Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - TEXAS CAPITAL BANCSHARES INC/TXa06302016exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - TEXAS CAPITAL BANCSHARES INC/TXa06302016exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - TEXAS CAPITAL BANCSHARES INC/TXa06302016exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - TEXAS CAPITAL BANCSHARES INC/TXa06302016exhibit311.htm
EX-10.1 - EXHIBIT 10.1 - TEXAS CAPITAL BANCSHARES INC/TXa2016rsucashagreement-elec.htm

 
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.
Large Accelerated Filer
 
ý
  
Accelerated Filer
 
¨
 
 
 
 
Non-Accelerated Filer
 
¨
  
Smaller Reporting Company
 
¨

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

On 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
 



Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended June 30, 2016
Index
 


2


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.

3



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.

4


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.

5


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.

6


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.

7



(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.

8


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


9


 
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.

10


(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.

11


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):

12


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



13


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.


14


Our recorded investment in loans as of June 30, 2016December 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.

15


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