans as of September 30, 2017, December 31, 2016 and September 30, 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):
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Mortgage
Finance
 
Construction
 
Real Estate
 
Consumer
 
Leases
 
Total
Loans individually evaluated for impairment
$
117,426

 
$
—

 
$
—

 
$
2,117

 
$
—

 
$
—

 
$
119,543

Loans collectively evaluated for impairment
8,693,399

 
5,642,285

 
2,099,355

 
3,681,447

 
70,436

 
259,720

 
20,446,642

Total
$
8,810,825

 
$
5,642,285

 
$
2,099,355

 
$
3,683,564

 
$
70,436

 
$
259,720

 
$
20,566,185

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Mortgage
Finance
 
Construction
 
Real Estate
 
Consumer
 
Leases
 
Total
Loans individually evaluated for impairment
$
168,014

 
$
—

 
$
159

 
$
3,787

 
$
200

 
$
—

 
$
172,160

Loans collectively evaluated for impairment
6,885,965

 
4,961,159

 
2,150,294

 
3,388,044

 
27,354

 
96,878

 
17,509,694

Total
$
7,053,979

 
$
4,961,159

 
$
2,150,453

 
$
3,391,831

 
$
27,554

 
$
96,878

 
$
17,681,854


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 September 30, 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.

14
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 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 September 30, 2017 and December 31, 2016 (in thousands):
September 30, 2017
 
 
 
 
 
 
 
 
 
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
Business loans
$
23,561

 
$
24,983

 
$
—

 
$
23,513

 
$
—

Energy
32,378

 
37,221

 
—

 
39,196

 
—

Construction
 
 
 
 
 
 
 
 
 
Market risk
—

 
—

 
—

 
—

 
—

Real estate
 
 
 
 
 
 
 
 
 
Market risk
—

 
—

 
—

 
—

 
—

Commercial
1,700

 
1,700

 
—

 
2,388

 
—

Secured by 1-4 family
—

 
—

 
—

 
—

 
—

Consumer
—

 
—

 
—

 
—

 
—

Leases
—

 
—

 
—

 
—

 
—

Total impaired loans with no allowance recorded
$
57,639

 
$
63,904

 
$
—

 
$
65,097

 
$
—

With an allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
Business loans
$
12,267

 
$
12,267