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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended June 30, 2018
¨
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 July 18, 2018, 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 50,158,736
 


Table of Contents

Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended June 30, 2018
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)
 
June 30,
2018
 
December 31,
2017
 
(Unaudited)
 
 
Assets
 
 
 
Cash and due from banks
$
174,687

 
$
178,010

Interest-bearing deposits in other banks
3,249,107

 
2,697,581

Federal funds sold and securities purchased under resale agreements
39,000

 
30,000

Investment securities
24,408

 
23,511

Loans held for sale ($1,275.5 million and $1,007.7 million at June 30, 2018 and December 31, 2017, respectively, at fair value)
1,276,768

 
1,011,004

Loans held for investment, mortgage finance
5,923,058

 
5,308,160

Loans held for investment (net of unearned income)
16,536,721

 
15,366,252

Less: Allowance for loan losses
179,096

 
184,655

Loans held for investment, net
22,280,683

 
20,489,757

Mortgage servicing rights, net
82,776

 
85,327

Premises and equipment, net
26,175

 
25,176

Accrued interest receivable and other assets
609,501

 
516,239

Goodwill and intangible assets, net
18,805

 
19,040

Total assets
$
27,781,910

 
$
25,075,645

Liabilities and Stockholders’ Equity
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
7,648,125

 
$
7,812,660

Interest-bearing
12,686,746

 
11,310,520

Total deposits
20,334,871

 
19,123,180

Accrued interest payable
11,268

 
7,680

Other liabilities
176,400

 
182,212

Federal funds purchased and repurchase agreements
520,849

 
365,040

Other borrowings
4,000,000

 
2,800,000

Subordinated notes, net
281,586

 
281,406

Trust preferred subordinated debentures
113,406

 
113,406

Total liabilities
25,438,380

 
22,872,924

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, 2018 and December 31, 2017
150,000

 
150,000

Common stock, $.01 par value:
 
 
 
Authorized shares – 100,000,000
 
 
 
Issued shares – 50,151,481 and 49,643,761 at June 30, 2018 and December 31, 2017, respectively
502

 
496

Additional paid-in capital
963,732

 
961,305

Retained earnings
1,228,924

 
1,090,500

Treasury stock – shares at cost: 417 at June 30, 2018 and December 31, 2017
(8
)
 
(8
)
Accumulated other comprehensive income, net of taxes
380

 
428

Total stockholders’ equity
2,343,530

 
2,202,721

Total liabilities and stockholders’ equity
$
27,781,910

 
$
25,075,645

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,
 
2018
 
2017
 
2018
 
2017
Interest income
 
 
 
 
 
 
 
Interest and fees on loans
$
279,447

 
$
201,646

 
$
523,311

 
$
378,270

Investment securities
193

 
287

 
399

 
512

Federal funds sold and securities purchased under resale agreements
745

 
434

 
1,790

 
964

Interest-bearing deposits in other banks
6,467

 
5,824

 
15,221

 
12,391

Total interest income
286,852

 
208,191

 
540,721

 
392,137

Interest expense
 
 
 
 
 
 
 
Deposits
39,607

 
16,533

 
71,309

 
29,826

Federal funds purchased
1,665

 
726

 
2,634

 
978

Other borrowings
8,484

 
2,901

 
14,164

 
4,922

Subordinated notes
4,191

 
4,191

 
8,382

 
8,382

Trust preferred subordinated debentures
1,193

 
881

 
2,220

 
1,711

Total interest expense
55,140

 
25,232

 
98,709

 
45,819

Net interest income
231,712

 
182,959

 
442,012

 
346,318

Provision for credit losses
27,000

 
13,000

 
39,000

 
22,000

Net interest income after provision for credit losses
204,712

 
169,959

 
403,012

 
324,318

Non-interest income
 
 
 
 
 
 
 
Service charges on deposit accounts
3,005

 
3,067

 
6,142

 
6,112

Wealth management and trust fee income
2,007

 
1,402

 
3,931

 
2,759

Bank owned life insurance (BOLI) income
657

 
481

 
1,316

 
947

Brokered loan fees
5,815

 
5,809

 
10,983

 
11,487

Servicing income
4,967

 
3,700

 
10,459

 
5,901

Swap fees
1,352

 
954

 
2,914

 
2,757

Other
(524
)
 
3,356

 
1,481

 
5,916

Total non-interest income
17,279

 
18,769

 
37,226

 
35,879

Non-interest expense
 
 
 
 
 
 
 
Salaries and employee benefits
72,404

 
63,154

 
144,941

 
126,157

Net occupancy expense
7,356

 
6,515

 
14,590

 
12,626

Marketing
10,236

 
6,157

 
18,913

 
11,107

Legal and professional
11,654

 
7,127

 
19,184

 
14,580

Communications and technology
7,143

 
11,906

 
13,776

 
18,412

FDIC insurance assessment
6,257

 
4,603

 
12,360

 
10,597

Servicing related expenses
4,367

 
2,682

 
8,172

 
4,432

Allowance and other carrying costs for other real estate owned (OREO)
176

 
71

 
2,331

 
210

Other
12,538

 
9,599

 
24,824

 
19,787

Total non-interest expense
132,131

 
111,814

 
259,091

 
217,908

Income before income taxes
89,860

 
76,914

 
181,147

 
142,289

Income tax expense
18,424

 
25,819

 
37,766

 
48,652

Net income
71,436

 
51,095

 
143,381

 
93,637

Preferred stock dividends
2,437

 
2,437

 
4,875

 
4,875

Net income available to common stockholders
$
68,999

 
$
48,658

 
$
138,506

 
$
88,762

Other comprehensive income (loss)
 
 
 
 
 
 
 
Change in net unrealized gain on available-for-sale debt securities arising during period, before-tax
$
(104
)
 
$
(33
)
 
$
(167
)
 
$
(30
)
Income tax expense (benefit) related to net unrealized gain on available-for-sale debt securities
(22
)
 
(11
)
 
(35
)
 
(10
)
Other comprehensive income (loss), net of tax
(82
)
 
(22
)
 
(132
)
 
(20
)
Comprehensive income
$
71,354

 
$
51,073

 
$
143,249

 
$
93,617

 
 
 
 
 
 
 
 
Basic earnings per common share
$
1.39

 
$
0.98

 
$
2.79

 
$
1.79

Diluted earnings per common share
$
1.38

 
$
0.97

 
$
2.76

 
$
1.77

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, 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

 

 

 

 

 
93,637

 

 

 

 
93,637

Change in unrealized gain on available-for-sale securities, net of taxes of $10

 

 

 

 

 

 

 

 
(20
)
 
(20
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
93,617

Stock-based compensation expense recognized in earnings

 

 

 

 
3,461

 

 

 

 

 
3,461

Preferred stock dividend

 

 

 

 

 
(4,875
)
 

 

 

 
(4,875
)
Issuance of stock related to stock-based awards

 

 
57,995

 
1

 
(1,208
)
 

 

 

 

 
(1,207
)
Issuance of common stock related to warrants

 

 
33,595

 

 

 

 

 

 

 

Balance at June 30, 2017
6,000,000

 
$
150,000

 
49,595,669

 
$
496

 
$
957,721

 
$
991,949

 
(417
)
 
$
(8
)
 
$
395

 
$
2,100,553

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017 (audited)
6,000,000

 
$
150,000

 
49,643,761

 
$
496

 
$
961,305

 
$
1,090,500

 
(417
)
 
$
(8
)
 
$
428

 
$
2,202,721

Impact of adoption of new accounting standards(1)

 

 

 

 

 
(82
)
 

 

 
84

 
2

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 
143,381

 

 

 

 
143,381

Change in unrealized gain on available-for-sale debt securities, net of taxes of $35

 

 

 

 

 

 

 

 
(132
)
 
(132
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
143,249

Stock-based compensation expense recognized in earnings

 

 

 

 
4,091

 

 

 

 

 
4,091

Preferred stock dividend

 

 

 

 

 
(4,875
)
 

 

 

 
(4,875
)
Issuance of stock related to stock-based awards

 

 
71,072

 
1

 
(1,659
)
 

 

 

 

 
(1,658
)
Issuance of common stock related to warrants

 

 
436,648

 
5

 
(5
)
 

 

 

 

 

Balance at June 30, 2018
6,000,000

 
$
150,000

 
50,151,481

 
$
502

 
$
963,732

 
$
1,228,924

 
(417
)
 
$
(8
)
 
$
380

 
$
2,343,530

(1)
Represents the impact of adopting Accounting Standard Update ("ASU") 2018-02 and ASU 2016-01. See Note 1 to the consolidated financial statements for more information.
See accompanying notes to consolidated financial statements.

5

Table of Contents

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS—UNAUDITED
(In thousands) 
 
Six months ended June 30,
 
2018
 
2017
Operating activities
 
 
 
Net income
$
143,381

 
$
93,637

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
39,000

 
22,000

Depreciation and amortization
16,214

 
12,346

Decrease in valuation allowance on mortgage servicing rights
(757
)
 

Bank owned life insurance (BOLI) income
(1,316
)
 
(947
)
Stock-based compensation expense
11,197

 
8,954

Purchases and originations of loans held for sale
(3,205,483
)
 
(2,843,690
)
Proceeds from sales and repayments of loans held for sale
2,908,777

 
2,939,002

Proceeds from sale of MSRs
22,439

 

Net loss on sale of loans held for sale and other assets
7,648

 
93

Technology write-off

 
5,285

Increase in OREO valuation allowance
2,000

 

Changes in operating assets and liabilities:
 
 
 
Accrued interest receivable and other assets
(97,710
)
 
(46,025
)
Accrued interest payable and other liabilities
(14,289
)
 
(488
)
Net cash provided by (used in) operating activities
(168,899
)
 
190,167

Investing activities
 
 
 
Purchases of investment securities
(3,323
)
 
(96,871
)
Maturities and calls of available-for-sale securities
349

 
275

Principal payments received on available-for-sale securities
1,644

 
2,397

Originations of mortgage finance loans
(45,661,608
)
 
(37,251,933
)
Proceeds from pay-offs of mortgage finance loans
45,046,710

 
36,565,671

Net increase in loans held for investment, excluding mortgage finance loans
(1,213,641
)
 
(1,297,460
)
Purchase of premises and equipment, net
(5,212
)
 
(4,194
)
Proceeds from sale of foreclosed assets
216

 
272

Net cash provided by investing activities
(1,834,865
)
 
(2,081,843
)
Financing activities
 
 
 
Net increase in deposits
1,211,691

 
275,392

Costs from issuance of stock related to stock-based awards and warrants
(1,658
)
 
(1,207
)
Preferred dividends paid
(4,875
)
 
(4,875
)
Net increase in other borrowings
1,200,000

 
700,000

Net increase in Federal funds purchased and repurchase agreements
155,809

 
352,649

Net cash provided by financing activities
2,560,967

 
1,321,959

Net increase (decrease) in cash and cash equivalents
557,203

 
(569,717
)
Cash and cash equivalents at beginning of period
2,905,591

 
2,839,352

Cash and cash equivalents at end of period
$
3,462,794

 
$
2,269,635

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
95,121

 
$
45,071

Cash paid during the period for income taxes
49,770

 
52,042

Transfers from loans/leases to OREO and other repossessed assets

 

See accompanying notes to consolidated financial statements.

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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 a majority of our loans being made to businesses headquartered or with operations in Texas. At the same time, our national lines of business continue to provide specialized lending products to businesses throughout the United States.
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 are unaudited and 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, 2017, included in our Annual Report on Form 10-K filed with the SEC on February 14, 2018 (the “2017 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.
Accounting Changes
ASU 2018-02 "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU 2018-02") allows a reclassification from accumulated other comprehensive income (loss) ("AOCI") to retained earnings for the stranded tax effects caused by the revaluation of deferred taxes resulting from the newly enacted corporate tax rate in the Tax Cuts and Jobs Act. The ASU is effective in years beginning after December 15, 2018, but permits early adoption in a period for which financial statements have not yet been issued. We have elected to early adopt the ASU as of January 1, 2018. The adoption of the guidance resulted in an insignificant cumulative-effect adjustment that decreased retained earnings and increased AOCI in the first quarter of 2018.
ASU 2016-15 "Statement of Cash Flows (Topic 230)" ("ASU 2016-15") is intended to reduce the diversity in practice around how certain transactions are classified within the statement of cash flows. ASU 2016-15 became effective for us on January 1, 2018 and did not have a significant impact on our financial statements.
ASU 2016-01 "Financial Instruments - Overall (Subtopic 825-10): Recognition of Financial Assets and Financial Liabilities, ("ASU 2016-01") makes targeted amendments to the guidance for recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 requires equity investments, other than equity method investments, to be measured at fair value with changes in fair value recognized in net income. The ASU requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption to reclassify the cumulative change in fair value of equity securities previously recognized in AOCI. ASU 2016-01 became effective for us on January 1, 2018. The adoption of the guidance resulted in an insignificant cumulative-effect adjustment that increased retained earnings, with offsetting related adjustments to deferred taxes and AOCI. ASU 2016-01 also emphasizes the existing requirement to use exit prices to measure fair value for disclosure purposes and clarifies that entities should not make use of a practicability exception in determining the fair value of loans. Accordingly, we refined the calculation used to determine the disclosed fair value of our loans held for investment portfolio as part of adopting this standard. The refined calculation did not have a significant impact on our fair value disclosures. See Note 11 - Fair Value Disclosures.

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Table of Contents

ASU 2014-09 "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09") implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 establishes a five-step model which entities must follow to recognize revenue and removes inconsistencies and weaknesses in existing guidance. The guidance does not apply to revenue associated with financial instruments, including loans and investment securities that are accounted for under other GAAP, which comprises a significant portion of our revenue stream. ASU 2014-09 became effective for us on January 1, 2018 and had no material effect on how we recognize revenue or to our consolidated financial statements and disclosures. See below for additional information related to revenue generated from contracts with customers.
Revenue Recognition
Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.
The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, derivatives and investment securities, as well as revenue related to our mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within our disclosures. Descriptions of our revenue-generating activities that are within the scope of ASC 606, which are presented in our income statements as components of non-interest income are as follows:
Service charges on deposit accounts - these represent general service fees for monthly account maintenance and activity- or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payments for such performance obligations are generally received at the time the performance obligations are satisfied.
Wealth management and trust fee income - this represents monthly fees due from wealth management customers as consideration for managing the customers' assets. Wealth management and trust services include custody of assets, investment management, escrow services, fees for trust services and similar fiduciary activities. Revenue is recognized when our performance obligation is completed each month, which is generally the time that payment is received. Also included are fees received from a third party broker-dealers as part of a revenue-sharing agreement for fees earned from customers that we refer to the third party. These fees are paid to us by the third party on a quarterly basis and recognized ratably throughout the quarter as our performance obligation is satisfied.
Brokered loan fees - these represent fees for the administration and funding of purchased mortgage loan interests as well as facility renewal and application fees received from mortgage originator customers in our warehouse lending business. Also included are fees received from independent correspondent mortgage lenders as consideration for our purchase of individual residential mortgage loans through our Mortgage Correspondent Aggregation ("MCA") business. Revenue related to the warehouse lending business is recognized when the related loan interest is disposed (i.e., through sale or payoff) or upon receipt of the facility renewal or application. Revenue related to our MCA business is recognized at the time a loan is purchased.
Other non-interest income primarily includes items such as letter of credit fees, gains on sale of loans held for sale and servicing fees related to the MCA program, none of which are subject to the requirements of ASC 606.
Investment Securities
Investment securities includes available-for-sale debt securities and equity securities at fair value.
Debt Securities
Debt securities are classified as trading, available-for-sale or held-to-maturity. Management classifies debt securities at the time of purchase and re-assesses such designation at each balance sheet date; however, transfers between categories from this re-assessment are rare.

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Trading Account
Debt securities acquired for resale in anticipation of short-term market movements are classified as trading, with realized and unrealized gains and losses recognized in income. To date, we have not had any activity in our trading account.
Held-to-Maturity
Debt securities are classified as held to maturity when we have the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt securities not classified as held-to-maturity or trading are classified as available-for-sale.
Available-for-Sale
Available-for-sale debt securities are stated at fair value, with the unrealized gains and losses reported as a separate component of AOCI, net of tax. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization and accretion is included in interest income from securities. Realized gains and losses and declines in value judged to be other-than-temporary are included in gain (loss) on sale of securities. The cost of securities sold is based on the specific identification method.
All debt securities are available-for-sale as of June 30, 2018 and December 31, 2017.
Equity Securities
Beginning January 1, 2018, upon adoption of ASU 2016-01, equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in other non-interest income in the consolidated statements of income and other comprehensive income. For periods prior to January 1, 2018, equity securities were classified as available-for-sale and stated at fair value with unrealized gains and losses reported as a separate component of AOCI, net of tax. Equity securities without readily determinable fair values are recorded at cost less any impairment, if any.
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.

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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 share data):
 
 
Three months ended 
 June 30,
 
Six months ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net income
$
71,436

 
$
51,095

 
$
143,381

 
$
93,637

Preferred stock dividends
2,437

 
2,437

 
4,875

 
4,875

Net income available to common stockholders
68,999

 
48,658

 
$
138,506

 
88,762

Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share—weighted average shares
49,736,384

 
49,576,837

 
49,695,783

 
49,556,393

Effect of employee stock-based awards(1)
348,762

 
224,306

 
336,285

 
244,058

Effect of warrants to purchase common stock
10,869

 
428,527

 
112,884

 
432,660

Denominator for dilutive earnings per share—adjusted weighted average shares and assumed conversions
50,096,015

 
50,229,670

 
50,144,952

 
50,233,111

Basic earnings per common share
$
1.39

 
$
0.98

 
$
2.79

 
$
1.79

Diluted earnings per common share
$
1.38

 
$
0.97

 
$
2.76

 
$
1.77

 
(1)
SARs and RSUs outstanding of 4,000 at June 30, 2018 and 6,200 at June 30, 2017 have not been included in diluted earnings per share because to do so would have been anti-dilutive for the periods presented.

(3) INVESTMENT SECURITIES
Available-for-Sale Debt Securities
The following is a summary of available-for-sale debt securities (in thousands):
 
June 30, 2018

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair
Value
Residential mortgage-backed securities
$
8,304


$
481

 
$

 
$
8,785

 
 
 
 
 
 
 
 
 
December 31, 2017
 
Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Estimated
Fair
Value
Residential mortgage-backed securities
$
10,297

 
$
648

 
$

 
$
10,945

The amortized cost and estimated fair value of available-for-sale debt securities are presented below by contractual maturity (in thousands, except percentage data): 
 
June 30, 2018

Less Than
One Year

After One
Through
Five Years

After Five
Through
Ten Years

After Ten
Years

Total
Residential mortgage-backed securities:(1)









Amortized cost
50

 
1,895

 

 
6,359

 
8,304

Estimated fair value
52

 
2,038

 

 
6,695

 
8,785

Weighted average yield(2)
5.24
%
 
5.55
%
 
%
 
3.75
%
 
4.17
%

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Table of Contents

 
December 31, 2017

Less Than
One Year

After One
Through
Five Years

After Five
Through
Ten Years

After Ten
Years

Total
Residential mortgage-backed securities:(1)









Amortized cost
$
409

 
$
819

 
$
1,502

 
$
7,567

 
$
10,297

Estimated fair value
418

 
916

 
1,636

 
7,975

 
10,945

Weighted average yield(2)
4.59
%
 
6.02
%
 
5.32
%
 
3.45
%
 
3.97
%
(1)
Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
(2)
Yields are calculated based on amortized cost.

As of June 30, 2018 and December 31, 2017, we did not have any available-for-sale debt securities in an unrealized loss position.
At June 30, 2018, available-for-sale debt securities with carrying values of $2.0 million and $5.8 million were pledged to secure certain deposits and repurchase agreements, respectively.
Equity Securities
Equity securities consist of Community Reinvestment Act funds and investments related to our non-qualified deferred compensation plan. At June 30, 2018 and December 31, 2017, we had $15.6 million and $12.6 million, respectively, in equity securities recorded at fair value. Prior to January 1, 2018, equity securities were stated at fair value with unrealized gains and losses reported as a separate component of AOCI, net of tax. At December 31, 2017, net unrealized gains of $10,000 had been recognized in AOCI. On January 1, 2018, these unrealized gains and losses were reclassified out of AOCI and into retained earnings with subsequent changes in fair value being recognized in other non-interest income. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three and six months ended June 30, 2018 (in thousands):
 
Three months ended
 
Six months ended
 
June 30, 2018
 
June 30, 2018
Net gains and (losses) recognized during the period on equity securities
$
108

 
$
(104
)
Less: Net gains and (losses) recognized during the period on equity securities sold during the period
162

 
162

Unrealized gains and (losses) recognized during the reporting period on equity securities still held at the reporting date
$
(54
)
 
$
(266
)


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Table of Contents

(4) LOANS HELD FOR INVESTMENT AND ALLOWANCE FOR LOAN LOSSES
At June 30, 2018 and December 31, 2017, loans held for investment were as follows (in thousands):
 
 
June 30,
2018
 
December 31,
2017
Commercial
$
10,189,832

 
$
9,189,811

Mortgage finance
5,923,058

 
5,308,160

Construction
2,226,590

 
2,166,208

Real estate
3,868,411

 
3,794,577

Consumer
46,652

 
48,684

Leases
314,575

 
264,903

Gross loans held for investment
22,569,118

 
20,772,343

Deferred income (net of direct origination costs)
(109,339
)
 
(97,931
)
Allowance for loan losses
(179,096
)
 
(184,655
)
Total loans held for investment, net
$
22,280,683

 
$
20,489,757

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. We have agreements with mortgage lenders and purchase interests in individual loans they originate. The ownership interests collateralizing our mortgage finance loans are typically held on our balance sheet for 10 to 20 days, and substantially all loans are conforming loans. Substantially all mortgage loans are underwritten consistently with established programs for permanent financing with financially sound investors. Balances as of June 30, 2018 and December 31, 2017 are stated net of $242.7 million and $171.2 million of 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 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 loan defaults, increasing risk of exposure to classification, non-performing status, reserve allocation and actual credit loss and foreclosure. These loans typically have floating rates and require 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. 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 June 30, 2018 and December 31, 2017, we had a blanket floating lien on certain real estate-secured loans, mortgage finance loans and certain investment securities used as collateral for Federal Home Loan Bank 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 June 30, 2018 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, 2018 and December 31, 2017 (in thousands):

June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Mortgage
Finance
 
Construction
 
Real Estate
 
Consumer
 
Leases
 
Total
Grade:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
9,945,020

 
$
5,923,058

 
$
2,211,981

 
$
3,778,808

 
$
46,493

 
$
299,825

 
$
22,205,185

Special mention
87,297

 

 
14,609

 
56,003

 

 

 
157,909

Substandard-accruing
77,929

 

 

 
31,057

 
93

 
13,650

 
122,729

Non-accrual
79,586

 

 

 
2,543

 
66

 
1,100

 
83,295

Total loans held for investment
$
10,189,832

 
$
5,923,058

 
$
2,226,590

 
$
3,868,411

 
$
46,652

 
$
314,575

 
$
22,569,118

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Mortgage
Finance
 
Construction
 
Real Estate
 
Consumer
 
Leases
 
Total
Grade:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
8,967,471

 
$
5,308,160

 
$
2,152,654

 
$
3,706,541

 
$
48,591

 
$
249,865

 
$
20,433,282

Special mention
19,958

 

 
13,554

 
53,652

 

 
495

 
87,659

Substandard-accruing
102,651

 

 

 
32,671

 
93

 
14,543

 
149,958

Non-accrual
99,731

 

 

 
1,713

 

 

 
101,444

Total loans held for investment
$
9,189,811

 
$
5,308,160

 
$
2,166,208

 
$
3,794,577

 
$
48,684

 
$
264,903

 
$
20,772,343


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Table of Contents


The following table details activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2018 and 2017. 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, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Commercial
 
Mortgage
Finance
 
Construction
 
Real
Estate
 
Consumer
 
Leases
 
Additional Qualitative Reserve
 
Total
Beginning balance
$
118,806

 
$

 
$
19,273

 
$
34,287

 
$
357

 
$
3,542

 
$
8,390

 
$
184,655

Provision for loan losses
38,920

 

 
621

 
928

 
(205
)
 
860

 
(3,511
)
 
37,613

Charge-offs
43,972

 

 

 

 

 

 

 
43,972

Recoveries
680

 

 

 
32

 
68

 
20

 

 
800

Net charge-offs (recoveries)
43,292

 

 

 
(32
)
 
(68
)
 
(20
)
 

 
43,172

Ending balance
$
114,434

 
$

 
$
19,894

 
$
35,247

 
$
220

 
$
4,422

 
$
4,879

 
$
179,096

Period end amount allocated to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
11,772

 
$

 
$

 
$
73

 
$
11

 
$
495

 
$

 
$
12,351

Loans collectively evaluated for impairment
102,662

 

 
19,894

 
35,174

 
209

 
3,927

 
4,879

 
166,745

Ending balance
$
114,434

 
$

 
$
19,894

 
$
35,247

 
$
220

 
$
4,422

 
$
4,879

 
$
179,096

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 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
19,384

 

 
680

 
3,436

 
287

 
2,989

 
(2,559
)
 
24,217

Charge-offs
21,543

 

 

 
40

 
180

 

 

 
21,763

Recoveries
3,442

 

 
101

 
53

 
41

 
8

 

 
3,645

Net charge-offs (recoveries)
18,101

 

 
(101
)
 
(13
)
 
139

 
(8
)
 

 
18,118

Ending balance
$
130,051

 
$

 
$
13,925

 
$
22,598

 
$
389

 
$
4,121

 
$
3,141

 
$
174,225

Period end amount allocated to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
28,382

 
$

 
$

 
$
180

 
$

 
$

 
$

 
$
28,562

Loans collectively evaluated for impairment
101,669

 

 
13,925

 
22,418

 
389

 
4,121

 
3,141

 
145,663

Ending balance
$
130,051

 
$

 
$
13,925

 
$
22,598

 
$
389

 
$
4,121

 
$
3,141

 
$
174,225

The table below presents the activity in the allowance for off-balance sheet credit losses related to unfunded commitments for the three and six months ended June 30, 2018 and 2017 (in thousands). This allowance is recorded in other liabilities in the consolidated balance sheet.
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Beginning balance
 
$
9,623

 
$
10,847

 
$
9,071

 
$
11,422

Provision for off-balance sheet credit losses
 
835

 
(1,642
)
 
1,387

 
(2,217
)
Ending balance
 
$
10,458

 
$
9,205

 
$
10,458

 
$
9,205


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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 decrease in the additional qualitative reserve at June 30, 2018 as compared to December 31, 2017 was primarily related to the resolution of remaining uncertainty regarding the impact to our loan portfolio from Hurricanes Harvey and Irma. We believe the level of additional qualitative reserves at June 30, 2018 is warranted due to uncertainties and unpredictable factors that have 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 uncertainties or unpredictable events.
Our recorded investment in loans as of June 30, 2018December 31, 2017 and June 30, 2017 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, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Mortgage
Finance
 
Construction
 
Real Estate
 
Consumer
 
Leases
 
Total
Loans individually evaluated for impairment
$
80,171

 
$

 
$

 
$
2,543

 
$
66

 
$
1,100

 
$
83,880

Loans collectively evaluated for impairment
10,109,661

 
5,923,058

 
2,226,590

 
3,865,868

 
46,586

 
313,475

 
22,485,238

Total
$
10,189,832

 
$
5,923,058

 
$
2,226,590

 
$
3,868,411

 
$
46,652

 
$
314,575

 
$
22,569,118

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Mortgage
Finance
 
Construction
 
Real Estate
 
Consumer
 
Leases
 
Total
Loans individually evaluated for impairment
$
100,676

 
$

 
$

 
$
2,008

 
$

 
$

 
$
102,684

Loans collectively evaluated for impairment
9,089,135

 
5,308,160

 
2,166,208

 
3,792,569

 
48,684

 
264,903

 
20,669,659

Total
$
9,189,811

 
$
5,308,160

 
$
2,166,208

 
$
3,794,577

 
$
48,684

 
$
264,903

 
$
20,772,343

 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Mortgage
Finance
 
Construction
 
Real Estate
 
Consumer
 
Leases
 
Total
Loans individually evaluated for impairment
$
120,770

 
$

 
$

 
$
4,514

 
$

 
$

 
$
125,284

Loans collectively evaluated for impairment
8,130,182

 
5,183,600

 
2,242,562

 
3,565,273

 
39,122

 
274,863

 
19,435,602

Total
$
8,250,952

 
$
5,183,600

 
$
2,242,562

 
$
3,569,787

 
$
39,122

 
$
274,863

 
$
19,560,886


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, 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 both June 30, 2018 and December 31, 2017, none of our non-accrual loans were earning on a cash basis. A loan is placed back on accrual status when both principal and interest are current and it is probable that we will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.

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Table of Contents

A loan held for investment is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due (both principal and interest) according to the terms of the 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 June 30, 2018 and December 31, 2017 (in thousands):
June 30, 2018
 
 
 
 
 
 
 
 
 
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
Business loans
$
27,521

 
$
52,966

 
$

 
$
12,449

 
$
133

Energy
16,373

 
17,549

 

 
20,393

 

Construction
 
 
 
 
 
 
 
 
 
Market risk

 

 

 

 

Real estate
 
 
 
 
 
 
 
 
 
Market risk

 

 

 

 

Commercial
1,042

 
1,042

 

 
1,074

 

Secured by 1-4 family
1,263

 
1,263

 

 
211

 

Consumer

 

 

 

 

Leases

 

 

 

 

Total impaired loans with no allowance recorded
$
46,199

 
$
72,820

 
$

 
$
34,127

 
$
133

With an allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
Business loans
$
19,038

 
$
19,038

 
$
5,597

 
$
43,537

 
$

Energy
17,239

 
18,500

 
6,175

 
32,145

 

Construction
 
 
 
 
 
 
 
 
 
Market risk

 

 

 

 

Real estate
 
 
 
 
 
 
 
 
 
Market risk

 

 

 
98

 

Commercial

 

 

 
166

 

Secured by 1-4 family
238

 
238

 
73

 
138

 

Consumer
66

 
71

 
11

 
47

 

Leases
1,100

 
1,100

 
495

 
183

 

Total impaired loans with an allowance recorded
$
37,681

 
$
38,947

 
$
12,351

 
$
76,314

 
$

Combined:
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
Business loans
$
46,559

 
$
72,004

 
$
5,597

 
$
55,986

 
$
133

Energy
33,612

 
36,049

 
6,175

 
52,538

 

Construction
 
 
 
 
 
 
 
 
 
Market risk

 

 

 

 

Real estate
 
 
 
 
 
 
 
 
 
Market risk

 

 

 
98

 

Commercial
1,042

 
1,042

 

 
1,240

 

Secured by 1-4 family
1,501

 
1,501

 
73

 
349

 

Consumer
66