What changed in this filing

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Item 1. Financial Statements

2020-10-22 compared with 2020-07-24 · 140 added, 133 removed, 842 unchanged (24% of the section changed)

3 unchanged sentences

(in thousands except share data)

June 30, 2020

September 30, 2020

December 31, 2019

3 unchanged sentences

Investment securities

Loans held for sale ($454.6 million at June 30, 2020 and $2,571.3 million at December 31, 2019, at fair value)

Loans held for sale ($639.0 million at September 30, 2020 and $2,571.3 million at December 31, 2019, at fair value)

Loans held for investment, mortgage finance

20 unchanged sentences

Authorized shares—10,000,000

Issued shares—6,000,000 shares issued at June 30, 2020 and December 31, 2019

Issued shares—6,000,000 shares issued at September 30, 2020 and December 31, 2019

Common stock, $.01 par value:

Authorized shares—100,000,000

Issued shares— 50,436,089 and 50,338,158 at June 30, 2020 and December 31, 2019, respectively

Issued shares— 50,455,969 and 50,338,158 at September 30, 2020 and December 31, 2019, respectively

Additional paid-in capital

1 unchanged sentence

Treasury stock (shares at cost:

417 at June 30, 2020 and December 31, 2019)

417 at September 30, 2020 and December 31, 2019)

Accumulated other comprehensive income, net of taxes

5 unchanged sentences

COMPREHENSIVE INCOME/(LOSS) - UNAUDITED

Three months ended June 30,

Six months ended June 30,

Three months ended September 30,

Nine months ended September 30,

(in thousands except per share data)

30 unchanged sentences

Total non-interest expense

Income/(loss) before income taxes

Income tax expense/(benefit)

Net income/(loss)

Income before income taxes

Income tax expense

Preferred stock dividends

4 unchanged sentences

Other comprehensive income/(loss), net of tax

Comprehensive income/(loss)

Comprehensive income

Basic earnings/(loss) per common share

7 unchanged sentences

(in thousands except share data)

Balance at March 31, 2019

Balance at June 30, 2019

Comprehensive income:

4 unchanged sentences

Issuance of stock related to stock-based awards

Balance at September 30, 2019

Balance at June 30, 2020

Balance at March 31, 2020

Impact of adoption of new accounting standards(1)

Comprehensive loss:

Comprehensive income:

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

Total comprehensive loss

Total comprehensive income

Stock-based compensation expense recognized in earnings

1 unchanged sentence

Issuance of stock related to stock-based awards

Balance at June 30, 2020

Represents the impact of adopting Accounting Standard Update ("ASU") 2016-13.

See Note 1 to the consolidated financial statements for more information.

Balance at September 30, 2020

See accompanying notes to consolidated financial statements.

13 unchanged sentences

Issuance of common stock related to warrants

Balance at June 30, 2019

Balance at September 30, 2019

Balance at December 31, 2019 (audited)

Impact of adoption of new accounting standards, net of taxes(1)

Comprehensive loss:

Comprehensive income:

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

Total comprehensive loss

Total comprehensive income

Stock-based compensation expense recognized in earnings

1 unchanged sentence

Issuance of stock related to stock-based awards

Balance at June 30, 2020

Balance at September 30, 2020

Represents the impact of adopting Accounting Standard Update ("ASU") 2016-13.

3 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

Six months ended June 30,

Nine months ended September 30,

(in thousands)

Operating activities

Net income/(loss)

Adjustments to reconcile net income/(loss) to net cash provided by operating activities:

Adjustments to reconcile net income to net cash provided by operating activities:

Provision for credit losses

8 unchanged sentences

Accrued interest payable and other liabilities

Net cash provided by operating activities

Net cash provided by/(used in) operating activities

Investing activities

2 unchanged sentences

Originations of mortgage finance loans

( 157,016,926

Proceeds from pay-offs of mortgage finance loans

Net increase in loans held for investment, excluding mortgage finance loans

Net decrease/(increase) in loans held for investment, excluding mortgage finance loans

Purchase of premises and equipment, net

6 unchanged sentences

Net increase/(decrease) in other borrowings

Net increase in federal funds purchased and repurchase agreements

Net increase/(decrease) in federal funds purchased and repurchase agreements

Net cash provided by financing activities

17 unchanged sentences

(“IBTX”) entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, on the terms and subject to the conditions therein, the Company would be merged with and into IBTX.

On May 22, 2020, the Company and IBTX entered into an agreement (the “Mutual Termination Agreement”) pursuant to which the parties mutually agreed to terminate the Merger Agreement.

On May 22, 2020, the Company and IBTX entered into an agreement pursuant to which the parties mutually agreed to terminate the Merger Agreement.

Neither party paid a termination fee in connection with the termination of the Merger Agreement.

5 unchanged sentences

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, 2019 , included in our 2019 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.

3 unchanged sentences

In accordance with the guidance set forth in SEC Staff Bulletin 99, Materiality , and SEC Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financials , the Company concluded that the error was not material, individually or in the aggregate with other previously identified immaterial errors, to any prior periods, the current period or the trend in earnings from a quantitative and qualitative perspective.

However, correcting the cumulative effect of the errors in the current period would have resulted in a material misstatement in the current period and, as such, we have revised our previously reported financial information contained in our Quarterly Report on Form 10-Q for the three and six-months ended June 30, 2019 to correct the immaterial error, as well as other previously identified immaterial errors.

However, correcting the cumulative effect of the errors in the current period would have resulted in a material misstatement in the current period and, as such, we have revised our previously reported financial information contained in our Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2019 to correct the immaterial error, as well as other previously identified immaterial errors.

We will also revise previously reported financial information for these immaterial errors in our future filings, as applicable.

6 unchanged sentences

Revised Consolidated Statement of Operations and Other Comprehensive Income/(Loss)

Three Months Ended June 30, 2019

Six Months Ended June 30, 2019

Three Months Ended September 30, 2019

Nine Months Ended September 30, 2019

(in thousands)

6 unchanged sentences

Revised Consolidated Statement of Stockholders' Equity

Three Months Ended June 30, 2019

Six Months Ended June 30, 2019

Three Months Ended September 30, 2019

Nine Months Ended September 30, 2019

(in thousands)

3 unchanged sentences

Ending balance total equity

March 31, 2020 reported balances of $ 1,668,329 and $ 2,803,533 for retained earnings and total equity, respectively were both adjusted down by $ 30,937 to revised balances of $ 1,637,392 and $ 2,772,596 , respectively.

The share-based liabilities relate to agreements with certain employees of a subsidiary of the Company that was acquired in 2005.

1 unchanged sentence

The put feature causes the liability to be remeasured to current puttable value at each period end.

The impact of adjusting the liability to puttable value at each period is recorded in salaries and employee benefits expense.

The impact of adjusting the liability to puttable value at each period end is recorded in salaries and employee benefits expense.

During the second quarter of 2020, put features were exercised on a portion of the outstanding liability.

As of June 30, 2020, the carrying value of these share-based liabilities totaled $ 6.7 million and is recorded in other liabilities on the consolidated balance sheets.

As of September 30, 2020, the carrying value of these share-based liabilities totaled $ 7.2 million and is recorded in other liabilities on the consolidated balance sheets.

Accounting Changes

122 unchanged sentences

The committees report to the board as part of the board's review on a quarterly basis of our consolidated financial statements.

When management determines that foreclosure is probable, and for certain collateral-dependent loans where foreclosure is not considered probable, expected credit losses are based on the fair value of the collateral adjusted for selling costs, when appropriate.

When management determines that foreclosure is probable, and for certain collateral-dependent loans where foreclosure is not considered probable, expected credit losses are based on the estimated fair value of the collateral adjusted for selling costs, when appropriate.

A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.

15 unchanged sentences

Accordingly, we do not recognize an allowance for credit loss against accrued interest receivable.

All debt securities are available-for-sale as of June 30, 2020 and December 31, 2019.

All debt securities are available-for-sale as of September 30, 2020 and December 31, 2019 .

Included in debt securities available-for-sale are Credit Risk Transfer ("CRT") securities.

3 unchanged sentences

Unrealized losses recognized in accumulated other comprehensive income ("AOCI") for the CRT securities are primarily related to the difference between the current market rate for similar securities and the stated interest rate and are not considered to be related to credit loss events.

The CRT securities are generally interest-only for an initial period of time and are restricted from being transferred until a future date.

The CRT securities are generally interest-only for an initial period of time and may be restricted from being transferred until a future date.

Use of Estimates

4 unchanged sentences

The following table presents the computation of basic and diluted earnings per share:

Three months ended June 30,

Six months ended June 30,

Three months ended September 30,

Nine months ended September 30,

(in thousands except share and per share data)

Net income/(loss)

Preferred stock dividends

5 unchanged sentences

Diluted earnings/(loss) per common share

SARs and RSUs outstanding of 510,095 at June 30, 2020 and 116,840 at June 30, 2019 have not been included in diluted earnings/(loss) per share because to do so would have been antidilutive for the periods presented.

SARs and RSUs outstanding of 480,062 at September 30, 2020 and 107,615 at September 30, 2019 have not been included in diluted earnings/(loss) per share because to do so would have been antidilutive for the periods presented.

(3) Investment Securities

2 unchanged sentences

(in thousands)

June 30, 2020

September 30, 2020

Available-for-sale debt securities:

Government Agency Securities

Residential mortgage-backed securities

6 unchanged sentences

Credit risk transfer securities

Excludes accrued interest receivable of $ 1.5 million and $ 1.6 million at June 30, 2020 and December 31, 2019, respectively, that is recorded in accrued interest receivable and other assets.

Excludes accrued interest receivable of $ 3.3 million and $ 1.6 million at September 30, 2020 and December 31, 2019, respectively, that is recorded in accrued interest receivable and other assets.

The amortized cost and estimated fair value, excluding accrued interest receivable, and weighted average yield of available-for-sale debt securities are presented below by contractual maturity:

(in thousands, except percentage data)

June 30, 2020

September 30, 2020

Available-for-sale:

Government Agency Securities:(1)

Amortized cost

Estimated fair value

Weighted average yield(3)

Residential mortgage-backed securities:(1)

40 unchanged sentences

Unrealized Loss

June 30, 2020

Tax-exempt asset-backed securities

September 30, 2020

Government Agency Securities

Residential mortgage-backed securities

CRT securities

2 unchanged sentences

We conduct periodic reviews of securities with unrealized losses to evaluate whether the decline in fair value has resulted from credit losses or other factors.

Based on the results of our periodic review, at June 30, 2020 management believes that unrealized losses on the tax-exempt asset-backed securities and CRT securities have resulted from factors not deemed credit-related and no allowance for credit loss was recorded.

Based on the results of our periodic review, at September 30, 2020 management believes that all of our unrealized losses have resulted from factors not deemed credit-related and no allowance for credit loss was recorded.

We have evaluated the near-term prospects of each securities portfolio in relation to the severity of the non credit-related unrealized losses and adverse conditions related to the securities among other factors.

Based on that evaluation management has determined that we have the ability and intent to hold the securities until recovery of fair value and have recorded the non credit-related unrealized losses in AOCI.

Available-for-sale debt securities with carrying values of approximately $ 3.0 million and $ 1.4 million were pledged to secure certain customer repurchase agreements and deposits, respectively, at June 30, 2020 .

Available-for-sale debt securities with carrying values of approximately $ 33.0 million and $ 2.0 million were pledged to secure certain customer repurchase agreements and deposits, respectively, at September 30, 2020 .

The comparative amounts at December 31, 2019 were $ 3.5 million and $ 1.2 million , respectively.

1 unchanged sentence

Equity securities consist of Community Reinvestment Act funds and investments related to our non-qualified deferred compensation plan.

At June 30, 2020 and December 31, 2019 , we had $ 28.1 million and $ 25.6 million , respectively, in equity securities recorded at fair value.

At September 30, 2020 and December 31, 2019 , we had $ 29.7 million and $ 25.6 million , respectively, in equity securities recorded at fair value.

The following is a summary of unrealized and realized gains/(losses) recognized on equity securities and included in other non-interest income in the consolidated statements of income:

Three months ended June 30,

Six months ended June 30,

Three months ended September 30,

Nine months ended September 30,

(in thousands)

Net gains/(losses) recognized during the period

Net gains recognized during the period

Realized net gains/(losses) recognized during the period on equity securities sold

3 unchanged sentences

(in thousands)

June 30, 2020

September 30, 2020

December 31, 2019

4 unchanged sentences

Total loans held for investment, net(2)

Balances at June 30, 2020 and December 31, 2019 are stated net of $ 1.3 billion and $ 682.7 million of participations sold, respectively.

Excludes accrued interest receivable of $ 55.8 million and $ 63.4 million at June 30, 2020 and December 31, 2019 , respectively, that is recorded in accrued interest receivable and other assets.

Balances at September 30, 2020 and December 31, 2019 are stated net of $ 1.1 billion and $ 682.7 million of participations sold, respectively.

Excludes accrued interest receivable of $ 57.2 million and $ 63.4 million at September 30, 2020 and December 31, 2019 , respectively, that is recorded in accrued interest receivable and other assets.

The following table summarizes our gross loans held for investment by year of origination and internally assigned credit grades:

3 unchanged sentences

Revolving lines of credit converted to term loans

June 30, 2020

September 30, 2020

(8) Special mention

29 unchanged sentences

Additional Qualitative Reserve

Six months ended June 30, 2020

Nine months ended September 30, 2020

Allowance for credit losses on loans:

4 unchanged sentences

Ending balance

Six months ended June 30, 2019

Nine months ended September 30, 2019

Allowance for credit losses on loans:

3 unchanged sentences

Ending balance

During the first quarter of 2020, we adopted ASU 2016-13, which replaces the incurred loss methodology for determining our provision for credit losses and allowance for credit losses with an expected loss methodology that is referred to as the CECL model.

During the first quarter of 2020, we adopted ASU 2016-13, which replaced the incurred loss methodology for determining our provision for credit losses and allowance for credit losses with an expected loss methodology that is referred to as the CECL model.

Upon adoption, the allowance for credit losses was increased by $ 9.1 million , which included a $ 563,000 increase to the allowance for off-balance sheet credit losses, with no impact to the consolidated statement of income.

We recorded a $ 100.0 million provision for credit losses for the second quarter of 2020 , compared to $ 96.0 million for the first quarter of 2020 and $ 27.0 million for the second quarter of 2019.

The increased provision for credit losses resulted primarily from an increase in charge-offs and reserve build related to higher criticized loan levels and continued economic uncertainty from the COVID-19 pandemic.

We recorded $ 74.1 million in net charge-offs during the second quarter of 2020, including $ 62.4 million in energy charge-offs and $ 8.1 million in leveraged lending charge-offs, all of which were loans that had been previously identified as problem loans, compared to $ 57.7 million during the first quarter of 2020 and $ 20.0 million during the second quarter of 2019.

Criticized loans totaled $ 1.0 billion at June 30, 2020 , compared to $ 584.1 million at December 31, 2019 and $ 629.1 million at June 30, 2019 .

The increase in criticized loans was predominantly in special mention and was primarily due to the continued downgrade of loans that have been impacted by the COVID-19 pandemic or that are in categories that are expected to be more significantly impacted by COVID-19.

We recorded a $ 30.0 million provision for credit losses for the third quarter of 2020 , compared to $ 100.0 million for the second quarter of 2020 and $ 11.0 million for the third quarter of 2019.

The decreased provision for credit losses in the third quarter of 2020 as compared to the second quarter of 2020 resulted primarily from a decrease in charge-offs.

We recorded $ 1.6 million in net charge-offs during the third quarter of 2020, compared to $ 74.1 million during the second quarter of 2020 and $ 36.9 million during the third quarter of 2019.

Criticized loans totaled $ 1.1 billion at September 30, 2020 , compared to $ 584.1 million at December 31, 2019 and $ 536.3 million at September 30, 2019 .

Criticized loan levels have remained heightened throughout 2020 due to the downgrade of loans to borrowers that have been impacted by the COVID-19 pandemic or that are in categories that are expected to be more significantly impacted by COVID-19.

3 unchanged sentences

Business Assets

Real Property

Oil/Gas Mineral Reserves

June 30, 2020

Rolling Stock

Government Guaranty

September 30, 2020

Total collateral-dependent loans held for investment

4 unchanged sentences

Non-accrual With No Allowance

June 30, 2020

September 30, 2020

Mortgage finance loans

4 unchanged sentences

The receipt of the refund of premiums from the insurance carriers can take 180 days or longer from the cancellation date.

As of June 30, 2020 and December 31, 2019 , none of our non-accrual loans were earning interest income on a cash basis.

Additionally, no interest income was recognized on non-accrual loans for the six months ended June 30, 2020.

Accrued interest of $ 708,000 was reversed during the six months ended June 30, 2020.

As of September 30, 2020 and December 31, 2019 , none of our non-accrual loans were earning interest income on a cash basis.

Additionally, no interest income was recognized on non-accrual loans for the nine months ended September 30, 2020 .

Accrued interest of $ 1.0 million was reversed during the nine months ended September 30, 2020 .

On January 1, 2020, the date we adopted CECL, non-accrual loans totaled $ 225.4 million , and included $ 88.6 million in commercial loans, $ 125.0 million in energy loans, $ 9.4 million in CRE loans, $ 881,000 in real estate-other loans and

$ 1.4 million in secured by 1-4 family loans.

As of June 30, 2020 and December 31, 2019 , we did not have any loans considered restructured that were not on non-accrual.

Of the non-accrual loans at June 30, 2020 and December 31, 2019 , $ 23.7 million and $ 35.1 million , respectively, met the criteria for restructured.

As of September 30, 2020 and December 31, 2019 , we did not have any loans considered restructured that were not on non-accrual.

Of the non-accrual loans at September 30, 2020 and December 31, 2019 , $ 47.7 million and $ 35.1 million , respectively, met the criteria for restructured.

These loans had no unfunded commitments at their respective balance sheet dates.

The following table details the recorded investment at June 30, 2020 and June 30, 2019 of loans restructured during the six months ended June 30, 2020 and June 30, 2019 by type of modification:

The following table details the recorded investment at September 30, 2020 and September 30, 2019 of loans restructured during the nine months ended September 30, 2020 and September 30, 2019 by type of modification:

Extended Maturity

7 unchanged sentences

Balance at Period End

Six months ended June 30, 2020

Nine months ended September 30, 2020

Commercial loans

Six months ended June 30, 2019

Nine months ended September 30, 2019

Commercial loans

1 unchanged sentence

We did not forgive any principal on the above restructured loans.

At June 30, 2020 and 2019, all of the above restructured loans were on non-accrual.

The restructuring of the loans did not have a significant impact on our allowance for credit losses at June 30, 2020 or 2019 .

As of June 30, 2020 and 2019 , we did not have any loans that were restructured within the last 12 months that subsequently defaulted.

At September 30, 2020 and 2019, all of the above restructured loans were on non-accrual.

The restructuring of the loans did not have a significant impact on our allowance for credit losses at September 30, 2020 or 2019 .

As of September 30, 2020 and 2019 , we did not have any loans that were restructured within the last 12 months that subsequently defaulted.

In response to the COVID-19 pandemic, we implemented a short-term modification program in late March 2020 to provide temporary payment relief to borrowers who meet the program's qualifications.

1 unchanged sentence

The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan.

As of June 30, 2020, we have granted temporary modifications on 482 loans with a total outstanding balance of $ 1.2 billion , resulting in the deferral of $ 10.8 million in interest payments.

Under the applicable guidance, none of these loans were considered restructured as of June 30, 2020.

Through September 30, 2020 , we granted temporary modifications on 483 loans with a total outstanding balance of $ 1.3 billion , resulting in the deferral of $ 10.7 million in interest payments.

As of September 30, 2020 , 73 loans with a total

outstanding balance of $ 166.2 million remain on deferral, of which $ 61.2 million have been granted a second deferral.

Under the applicable guidance, none of these loans were considered restructured as of September 30, 2020.

(5) Certain Transfers of Financial Assets

The table below presents a reconciliation of the changes in loans held for sale:

Six Months Ended June 30,

Nine Months Ended September 30,

(in thousands)

9 unchanged sentences

Loans held for sale at fair value

Includes $ 5.8 million of loans held for sale that are carried at lower of cost or market as of December 31, 2019 and $ 299,000 as of December 31, 2018 , as well as $ 1.1 million as of June 30, 2019.

There were no loans held for sale carried at lower of cost or market as of June 30, 2020.

No loans held for sale were on non-accrual as of June 30, 2020 or December 31, 2019 .

At June 30, 2020 and December 31, 2019 , we had $ 10.2 million and $ 8.2 million , respectively, of loans held for sale that were 90 days or more past due.

The $ 10.2 million in loans held for sale that were 90 days or more past due at June 30, 2020 included $ 4.6 million of loans guaranteed by U.S.

Includes $ 9.0 million and $ 5.8 million of loans held for sale that are carried at lower of cost or market as of September 30, 2020 and December 31, 2019 , respectively, as well as $ 7.1 million and $ 299,000 as of September 30, 2019 and December 31, 2018 , respectively.

No loans held for sale were on non-accrual as of September 30, 2020 or December 31, 2019 .

At September 30, 2020 and December 31, 2019 , we had $ 15.6 million and $ 8.2 million , respectively, of loans held for sale that were 90 days or more past due.

The $ 15.6 million in loans held for sale that were 90 days or more past due at September 30, 2020 included $ 3.7 million of loans guaranteed by U.S.

government agencies that were purchased out of Ginnie Mae securities and recorded as loans held for sale, at fair value, on the balance sheet.

1 unchanged sentence

Also included in the $ 15.6 million were $ 11.9 million in loans that, pursuant to Ginnie Mae servicing guidelines, we have the unilateral right, but not the obligation, to repurchase if defined delinquent loan criteria are met, and therefore must record as held for sale on our balance sheet regardless of whether the repurchase option has been exercised.

At December 31, 2019 , $ 6.0 million of the $ 8.2 million in loans held for sale were loans guaranteed by U.S.

At December 31, 2019 , $ 6.0 million of the $ 8.2 million in loans held for sale that were 90 days or more past due were loans guaranteed by U.S.

government agencies that were purchased out of Ginnie Mae securities and recorded as loans held for sale, at fair value, on the balance sheet and $ 1.9 million were loans that we have the unilateral right, but not the obligation, to repurchase if defined delinquent loan criteria are met.

1 unchanged sentence

A summary of MSR activity is as follows:

Six months ended June 30,

Nine months ended September 30,

(in thousands)

7 unchanged sentences

MSRs, fair value

At June 30, 2020 and December 31, 2019 , our servicing portfolio of residential mortgage loans had outstanding principal balances of $ 10.2 billion and $ 6.7 billion , respectively.

At September 30, 2020 and December 31, 2019 , our servicing portfolio of residential mortgage loans had outstanding principal balances of $ 12.7 billion and $ 6.7 billion , respectively.

In connection with the servicing of these loans, we hold deposits in the name of investors representing escrow funds for taxes and insurance, as well as collections in transit to the investors.

These escrow funds are segregated and held in separate non-interest-bearing deposit accounts at the Bank.

These deposits, included in total non-interest-bearing deposits on the consolidated balance sheets, were $ 128.0 million at June 30, 2020 and $ 63.7 million at December 31, 2019 .

These escrow funds are segregated and held in separate non-

interest-bearing deposit accounts at the Bank.

These deposits, included in total non-interest-bearing deposits on the consolidated balance sheets, were $ 173.5 million at September 30, 2020 and $ 63.7 million at December 31, 2019 .

The estimated fair value of the MSR assets is obtained from an independent third party and reviewed by management on a quarterly basis.

3 unchanged sentences

Each quarter, management and the independent third party review the key assumptions used in the discounted cash flow model and make adjustments as necessary to estimate the fair value of the MSRs.

At June 30, 2020 , the estimated fair value of MSRs was adjusted as a result of the decline in mortgage interest rates experienced in the first six months of 2020 , which resulted in a $ 20.8 million impairment charge, compared to a $ 5.8 million impairment charge for the first six months of 2019.

At September 30, 2020 , the estimated fair value of MSRs was adjusted as a result of the decline in mortgage interest rates experienced in the first nine months of 2020 , which resulted in a $ 20.9 million impairment charge, compared to an $ 8.4 million impairment charge for the first nine months of 2019.

To mitigate exposure to potential impairment charges from adverse changes in the fair value of our residential MSR portfolio, we enter into certain derivative contracts, as is further discussed in Note 10 - Derivative Financial Instruments.

The following summarizes the assumptions used by management to determine the fair value of MSRs:

June 30, 2020

September 30, 2020

December 31, 2019

4 unchanged sentences

(in thousands)

June 30, 2020

September 30, 2020

December 31, 2019

6 unchanged sentences

In conjunction with the sale and securitization of loans held for sale, we may be exposed to liability resulting from repurchase, indemnification and make-whole agreements.

Our estimated exposure related to those agreements totaled $ 2.5 million and $ 3.6 million at June 30, 2020 and December 31, 2019 , respectively, and is recorded in other liabilities on the consolidated balance sheets.

We incurred $ 4.5 million in losses due to make-whole obligations during the six months ended June 30, 2020 compared to $ 1.0 million during the six months ended June 30, 2019 .

The increase in make-whole obligation losses is primarily related to an increase in early payoffs resulting from the declining interest rate environment.

Our estimated exposure related to those agreements totaled $ 1.0 million and $ 3.6 million at September 30, 2020 and December 31, 2019 , respectively, and is recorded in other liabilities on the consolidated balance sheets.

$ 7.8 million in make-whole obligation payments were made during the nine months ended September 30, 2020 compared to $ 4.5 million during the nine months ended September 30, 2019 .

The increase in make-whole obligation payments is primarily related to an increase in early payoffs resulting from the declining interest rate environment.

(6) Financial Instruments with Off-Balance Sheet Risk

1 unchanged sentence

This allowance is recorded in other liabilities on the consolidated balance sheets.

Three months ended June 30,

Six months ended June 30,

Three months ended September 30,

Nine months ended September 30,

(in thousands)

4 unchanged sentences

(in thousands)

June 30, 2020

September 30, 2020

December 31, 2019

12 unchanged sentences

federal regulatory authorities issued an interim final rule that provides banking organizations that adopt CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total).

In the third quarter of 2020, a final rule was issued that was substantially similar to the interim rule issued in the first quarter.

In connection with our adoption of CECL on January 1, 2020, we have elected to utilize the five-year CECL transition.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of CET1, Tier 1 and total capital to risk-weighted assets, and of Tier 1 capital to average assets, each as defined in the regulations.

Management believes, as of June 30, 2020 , that the Company and the Bank meet all capital adequacy requirements to which they are subject.

Management believes, as of September 30, 2020 , that the Company and the Bank meet all capital adequacy requirements to which they are subject.

Financial institutions are categorized as well capitalized or adequately capitalized based on minimum total risk-based, Tier 1 risk-based, CET1 and Tier 1 leverage ratios.

As shown in the table below, the Company’s capital ratios exceeded the regulatory definition of adequately capitalized as of June 30, 2020 and December 31, 2019 .

As shown in the table below, the Company’s capital ratios exceeded the regulatory definition of adequately capitalized as of September 30, 2020 and December 31, 2019 .

Based upon the information in its most recently filed call report, the Bank met the capital ratios necessary to be well capitalized.

11 unchanged sentences

Capital Amount

June 30, 2020

September 30, 2020

Total capital (to risk-weighted assets)

8 unchanged sentences

Our mortgage finance loan volumes can increase significantly at month-end, causing a meaningful difference between ending balance and average balance for any period.

At June 30, 2020 , our mortgage finance loans were $ 9.0 billion compared to the average for the quarter ended June 30, 2020 of $ 8.7 billion .

At September 30, 2020 , our mortgage finance loans were $ 9.4 billion compared to the average for the quarter ended September 30, 2020 of $ 9.1 billion .

As CET1, Tier 1 and total capital ratios are calculated using quarter-end risk-weighted assets and our mortgage finance loans are 100% risk-weighted (excluding MCA mortgage loans held for sale, which receive lower risk weights), the period-end fluctuation in these balances can significantly impact our reported ratios.

4 unchanged sentences

The Basel III Capital Rules further limit the amount of dividends that may be paid by our Bank.

No dividends were declared or paid on our common stock during the six months ended June 30, 2020 , or 2019 .

No dividends were declared or paid on our common stock during the nine months ended September 30, 2020 , or 2019 .

(8) Stock-based Compensation

3 unchanged sentences

The table below summarizes our stock-based compensation expense:

Three months ended June 30,

Six months ended June 30,

Three months ended September 30,

Nine months ended September 30,

(in thousands)

3 unchanged sentences

(in thousands except period data)

June 30, 2020

September 30, 2020

Unrecognized compensation expense related to unvested stock-settled awards

12 unchanged sentences

(in thousands)

June 30, 2020

September 30, 2020

Available-for-sale debt securities:(1)

government agency securities

Residential mortgage-backed securities

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Balance at End of Period

Three months ended June 30, 2020

Three months ended September 30, 2020

Available-for-sale debt securities:(1)

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Loans held for sale(2)

Three months ended June 30, 2019

Three months ended September 30, 2019

Available-for-sale debt securities:(1)

2 unchanged sentences

Loans held for sale(2)

Six months ended June 30, 2020

Nine months ended September 30, 2020

Available-for-sale debt securities:(1)

2 unchanged sentences

Loans held for sale(2)

Six months ended June 30, 2019

Nine months ended September 30, 2019

Available-for-sale debt securities:(1)

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Loans held for sale(2)

Unrealized gains/(losses) on available-for-sale debt securities are recorded in AOCI and relate to assets that remain outstanding at June period end.

Unrealized gains/(losses) on available-for-sale debt securities are recorded in AOCI and relate to assets that remain outstanding at period end.

Realized gains/(losses) are recorded in other non-interest income.

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The fair value of tax-exempt asset-backed securities is based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs, the most significant of which were a discount rate and weighted-average life.

At June 30, 2020 , the discount rates utilized ranged from 3.52 % to 3.55 % and the weighted-average life ranged from 6.5 years to 7.7 years.

On a combined amortized cost weighted-average basis a discount rate of 3.54 % and weighted-average life of 7.1 years were utilized to determine the fair value of these securities at June 30, 2020 .

At September 30, 2020 , the discount rates utilized ranged from 2.55 % to 2.66 % and the weighted-average life ranged from 6.3 years to 7.5 years.

On a combined amortized cost weighted-average basis a discount rate of 2.61 % and weighted-average life of 6.9 years were utilized to determine the fair value of these securities at September 30, 2020 .

At December 31, 2019 , the combined weighted-average discount rate and weighted-average life utilized were 2.99 % and 7.0 years, respectively.

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The fair value of CRT securities is based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs, the most significant of which were a discount rate and weighted-average life.

At June 30, 2020 , the discount rates utilized ranged from 2.99 % to 7.20 % and the weighted-average life ranged from 7.0 years to 11.1 years.

On a combined amortized cost weighted-average basis a discount rate of 4.39 % and a weighted-average life of 8.4 years were utilized to determine the fair value of these securities at June 30, 2020 .

At September 30, 2020 , the discount rates utilized ranged from 2.76 % to 7.57 % and the weighted-average life ranged from 6.6 years to 10.8 years.

On a combined amortized cost weighted-average basis a discount rate of 4.36 % and a weighted-average life of 8.0 years were utilized to determine the fair value of these securities at September 30, 2020 .

At December 31, 2019 , the combined weighted-average discount rate and combined weighted-average life utilized were 4.54 % and 9.3 years, respectively.

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The fair value of such loans is generally based upon quoted prices of comparable loans with a liquidity discount applied.

At June 30, 2020 , the fair value of these loans was calculated using a weighted-average discounted price of 95.4 % , compared to 94.1 % at December 31, 2019 .

At September 30, 2020 , the fair value of these loans was calculated using a weighted-average discounted price of 96.8 % , compared to 94.1 % at December 31, 2019 .

Loans held for investment

Certain collateral-dependent loans held for investment are reported at fair value when, based upon an individual evaluation, the specific allocation of the allowance for credit losses that is deducted from the loan's amortized cost is based upon the fair value of the loan's underlying collateral.

The $ 72.6 million fair value of loans held for investment at June 30, 2020 reported above includes loans held for investment with a carrying value of $ 96.3 million that were reduced by specific allowance allocations totaling $ 23.7 million based on collateral valuations utilizing Level 3 inputs.

The $ 36.5 million fair value of loans held for investment at September 30, 2020 reported above includes loans held for investment with a carrying value of $ 74.3 million that were reduced by specific allowance allocations totaling $ 37.8 million based on collateral valuations utilizing Level 3 inputs.

The $ 109.6 million fair value of loans held for investment at December 31, 2019 reported above includes loans with a carrying value of $ 145.4 million that were reduced by specific allowance allocations totaling $ 35.8 million based on collateral valuations utilizing Level 3 inputs.

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A summary of the carrying amounts and estimated fair values of financial instruments is as follows:

June 30, 2020

September 30, 2020

December 31, 2019

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The notional amounts and estimated fair values of derivative positions outstanding are presented in the following table:

June 30, 2020

September 30, 2020

December 31, 2019

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Non-hedging interest rate swaps

The weighted-average strike rate for outstanding interest rate caps was 3.38 % at June 30, 2020 and 3.29 % at December 31, 2019 .

The weighted-average strike rate for outstanding interest rate caps was 3.38 % at September 30, 2020 and 3.29 % at December 31, 2019 .

Our credit exposure on derivative instruments is limited to the net favorable value and interest payments by each counterparty.

In some cases collateral may be required from the counterparties involved if the net value of the derivative instruments exceeds a nominal amount.

Our credit exposure associated with these instruments, net of any collateral pledged, was approximately $ 143.1 million at June 30, 2020 and approximately $ 48.7 million at December 31, 2019 .

Our credit exposure associated with these instruments, net of any collateral pledged, was approximately $ 124.6 million at September 30, 2020 , and approximately $ 48.7 million at December 31, 2019 .

Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap and cap values, as well as for changes in the value of forward sale commitments.

At June 30, 2020 , we had $ 134.5 million in cash collateral pledged for these derivatives, of which $ 128.9 million was included in interest-bearing deposits in other banks and $ 5.6 million was included in accrued interest receivable and other assets.

At September 30, 2020 , we had $ 123.4 million in cash collateral pledged for these derivatives, of which $ 119.7 million was included in interest-bearing deposits in other banks and $ 3.7 million was included in accrued interest receivable and other assets.

At December 31, 2019 , we had $ 56.6 million in cash collateral pledged for these derivatives, of which $ 54.3 million was included in interest-bearing deposits in other banks and $ 2.3 million was included in accrued interest receivable and other assets.

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The risk participation agreements entered into by us as a participant bank provide credit protection to the financial institution counterparty should the borrower fail to perform on its interest rate derivative contract with that financial institution.

We are party to 8 risk participation agreements where we are a participant bank with a notional amount of $ 110.7 million at June 30, 2020 , compared to 12 risk participation agreements having a notional amount of $ 146.7 million at December 31, 2019 .

The maximum estimated exposure to these agreements, assuming 100% default by all obligors, was approximately $ 7.0 million at June 30, 2020 and $ 3.6 million at December 31, 2019 .

The fair value of these exposures was insignificant to the consolidated financial statements at both June 30, 2020 and December 31, 2019 .

We are party to 8 risk participation agreements where we are a participant bank with a notional amount of $ 110.2 million at September 30, 2020 , compared to 12 risk participation agreements having a notional amount of $ 146.7 million at December 31, 2019 .

The maximum estimated exposure to these agreements, assuming 100% default by all obligors, was approximately $ 6.3 million at September 30, 2020 and $ 3.6 million at December 31, 2019 .

The fair value of these exposures was insignificant to the consolidated financial statements at both September 30, 2020 and December 31, 2019 .

Risk participation agreements entered into by us as the lead bank provide credit protection to us should the borrower fail to perform on its interest rate derivative contract with us.

We are party to 16 risk participation agreements where we are the lead bank having a notional amount of $ 166.9 million at June 30, 2020 , compared to 12 agreements having a notional amount of $ 145.9 million at December 31, 2019 .

We are party to 16 risk participation agreements where we are the lead bank having a notional amount of $ 166.3 million at September 30, 2020 , compared to 12 agreements having a notional amount of $ 145.9 million at December 31, 2019 .

(11) New Accounting Standards

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements