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Section 1: 10-Q (10-Q)

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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 March 31, 2019
¨
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 every Interactive Data File required to be submitted 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 such files).    Yes  ý        ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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. (Check one):
Large Accelerated Filer x
 
Accelerated Filer  ¨
 
 
  
 
Non-Accelerated Filer  ¨
 
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 April 17, 2019, 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 50,273,887


Table of Contents

Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended March 31, 2019

Index
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
Item 4.
 
 
 
Item 1.
 
Item 1A.
 
Item 6.
 
 





Table of Contents

PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except per share data)
March 31, 2019
 
December 31, 2018
 
(Unaudited)
 
 
Assets
 
 
 
Cash and due from banks
$
177,137

 
$
214,191

Interest-bearing deposits in other banks
2,129,155

 
2,815,684

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

 
50,190

Investment securities
230,749

 
120,216

Loans held for sale ($1,901.6 million at March 31, 2019 and $1,969.2 million at December 31, 2018, at fair value)
1,901,637

 
1,969,474

Loans held for investment, mortgage finance
6,299,710

 
5,877,524

Loans held for investment (net of unearned income)
17,061,590

 
16,690,550

Less: Allowance for loan losses
208,573

 
191,522

Loans held for investment, net
23,152,727

 
22,376,552

Mortgage servicing rights, net
44,088

 
42,474

Premises and equipment, net
24,200

 
23,802

Accrued interest receivable and other assets
679,966

 
626,614

Goodwill and intangible assets, net
18,452

 
18,570

Total assets
$
28,383,111

 
$
28,257,767

Liabilities and Stockholders’ Equity
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
6,743,607

 
$
7,317,161

Interest-bearing
13,906,520

 
13,288,952

Total deposits
20,650,127

 
20,606,113

Accrued interest payable
24,488

 
20,675

Other liabilities
233,398

 
194,238

Federal funds purchased and repurchase agreements
897,892

 
641,174

Other borrowings
3,600,000

 
3,900,000

Subordinated notes, net
281,858

 
281,767

Trust preferred subordinated debentures
113,406

 
113,406

Total liabilities
25,801,169

 
25,757,373

Stockholders’ equity:
 
 
 
Preferred stock, $.01 par value, $1,000 liquidation value:
 
 
 
Authorized shares—10,000,000
 
 
 
Issued shares—6,000,000 shares issued at March 31, 2019 and December 31, 2018
150,000

 
150,000

Common stock, $.01 par value:
 
 
 
Authorized shares—100,000,000
 
 
 
Issued shares—50,264,028 and 50,201,127 at March 31, 2019 and December 31, 2018, respectively
503

 
502

Additional paid-in capital
969,079

 
967,890

Retained earnings
1,461,893

 
1,381,492

Treasury stock (shares at cost: 417 at March 31, 2019 and December 31, 2018)
(8
)
 
(8
)
Accumulated other comprehensive income, net of taxes
475

 
518

Total stockholders’ equity
2,581,942

 
2,500,394

Total liabilities and stockholders’ equity
$
28,383,111

 
$
28,257,767

See accompanying notes to consolidated financial statements.

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Table of Contents

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND OTHER
COMPREHENSIVE INCOME -UNAUDITED
 
 
Three months ended March 31,
(in thousands except per share data)
 
2019
 
2018
Interest income
 
 
 
 
Interest and fees on loans
 
$
312,703

 
$
243,864

Investment securities
 
1,460

 
206

Federal funds sold and securities purchased under resale agreements
 
379

 
1,045

Interest-bearing deposits in other banks
 
11,019

 
8,754

Total interest income
 
325,561

 
253,869

Interest expense
 
 
 
 
Deposits
 
69,054

 
31,702

Federal funds purchased
 
3,516

 
969

Other borrowings
 
11,854

 
5,680

Subordinated notes
 
4,191

 
4,191

Trust preferred subordinated debentures
 
1,332

 
1,027

Total interest expense
 
89,947

 
43,569

Net interest income
 
235,614

 
210,300

Provision for credit losses
 
20,000

 
12,000

Net interest income after provision for credit losses
 
215,614

 
198,300

Non-interest income
 
 
 
 
Service charges on deposit accounts
 
2,979

 
3,137

Wealth management and trust fee income
 
2,009

 
1,924

Brokered loan fees
 
5,066

 
5,168

Servicing income
 
2,734

 
5,492

Swap fees
 
1,031

 
1,562

Net gain/(loss) on sale of loans held for sale
 
(505
)
 
(2,173
)
Other
 
16,700

 
4,837

Total non-interest income
 
30,014

 
19,947

Non-interest expense
 
 
 
 
Salaries and employee benefits
 
77,823

 
72,537

Net occupancy expense
 
7,879

 
7,234

Marketing
 
11,708

 
8,677

Legal and professional
 
10,030

 
7,530

Communications and technology
 
9,198

 
6,633

FDIC insurance assessment
 
5,122

 
6,103

Servicing related expenses
 
5,382

 
3,805

Allowance and other carrying costs for other real estate owned
 

 
2,155

Other
 
13,236

 
12,286

Total non-interest expense
 
140,378

 
126,960

Income before income taxes
 
105,250

 
91,287

Income tax expense
 
22,411

 
19,342

Net income
 
82,839

 
71,945

Preferred stock dividends
 
2,438

 
2,438

Net income available to common stockholders
 
$
80,401

 
$
69,507

Other comprehensive income (loss)
 
 
 
 
Change in unrealized gain (loss) on available-for-sale debt securities arising during period, before tax
 
$
(53
)
 
$
(63
)
Income tax expense (benefit) related to unrealized loss on available-for-sale debt securities
 
(10
)
 
(13
)
Other comprehensive income (loss), net of tax
 
(43
)
 
(50
)
Comprehensive income
 
$
82,796

 
$
71,895

Basic earnings per common share
 
$
1.60

 
$
1.40

Diluted earnings per common share
 
$
1.60

 
$
1.38

See accompanying notes to consolidated financial statements.

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Table of Contents

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED
 
Preferred Stock
 
Common Stock
 
Additional
 
 
 
Treasury Stock
 
Accumulated
Other
 
 
 
Paid-in
 
Retained
 
Comprehensive
 
 
(In thousands except share data)
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Earnings
 
Shares
 
Amount
 
Income
 
Total
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

 

 

 

 

 
71,945

 

 

 

 
71,945

Change in unrealized gain on available-for-sale securities, net of taxes of $13

 

 

 

 

 

 

 

 
(50
)
 
(50
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
71,895

Stock-based compensation expense recognized in earnings

 

 

 

 
1,957

 

 

 

 

 
1,957

Preferred stock dividend

 

 

 

 

 
(2,438
)
 

 

 

 
(2,438
)
Issuance of stock related to stock-based awards

 

 
26,430

 
1

 
(709
)
 

 

 

 

 
(708
)
Balance at March 31, 2018
6,000,000

 
$
150,000

 
49,670,191

 
$
497

 
$
962,553

 
$
1,159,925

 
(417
)
 
$
(8
)
 
$
462

 
$
2,273,429

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018 (audited)
6,000,000

 
$
150,000

 
50,201,127

 
$
502

 
$
967,890

 
$
1,381,492

 
(417
)
 
$
(8
)
 
$
518

 
$
2,500,394

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 
82,839

 

 

 

 
82,839

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

 

 

 

 

 

 

 

 
(43
)
 
(43
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
82,796

Stock-based compensation expense recognized in earnings

 

 

 

 
2,423

 

 

 

 

 
2,423

Preferred stock dividend

 

 

 

 

 
(2,438
)
 

 

 

 
(2,438
)
Issuance of stock related to stock-based awards

 

 
54,133

 
1

 
(1,234
)
 

 

 

 

 
(1,233
)
Issuance of common stock related to warrants

 

 
8,768

 

 

 

 

 

 

 

Balance at March 31, 2019
6,000,000

 
$
150,000

 
50,264,028

 
$
503

 
$
969,079

 
$
1,461,893

 
(417
)
 
$
(8
)
 
$
475

 
$
2,581,942

(1)
Represents the impact of adopting Accounting Standard Update ("ASU") 2018-02 and ASU 2016-01. See Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 for more information.
See accompanying notes to consolidated financial statements.

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Table of Contents

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
 
Three months ended March 31,
(In thousands)
2019
 
2018
Operating activities
 
 
 
Net income
$
82,839

 
$
71,945

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
20,000

 
12,000

Depreciation and amortization
7,792

 
8,240

Net (gain)/loss on sale of loans held for sale
505

 
2,173

Increase (decrease) in valuation allowance on mortgage servicing rights
2,931

 
(757
)
Stock-based compensation expense
4,488

 
5,971

Purchases and originations of loans held for sale
(1,550,059
)
 
(1,479,006
)
Proceeds from sales and repayments of loans held for sale
1,602,923

 
1,381,277

Other real estate owned write-down

 
2,000

Changes in operating assets and liabilities:
 
 
 
Accrued interest receivable and other assets
(58,278
)
 
15,238

Accrued interest payable and other liabilities
51,023

 
(13,757
)
Net cash provided by (used in) operating activities
164,164

 
5,324

Investing activities
 
 
 
Purchases of available-for-sale investment securities
(109,928
)
 
(2,455
)
Principal payments received on available-for-sale securities
307

 
763

Originations of mortgage finance loans
(24,328,971
)
 
(19,821,894
)
Proceeds from pay-offs of mortgage finance loans
23,906,785

 
20,440,116

Net increase in loans held for investment, excluding mortgage finance loans
(375,628
)
 
(380,725
)
Purchase of premises and equipment, net
(2,642
)
 
(4,441
)
Proceeds from sale of other real estate owned, net
79

 
184

Net cash provided by/(used in) by investing activities
(909,998
)
 
231,548

Financing activities
 
 
 
Net increase/(decrease) in deposits
44,014

 
(358,647
)
Costs from issuance of stock related to stock-based awards and warrants
(1,233
)
 
(708
)
Preferred dividends paid
(2,438
)
 
(2,438
)
Net increase/(decrease) in other borrowings
(300,000
)
 
(500,000
)
Net increase (decrease) in Federal funds purchased and repurchase agreements
256,718

 
170,500

Net cash provided by/(used in) financing activities
(2,939
)
 
(691,293
)
Net increase/(decrease) in cash and cash equivalents
(748,773
)
 
(454,421
)
Cash and cash equivalents at beginning of period
3,080,065

 
2,905,591

Cash and cash equivalents at end of period
$
2,331,292

 
$
2,451,170

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
86,134

 
$
46,075

Cash paid during the period for income taxes
6

 
266

See accompanying notes to consolidated financial statements.

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Table of Contents

(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 or national clientele of commercial borrowers. We are primarily a secured lender, with the majority of our loans held for investment, excluding mortgage finance loans and other national lines of business, being made to businesses headquartered or with operations in Texas. Our national lines of business 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, 2018, included in our Annual Report on Form 10-K filed with the SEC on February 14, 2019 (the “2018 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 2016-02 "Leases (Topic 842)" ("ASU 2016-02") requires that lessees and lessors recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. ASU 2016-02 was effective for us on January 1, 2019. ASU 2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption with the option to elect certain practical expedients. We have elected to apply ASU 2016-02 as of the beginning of the period of adoption (January 1, 2019) and have not restated comparative periods. Of the optional practical expedients available under ASU 2016-02, all have been adopted except for the hindsight practical expedient.
Our operating leases relate primarily to office space and bank branches. As a result of implementing ASU 2016-02, we recognized an operating lease right-of-use ("ROU") asset of $64 million and an operating lease liability of $74 million on January 1, 2019, with no impact on our consolidated statement of income or consolidated statement of cash flows compared to the prior lease accounting model. The ROU asset and operating lease liability are recorded in other assets and other liabilities, respectively, in the consolidated balance sheets. See Note 7 - Leases for additional information.
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 financial instruments and the status of contingencies are particularly susceptible to significant change.

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Table of Contents

(2) Earnings Per Share
The following table presents the computation of basic and diluted earnings per share:
 
Three months ended March 31,
(in thousands except per share data)
2019
 
2018
Numerator:
 
 
 
Net income
$
82,839

 
$
71,945

Preferred stock dividends
2,438

 
2,438

Net income available to common stockholders
$
80,401

 
$
69,507

Denominator:
 
 
 
Denominator for basic earnings per share—weighted average shares
50,229,797

 
49,650,884

Effect of employee stock-based awards(1)
115,602

 
255,794

Effect of warrants to purchase common stock

 
446,819

Denominator for dilutive earnings per share—adjusted weighted average shares and assumed conversions
50,345,399

 
50,353,497

Basic earnings per common share
$
1.60

 
$
1.40

Diluted earnings per common share
$
1.60

 
$
1.38

(1)
SARs and RSUs outstanding of 411,065 at March 31, 2019 and 5,139 at March 31, 2018 have not been included in diluted earnings per share because to do so would have been antidilutive 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)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
March 31, 2019
 
 
 
 
 
 
 
Available-for-sale debt securities:
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
6,567

 
$
361

 
$

 
$
6,928

Tax-exempt asset-backed securities
187,528

 
4,316

 

 
191,844

Credit risk transfer securities
14,713

 

 
(4,076
)
 
10,637

 
$
208,808

 
$
4,677

 
$
(4,076
)
 
$
209,409

 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
Available-for-sale debt securities:
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
6,874

 
$
368

 
$

 
$
7,242

Tax-exempt asset-backed securities
95,518

 
286

 

 
95,804

 
$
102,392

 
$
654

 
$

 
$
103,046

During the first quarter of 2019, we acquired a $92.0 million tax-exempt security backed with underlying cash flows from municipal revenue bonds, as well as $15.0 million in credit risk transfer ("CRT") securities. The securities were all recorded as available-for-sale upon acquisition and subsequently marked to fair value as of quarter end.
CRT securities represent unsecured obligations issued by government sponsored entities ("GSEs") such as Freddie Mac and are designed to transfer mortgage credit risk from the GSE to private investors. CRT securities are structured to be subject to the performance of a reference pool of mortgage loans in which we share in 50% of the first losses with the GSE. If the reference pool incurs losses, the amount we will recover on the notes is reduced by our share of the amount of such losses, which could potentially be up to 100% of the amount outstanding. The CRT securities are generally interest-only for an initial period of time and are restricted from being transferred until a future date.

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Table of Contents

The amortized cost and estimated fair value of available-for-sale debt securities are presented below by contractual maturity: 
(in thousands, except percentage data)
Less Than
One Year
 
After One
Through
Five Years
 
After Five
Through
Ten Years
 
After Ten
Years
 
Total
March 31, 2019
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:(1)
 
 
 
 
 
 
 
 
 
Amortized cost
$

 
$
1,419

 
$

 
$
5,148

 
$
6,567

Estimated fair value

 
1,516

 

 
5,412

 
6,928

Weighted average yield(3)
6.50
%
 
5.54
%
 
%
 
4.59
%
 
4.79
%
Tax-exempt asset-backed securities:(1)
 
 
 
 
 
 
 
 
 
Amortized Cost

 

 

 
187,528

 
187,528

Estimated fair value

 

 

 
191,844

 
191,844

Weighted average yield(2)(3)
%
 
%
 
%
 
4.20
%
 
4.20
%
CRT securities:
 
 
 
 
 
 
 
 
 
Amortized Cost

 

 

 
14,713

 
14,713

Estimated fair value

 

 

 
10,637

 
10,637

Weighted average yield(3)
%
 
%
 
%
 
2.49
%
 
2.49
%
Total available-for-sale debt securities:
 
 
 
 
 
 
 
 
 
Amortized cost
 
 
 
 
 
 
 
 
$
208,808

Estimated fair value
 
 
 
 
 
 
 
 
$
209,409

 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:(1)
 
 
 
 
 
 
 
 
 
Amortized cost
$
3

 
$
1,573

 
$

 
$
5,298

 
$
6,874

Estimated fair value
4

 
1,668

 

 
5,570

 
7,242

Weighted average yield(3)
6.50
%
 
5.54
%
 
%
 
4.53
%
 
4.76
%
Tax-exempt asset-backed securities:(1)
 
 
 
 
 
 
 
 
 
Amortized Cost

 

 

 
95,518

 
95,518

Estimated fair value

 

 

 
95,804

 
95,804

Weighted average yield(2)(3)
%
 
%
 
%
 
4.25
%
 
4.25
%
Total available-for-sale debt securities:
 
 
 
 
 
 
 
 
 
Amortized cost
 
 
 
 
 
 
 
 
$
102,392

Estimated fair value
 
 
 
 
 
 
 
 
$
103,046

(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 have been adjusted to a tax equivalent basis assuming a 21% federal tax rate.
(3)
Yields are calculated based on amortized cost.
The following table discloses as of March 31, 2019 our available-for-sale debt 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:
March 31, 2019
Less Than 12 Months
 
12 Months or Longer
 
Total
(in thousands)
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
CRT securities
$
14,713

 
$
(4,076
)
 
$

 
$

 
$
14,713

 
$
(4,076
)
At March 31, 2019, the CRT securities were the only available-for-sale debt securities in an unrealized loss position.

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We conduct periodic reviews of securities with unrealized losses to evaluate whether the impairment is other-than-temporary. Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in accumulated other comprehensive income ("AOCI") for available-for-sale debt securities. When we have the intent to sell or we believe we will more likely than not be required to sell an available-for-sale debt security, the entire excess of its amortized cost basis over its fair value is recognized in earnings. For available-for-sale debt securities that we do not intend to sell and are not likely to be required to sell, only the credit-related impairment is recognized in earnings and any non-credit-related impairment is recorded in AOCI.
Based on the results of our periodic review of available-for-sale debt securities in an unrealized loss position at March 31, 2019, we recorded a $331,000 other-than-temporary credit-related impairment on the CRT securities, reducing the amortized cost of the securities. The loss was measured as the excess of the amortized costs basis of the security over the present value of cash flows expected to be collected and was recorded in other non-interest expense. These securities also have unrealized losses, which we do not believe are other-than-temporary. We have evaluated the near-term prospects of the investments in relation to the severity and duration of the impairment and based on that evaluation have determined that we have the ability and intent to hold the investments until recovery of fair value.
Available-for-sale debt securities with carrying values of approximately $4.6 million and $1.6 million were pledged to secure certain customer repurchase agreements and deposits at March 31, 2019. The comparative amounts at December 31, 2018 were $4.8 million and $1.7 million, respectively.
Equity Securities
Equity securities consist of Community Reinvestment Act funds and investments related to our non-qualified deferred compensation plan. At March 31, 2019 and December 31, 2018, we had $21.3 million and $17.2 million, respectively, in equity securities recorded at fair value. The following is a summary of unrealized and realized gains/(losses) recognized on equity securities in other non-interest income in the consolidated statements of income:
 
 
Three months ended March 31,
(in thousands)
 
2019
 
2018
Net gains/(losses) recognized during the period
 
$
1,266

 
$
(212
)
Less: Realized net gains/(losses) recognized during the period on equity securities sold

(30
)
 

Unrealized net gains/(losses) recognized during the period on equity securities still held
 
$
1,296

 
$
(212
)
(4) Loans Held for Investment and Allowance for Loan Losses
Loans held for investment are summarized by portfolio segment as follows:
(in thousands)
March 31, 2019
 
December 31, 2018
Commercial
$
10,673,960

 
$
10,373,288

Mortgage finance(1)
6,299,710

 
5,877,524

Construction
2,493,192

 
2,120,966

Real estate
3,642,566

 
3,929,117

Consumer
61,377

 
63,438

Equipment leases
292,248

 
312,191

Gross loans held for investment
23,463,053

 
22,676,524

Deferred income (net of direct origination costs)
(101,753
)
 
(108,450
)
Allowance for loan losses
(208,573
)
 
(191,522
)
Total loans held for investment, net
$
23,152,727

 
$
22,376,552

(1)
Balances at March 31, 2019 and December 31, 2018 are stated net of $185.4 million and $193.0 million of participations sold, respectively.

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Summary of Loan Loss Experience
The following tables summarize the credit risk profile of our loans held for investment by internally assigned grades and non-accrual status:
(in thousands)
Commercial
 
Mortgage
Finance
 
Construction
 
Real Estate
 
Consumer
 
Equipment Leases
 
Total
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
10,205,865

 
$
6,299,710

 
$
2,478,880

 
$
3,526,380

 
$
59,759

 
$
289,664

 
$
22,860,258

Special mention
200,920

 

 

 
75,755

 

 
1,975

 
278,650

Substandard-accruing
145,988

 

 
14,312

 
27,980

 
1,566

 
609

 
190,455

Non-accrual
121,187

 

 

 
12,451

 
52

 

 
133,690

Total loans held for investment
$
10,673,960

 
$
6,299,710

 
$
2,493,192

 
$
3,642,566

 
$
61,377

 
$
292,248

 
$
23,463,053

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
10,034,597

 
$
5,877,524

 
$
2,099,955

 
$
3,850,811

 
$
61,815

 
$
309,775

 
$
22,234,477

Special mention
120,531

 

 
21,011

 
47,644

 

 
2,223

 
191,409

Substandard-accruing
140,297

 

 

 
28,205

 
1,568

 
193

 
170,263

Non-accrual
77,863

 

 

 
2,457

 
55

 

 
80,375

Total loans held for investment
$
10,373,288

 
$
5,877,524

 
$
2,120,966

 
$
3,929,117

 
$
63,438

 
$
312,191

 
$
22,676,524

The allowance for loan losses is comprised of general reserves and specific reserves for impaired loans based on our estimate of losses inherent in the portfolio at the balance sheet date, but not yet identified with specified loans. We believe the allowance at March 31, 2019 to be appropriate, given management's assessment of losses inherent in the portfolio as of the evaluation date, the growth in the loan and lease portfolio, current economic conditions in our market areas and other factors.

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The following table details activity in the allowance for loan losses, as well as the recorded investment in loans held for investment, by portfolio segment and disaggregated on the basis of our impairment methodology. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
(in thousands)
Commercial
Mortgage
Finance
Construction
Real
Estate
Consumer
Equipment Leases
Additional Qualitative Reserve
Total
Three months ended March 31, 2019
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
Beginning balance
$
129,442

$

$
19,242

$
33,353

$
425

$
1,829

$
7,231

$
191,522

Provision for loan losses
25,506

1,300

3,583

(1,272
)
(46
)
(201
)
(7,231
)
21,639

Charge-offs
4,865







4,865

Recoveries
266




10

1


277

Net charge-offs (recoveries)
4,599




(10
)
(1
)

4,588

Ending balance
$
150,349

$
1,300

$
22,825

$
32,081

$
389

$
1,629

$

$
208,573

Period end allowance for loan losses allocated to:
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
27,409

$

$

$
1,599

$
10

$

$

$
29,018

Loans collectively evaluated for impairment
122,940

1,300

22,825

30,482

379

1,629


179,555

Total
$
150,349

$
1,300

$
22,825

$
32,081

$
389

$
1,629

$

$
208,573

Period end loans allocated to:
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
121,187

$

$

$
18,709

$
52

$

$

$
139,948

Loans collectively evaluated for impairment
10,552,773

6,299,710

2,493,192

3,623,857

61,325

292,248


23,323,105

Total
$
10,673,960

$
6,299,710

$
2,493,192

$
3,642,566

$
61,377

$
292,248

$

$
23,463,053

 
 
 
 
 
 
 
 
 
Three months ended March 31, 2018
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
Beginning balance
$
118,806

$

$
19,273

$
34,287

$
357

$
3,542

$
8,390

$
184,655

Provision for loan losses
17,546


(518
)
(200
)
(178
)
(18
)
(5,184
)
11,448

Charge-offs
5,667







5,667

Recoveries
360



24

59

19


462

Net charge-offs (recoveries)
5,307



(24
)
(59
)
(19
)

5,205

Ending balance
$
131,045

$

$
18,755

$
34,111

$
238

$
3,543

$
3,206

$
190,898

Period end allowance for loan losses allocated to:
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
34,897

$

$

$
22

$
2

$

$

$
34,921

Loans collectively evaluated for impairment
96,148


18,755

34,089

236

3,543

3,206

155,977

Total
$
131,045

$

$
18,755

$
34,111

$
238

$
3,543

$
3,206

$
190,898

Period end loans allocated to:
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
123,206

$

$

$
1,187

$
72

$

$

$
124,465

Loans collectively evaluated for impairment
9,337,818

4,689,938

2,224,403

3,833,571

47,239

276,303


20,409,272

Total
$
9,461,024

$
4,689,938

$
2,224,403

$
3,834,758

$
47,311

$
276,303

$

$
20,533,737

During the first quarter of 2019, we refined our methodology for calculating the allowance for loan losses to improve the specificity of the risk weights and the risk-weighting process for each product type assigned to the loans in our held for investment portfolio. As a result of these refinements, management is better able to allocate inherent losses previously accounted for in the additional qualitative reserve component of our allowance for loan losses to specific product types and credit risk grades, thus eliminating the additional qualitative reserve component of our allowance for loan losses in the first quarter of 2019.  Additionally, this improved specificity and consideration of current mortgage market conditions has resulted

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in the allocation of a portion of the company’s provision for loan losses to our mortgage finance loan portfolio for the first time in the first quarter of 2019.
The following tables detail our impaired loans held for investment by portfolio segment. In accordance with ASC 310, Receivables, we have also included all restructured and formerly restructured loans in our impaired loan totals.
(in thousands)
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
March 31, 2019
 
 
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
Business loans
$
21,075

 
$
37,077

 
$

 
$
12,218

 
$

Energy loans
9,048

 
10,124

 

 
5,724

 

Real estate
 
 
 
 
 
 
 
 
 
Market risk

 

 

 

 

Commercial
7,220

 
7,220

 

 
4,048

 

Secured by 1-4 family
1,228

 
1,228

 

 
683

 

Consumer

 

 

 

 

Equipment leases

 

 

 

 

Total impaired loans with no allowance recorded
$
38,571

 
$
55,649

 
$

 
$
22,673

 
$

With an allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
Business loans
$
23,374

 
$
23,909

 
$
9,663

 
$
11,687

 
$

Energy loans
67,690

 
70,551

 
17,746

 
28,195

 

Real estate
 
 
 
 
 
 
 
 
 
Market risk
8,478

 
8,478

 
1,378

 
2,826

 

Commercial

 

 

 

 

Secured by 1-4 family
1,783

 
1,783

 
221

 
647

 

Consumer
52

 
52

 
10

 
30

 

Equipment leases

 

 

 

 

Total impaired loans with an allowance recorded
$
101,377

 
$
104,773

 
$
29,018

 
$
43,385

 
$

Combined:
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
Business loans
$
44,449

 
$
60,986

 
$
9,663

 
$
23,905

 
$

Energy loans
76,738

 
80,675

 
17,746

 
33,919

 

Real estate
 
 
 
 
 
 
 
 
 
Market risk
8,478

 
8,478

 
1,378

 
2,826

 

Commercial
7,220

 
7,220

 

 
4,048

 

Secured by 1-4 family
3,011

 
3,011

 
221

 
1,330

 

Consumer
52

 
52

 
10

 
30

 

Equipment leases

 

 

 

 

Total impaired loans
$
139,948

 
$
160,422

 
$
29,018

 
$
66,058

 
$


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(in thousands)
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
December 31, 2018
 
 
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
Business loans
$
23,367

 
$
55,008

 
$

 
$
16,426

 
$
133

Energy loans
12,188

 
13,363

 

 
17,135

 

Real estate
 
 
 
 
 
 
 
 
 
Market risk

 

 

 

 

Commercial
7,388

 
7,388

 

 
3,215

 

Secured by 1-4 family
1,233

 
1,233

 

 
734

 

Consumer

 

 

 

 

Equipment leases

 

 

 

 

Total impaired loans with no allowance recorded
$
44,176

 
$
76,992

 
$

 
$
37,510

 
$
133

With an allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
Business loans
$
17,529

 
$
17,564

 
$
4,679

 
$
41,307

 
$

Energy loans
25,344

 
28,105

 
3,573

 
25,672

 

Real estate
 
 
 
 
 
 
 
 
 
Market risk

 

 

 
49

 

Commercial

 

 

 
83

 

Secured by 1-4 family
236

 
236

 
48

 
188

 

Consumer
55

 
55

 
10

 
54

 

Equipment leases

 

 

 
275

 

Total impaired loans with an allowance recorded
$
43,164

 
$
45,960

 
$
8,310

 
$
67,628

 
$

Combined:
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
Business loans
$
40,896

 
$
72,572

 
$
4,679

 
$
57,733

 
$
133

Energy loans
37,532

 
41,468

 
3,573

 
42,807

 

Real estate

 

 

 

 

Market risk

 

 

 
49

 

Commercial
7,388

 
7,388

 

 
3,298

 

Secured by 1-4 family
1,469

 
1,469

 
48

 
922

 

Consumer
55

 
55

 
10

 
54

 

Equipment leases

 

 

 
275

 

Total impaired loans
$
87,340

 
$
122,952

 
$
8,310

 
$
105,138

 
$
133

Average impaired loans outstanding during the three months ended March 31, 2019, and 2018 totaled $66.1 million and $109.9 million, respectively. As of March 31, 2019 and December 31, 2018, none of our non-accrual loans were earning interest income on a cash basis.

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The table below provides an age analysis of our loans held for investment: