TEXAS CAPITAL BANCSHARES INC/TX 10-Q

ITEM 1. FINANCIAL STATEMENTS TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS (in thousands except share data) September 30, 2020 December 31, 2019 (Unaudited) Assets Cash and due from banks $ 185,242 $ 161,817 Interest-bearing deposits in other banks 10,461,544 4,233,766 Federal funds sold and securities purchased under resale agreements — 30,000 Investment securities 1,367,313 239,871 Loans held for sale ($639.0 million at September 30, 2020 and $2,571.3 million at December 31, 2019, at fair value) 648,009 2,577,134 Loans held for investment, mortgage finance 9,378,104 8,169,849 Loans held for investment (net of unearned income) 15,789,958 16,476,413 Less: Allowance for credit losses on loans 290,165 195,047 Loans held for investment, net 24,877,897 24,451,215 Mortgage servicing rights, net 95,323 64,904 Premises and equipment, net 26,653 31,212 Accrued interest receivable and other assets 753,123 740,051 Goodwill and intangible assets, net 17,768 18,099 Total assets $ 38,432,872 $ 32,548,069 Liabilities and Stockholders’ Equity Liabilities: Deposits: Non-interest-bearing $ 12,339,212 $ 9,438,459 Interest-bearing 19,620,275 17,040,134 Total deposits 31,959,487 26,478,593 Accrued interest payable 14,674 12,760 Other liabilities 354,318 318,094 Federal funds purchased and repurchase agreements 208,183 141,766 Other borrowings 2,700,000 2,400,000 Subordinated notes, net 282,400 282,129 Trust preferred subordinated debentures 113,406 113,406 Total liabilities 35,632,468 29,746,748 Stockholders’ equity: Preferred stock, $.01 par value, $1,000 liquidation value: Authorized shares—10,000,000 Issued shares—6,000,000 shares issued at September 30, 2020 and December 31, 2019 150,000 150,000 Common stock, $.01 par value: Authorized shares—100,000,000 Issued shares— 50,455,969 and 50,338,158 at September 30, 2020 and December 31, 2019, respectively 504 503 Additional paid-in capital 987,754 978,205 Retained earnings 1,655,317 1,663,671 Treasury stock (shares at cost: 417 at September 30, 2020 and December 31, 2019) ( 8 ) ( 8 ) Accumulated other comprehensive income, net of taxes 6,837 8,950 Total stockholders’ equity 2,800,404 2,801,321 Total liabilities and stockholders’ equity $ 38,432,872 $ 32,548,069 See accompanying notes to consolidated financial statements. 4 Table of Contents TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME/(LOSS) - UNAUDITED Three months ended September 30, Nine months ended September 30, (in thousands except per share data) 2020 2019 2020 2019 Interest income Interest and fees on loans $ 237,179 $ 329,344 $ 768,399 $ 971,889 Investment securities 3,674 2,316 7,881 6,036 Federal funds sold and securities purchased under resale agreements 1 554 692 1,090 Interest-bearing deposits in other banks 2,877 22,887 24,777 48,540 Total interest income 243,731 355,101 801,749 1,027,555 Interest expense Deposits 27,830 80,967 122,298 222,550 Federal funds purchased 128 1,835 973 10,553 Other borrowings 3,365 14,703 17,516 46,681 Subordinated notes 4,191 4,191 12,573 12,573 Trust preferred subordinated debentures 648 1,237 2,573 3,863 Total interest expense 36,162 102,933 155,933 296,220 Net interest income 207,569 252,168 645,816 731,335 Provision for credit losses 30,000 11,000 226,000 58,000 Net interest income after provision for credit losses 177,569 241,168 419,816 673,335 Non-interest income Service charges on deposit accounts 2,864 2,707 8,616 8,535 Wealth management and trust fee income 2,502 2,330 7,317 6,468 Brokered loan fees 15,034 8,691 33,813 21,093 Servicing income 7,329 3,549 18,195 9,409 Swap fees 484 1,196 4,709 2,828 Net gain/(loss) on sale of loans held for sale 25,242 ( 6,011 ) 51,265 ( 12,502 ) Other 6,893 7,839 18,715 38,848 Total non-interest income 60,348 20,301 142,630 74,679 Non-interest expense Salaries and employee benefits 84,096 80,722 262,080 238,235 Net occupancy expense 8,736 8,125 26,582 23,914 Marketing 3,636 14,753 20,146 40,548 Legal and professional 11,207 11,394 40,003 31,428 Communications and technology 31,098 10,805 87,649 31,025 FDIC insurance assessment 6,374 5,220 19,363 14,480 Servicing-related expenses 12,287 8,165 48,758 19,613 Merger-related expenses — — 17,756 — Other 8,307 10,245 31,173 33,420 Total non-interest expense 165,741 149,429 553,510 432,663 Income before income taxes 72,176 112,040 8,936 315,351 Income tax expense 15,060 23,958 2,823 67,756 Net income 57,116 88,082 6,113 247,595 Preferred stock dividends 2,438 2,438 7,313 7,313 Net income/(loss) available to common stockholders $ 54,678 $ 85,644 $ ( 1,200 ) $ 240,282 Other comprehensive income/(loss) Change in unrealized gain/(loss) on available-for-sale debt securities arising during period, before tax $ 8,053 $ 884 $ ( 2,674 ) $ 10,752 Income tax expense/(benefit) related to unrealized loss on available-for-sale debt securities 1,692 186 ( 561 ) 2,259 Other comprehensive income/(loss), net of tax 6,361 698 ( 2,113 ) 8,493 Comprehensive income $ 63,477 $ 88,780 $ 4,000 $ 256,088 Basic earnings/(loss) per common share $ 1.08 $ 1.70 $ ( 0.02 ) $ 4.78 Diluted earnings/(loss) per common share $ 1.08 $ 1.70 $ ( 0.02 ) $ 4.77 See accompanying notes to consolidated financial statements. 5 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 June 30, 2019 6,000,000 $ 150,000 50,297,969 $ 503 $ 972,219 $ 1,516,044 ( 417 ) $ ( 8 ) $ 8,313 $ 2,647,071 Comprehensive income: Net income — — — — — 88,082 — — — 88,082 Change in unrealized gain on available-for-sale securities, net of taxes — — — — — — — — 698 698 Total comprehensive income 88,780 Stock-based compensation expense recognized in earnings — — — — 3,023 — — — — 3,023 Preferred stock dividend — — — — — ( 2,438 ) — — — ( 2,438 ) Issuance of stock related to stock-based awards — — 20,102 — ( 443 ) — — — — ( 443 ) Balance at September 30, 2019 6,000,000 $ 150,000 50,318,071 $ 503 $ 974,799 $ 1,601,688 ( 417 ) $ ( 8 ) $ 9,011 $ 2,735,993 Balance at June 30, 2020 6,000,000 $ 150,000 50,436,089 $ 504 $ 983,144 $ 1,600,639 ( 417 ) $ ( 8 ) $ 476 $ 2,734,755 Comprehensive income: Net income — — — — — 57,116 — — — 57,116 Change in unrealized gain on available-for-sale securities, net of taxes — — — — — — — — 6,361 6,361 Total comprehensive income 63,477 Stock-based compensation expense recognized in earnings — — — — 4,799 — — — — 4,799 Preferred stock dividend — — — — — ( 2,438 ) — — — ( 2,438 ) Issuance of stock related to stock-based awards — — 19,880 — ( 189 ) — — — — ( 189 ) Balance at September 30, 2020 6,000,000 $ 150,000 50,455,969 $ 504 $ 987,754 $ 1,655,317 ( 417 ) $ ( 8 ) $ 6,837 $ 2,800,404 See accompanying notes to consolidated financial statements. 6 Table of Contents TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED - CONTINUED 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, 2018 (audited) 6,000,000 $ 150,000 50,201,127 $ 502 $ 967,890 $ 1,361,406 ( 417 ) $ ( 8 ) $ 518 $ 2,480,308 Comprehensive income: Net income — — — — — 247,595 — — — 247,595 Change in unrealized gain on available-for-sale securities, net of taxes — — — — — — — — 8,493 8,493 Total comprehensive income 256,088 Stock-based compensation expense recognized in earnings — — — — 8,565 — — — — 8,565 Preferred stock dividend — — — — — ( 7,313 ) — — — ( 7,313 ) Issuance of stock related to stock-based awards — — 108,176 1 ( 1,656 ) — — — — ( 1,655 ) Issuance of common stock related to warrants — — 8,768 — — — — — — — Balance at September 30, 2019 6,000,000 $ 150,000 50,318,071 $ 503 $ 974,799 $ 1,601,688 ( 417 ) $ ( 8 ) $ 9,011 $ 2,735,993 Balance at December 31, 2019 (audited) 6,000,000 $ 150,000 50,338,158 $ 503 $ 978,205 $ 1,663,671 ( 417 ) $ ( 8 ) $ 8,950 $ 2,801,321 Impact of adoption of new accounting standards, net of taxes(1) — — — — — ( 7,154 ) — — — ( 7,154 ) Comprehensive income: Net income — — — — — 6,113 — — — 6,113 Change in unrealized gain on available-for-sale securities, net of taxes — — — — — — — — ( 2,113 ) ( 2,113 ) Total comprehensive income 4,000 Stock-based compensation expense recognized in earnings — — — — 11,348 — — — — 11,348 Preferred stock dividend — — — — — ( 7,313 ) — — — ( 7,313 ) Issuance of stock related to stock-based awards — — 117,811 1 ( 1,799 ) — — — — ( 1,798 ) Balance at September 30, 2020 6,000,000 $ 150,000 50,455,969 $ 504 $ 987,754 $ 1,655,317 ( 417 ) $ ( 8 ) $ 6,837 $ 2,800,404 (1) Represents the impact of adopting Accounting Standard Update ("ASU") 2016-13. See Note 1 to the consolidated financial statements for more information. See accompanying notes to consolidated financial statements. 7 Table of Contents TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED Nine months ended September 30, (in thousands) 2020 2019 Operating activities Net income $ 6,113 $ 247,595 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 226,000 58,000 Depreciation and amortization 51,716 26,085 Net (gain)/loss on sale of loans held for sale ( 51,265 ) 12,502 Increase in valuation allowance on mortgage servicing rights 20,933 8,360 Stock-based compensation expense 12,064 12,973 Purchases and originations of loans held for sale ( 8,963,499 ) ( 7,288,823 ) Proceeds from sales and repayments of loans held for sale 10,859,458 6,534,879 Changes in operating assets and liabilities: Accrued interest receivable and other assets ( 16,912 ) ( 156,803 ) Accrued interest payable and other liabilities 25,222 115,636 Net cash provided by/(used in) operating activities 2,169,830 ( 429,596 ) Investing activities Purchases of investment securities ( 1,140,935 ) ( 111,131 ) Principal payments received on investment securities 12,042 5,534 Originations of mortgage finance loans ( 157,016,926 ) ( 99,799,613 ) Proceeds from pay-offs of mortgage finance loans 155,808,671 97,725,705 Net decrease/(increase) in loans held for investment, excluding mortgage finance loans 553,026 ( 143,741 ) Purchase of premises and equipment, net ( 2,705 ) ( 15,047 ) Proceeds from sale of other real estate owned, net — 79 Net cash used in investing activities ( 1,786,827 ) ( 2,338,214 ) Financing activities Net increase in deposits 5,480,894 6,807,190 Costs from issuance of stock related to stock-based awards and warrants ( 1,798 ) ( 1,655 ) Preferred dividends paid ( 7,313 ) ( 7,313 ) Net increase/(decrease) in other borrowings 300,000 ( 1,400,000 ) Net increase/(decrease) in federal funds purchased and repurchase agreements 66,417 ( 501,207 ) Net cash provided by financing activities 5,838,200 4,897,015 Net increase in cash and cash equivalents 6,221,203 2,129,205 Cash and cash equivalents at beginning of period 4,425,583 3,080,065 Cash and cash equivalents at end of period $ 10,646,786 $ 5,209,270 Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 154,019 $ 282,559 Cash paid during the period for income taxes 21,747 85,314 See accompanying notes to consolidated financial statements. 8 Table of Contents (1) Operations and Summary of Significant Accounting Policies Organization and Nature of Business Texas Capital Bancshares, Inc. (the "Company” or "TCBI"), 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. On December 9, 2019, the Company and Independent Bank Group, Inc. (“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 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. 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, 2019 , included in our Annual Report on Form 10-K for the year ended December 31, 2019 (the " 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. Revision of Prior Period Financial Statements During the second quarter of 2020, the Company identified an error in our historical financial statements related to the accounting for certain share-based liabilities of a consolidated entity that contained put features, whereby the liabilities were not remeasured to their puttable value at each period end. The aggregate amount of the errors at each period end represented 1% or less of our stockholders' equity in all prior periods. 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 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. A summary of revisions to certain previously reported financial information is presented below: Revised Consolidated Balance Sheet as of December 31, 2019 ( in thousands) As Reported Adjustment As Revised Other liabilities $ 287,157 $ 30,937 $ 318,094 Total liabilities 29,715,811 30,937 29,746,748 Retained Earnings 1,694,608 ( 30,937 ) 1,663,671 Total Equity 2,832,258 ( 30,937 ) 2,801,321 9 Table of Contents Revised Consolidated Statement of Operations and Other Comprehensive Income/(Loss) Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019 (in thousands) As Reported Adjustment As Revised As Reported Adjustment As Revised Salaries and employee benefits expense $ 80,106 $ 616 $ 80,722 $ 234,818 $ 3,417 $ 238,235 Other non-interest expense 10,802 ( 557 ) 10,245 35,483 ( 2,063 ) 33,420 Total non-interest expense 149,370 59 149,429 431,309 1,354 432,663 Income before tax 112,099 ( 59 ) 112,040 316,705 ( 1,354 ) 315,351 Net income 88,141 ( 59 ) 88,082 248,949 ( 1,354 ) 247,595 Net income available to common stockholders 85,703 ( 59 ) 85,644 241,636 ( 1,354 ) 240,282 Comprehensive income 88,839 ( 59 ) 88,780 257,442 ( 1,354 ) 256,088 Revised Consolidated Statement of Stockholders' Equity Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019 (in thousands) As Reported Adjustment As Revised As Reported Adjustment As Revised Beginning balance retained earnings $ 1,537,425 $ ( 21,381 ) $ 1,516,044 $ 1,381,492 $ ( 20,086 ) $ 1,361,406 Beginning balance total equity 2,668,452 ( 21,381 ) 2,647,071 2,500,394 ( 20,086 ) 2,480,308 Ending balance retained earnings 1,623,128 ( 21,440 ) 1,601,688 1,623,128 ( 21,440 ) 1,601,688 Ending balance total equity 2,757,433 ( 21,440 ) 2,735,993 2,757,433 ( 21,440 ) 2,735,993 The share-based liabilities relate to agreements with certain employees of a subsidiary of the Company that was acquired in 2005. The terms of the agreements include a put feature that, when exercised, requires mandatory settlement by the Company of the share-based liability at a formulaic price. 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 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 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 On January 1, 2020, we adopted ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("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 Current Expected Credit Loss ("CECL") model. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with ASU 2016-02 "Leases (Topic 842)" . In addition, ASU 2016-13 made changes to the accounting for available-for-sale debt securities. One such change is to require credit-related impairments to be recognized in the allowance for credit losses rather than as a write-down of the securities' amortized cost basis when management does not intend to sell or believes that it is not more likely than not that they will be required to sell the securities prior to recovery of the securities amortized cost basis. We adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost, off-balance sheet credit exposures and net investments in leases. Results for reporting periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. We adopted ASU 2016-13 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2020. As a result, the amortized cost basis remains the same before and after the effective date of ASU 2016-13. 10 Table of Contents The following table illustrates the impact of adopting ASU 2016-13 and details how outstanding loan balances have been reclassified as a result of changes made to our primary portfolio segments under CECL: January 1, 2020 (in thousands) As Reported Under ASU 2016-13 Pre-ASU 2016-13 Impact of ASU 2016-13 Adoption Assets: Loans held for investment (outstanding balance) Commercial $ 9,133,444 $ 10,230,828 $ ( 1,097,384 ) Energy 1,425,309 1,425,309 Mortgage finance 8,169,849 8,169,849 — Construction 2,563,339 ( 2,563,339 ) Real estate 6,008,040 3,444,701 2,563,339 Consumer 71,463 ( 71,463 ) Equipment leases 256,462 ( 256,462 ) Allowance for credit losses on loans ( 203,632 ) ( 195,047 ) ( 8,585 ) Total loans held for investment, net 24,442,630 24,451,215 ( 8,585 ) Net deferred tax asset 23,058 21,064 1,994 Liabilities: Allowance for credit losses on off-balance sheet exposures 9,203 8,640 563 Equity: Retained earnings 1,656,517 1,663,671 ( 7,154 ) In connection with our adoption of ASU 2016-13, changes were made to our primary portfolio segments to align with the methodology applied in determining the allowance under CECL. These changes included segregating energy loans into a stand-alone portfolio segment and reclassifying consumer and equipment leases into the commercial loan portfolio segment. Additionally, construction and real estate loans were combined into a single portfolio segment, referred to as real estate. The real estate loan portfolio segment includes loans further categorized as commercial real estate, residential homebuilder finance, secured by 1-4 family and an "other" category. See Allowance for Credit Losses - Loans below for further discussion of these portfolio segments. Loans Loans Held for Investment Loans held for investment (including financing leases) are stated at the amount of unpaid principal reduced by deferred income (net of costs). Interest on loans is recognized using the simple interest method on the daily balances of the principal amounts outstanding. Loan origination fees, net of direct loan origination costs, and commitment fees are deferred and amortized as an adjustment to yield over the life of the loan, or over the commitment period, as applicable. Restructured loans are loans on which, due to the borrower’s financial difficulties, we have granted a concession that we would not otherwise consider for borrowers of similar credit quality. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two. Modifications of terms that could potentially qualify as a restructuring include reduction of contractual interest rate, extension of the maturity date at a contractual interest rate lower than the current rate for new debt with similar risk, a reduction of the face amount of debt or forgiveness of either principal or accrued interest. A loan continues to qualify as restructured until a consistent payment history or change in the borrower’s financial condition has been evidenced, generally for no less than twelve months. If the restructuring agreement specifies an interest rate at the time of the restructuring that is greater than or equal to the rate that we are willing to accept for a new extension of credit with comparable risk, then the loan is no longer considered a restructuring if it is in compliance with the modified terms in calendar years after the year of the restructure. A loan is considered past due when a contractually due payment has not been received by the contractual due date. We place a loan on non-accrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed as a reduction of current period interest income. Interest income is subsequently recognized on a cash basis as long as the remaining book balance of the asset is deemed to be collectible. If collectability is questionable, then cash payments are applied to principal. 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. 11 Table of Contents Loans held for investment includes legal ownership interests in mortgage loans that we purchase through our mortgage warehouse lending division. The ownership interests are purchased from unaffiliated mortgage originators who are seeking additional funding through sale of the undivided ownership interests to facilitate their ability to originate loans. The mortgage originator has no obligation to offer and we have no obligation to purchase these interests. The originator closes mortgage loans consistent with underwriting standards established by approved investors, and, at the time of the sale to the investor, our ownership interest and that of the originator are delivered by us to the investor selected by the originator and approved by us. We typically purchase up to a 99% ownership interest in each mortgage with the originator owning the remaining percentage. These mortgage ownership interests are generally held by us for a period of less than 30 days and more typically 10-20 days. Because of conditions in agreements with originators designed to reduce transaction risks, under ASC 860, Transfers and Servicing of Financial Assets (“ASC 860”), the ownership interests do not qualify as participating interests. Under ASC 860, the ownership interests are deemed to be loans to the originators and payments we receive from investors are deemed to be payments made by or on behalf of the originator to repay the loan deemed made to the originator. Because we have an actual, legal ownership interest in the underlying residential mortgage loan, these interests are reported as extensions of credit to the originators that are secured by the mortgage loans as collateral. Due to market conditions or events of default by the investor or the originator, we could be required to purchase the remaining interests in the mortgage loans and hold them beyond the expected 10-20 days. Mortgage loans acquired under these conditions would require mark-to-market adjustments to income and could require future allocations of the allowance for credit losses or be subject to charge-off in the event the loans become impaired. Allowance for Credit Losses The allowance for credit losses is an estimate of the expected credit losses in the loans held for investment and available-for-sale debt securities portfolios. Loans ASU 2016-13 replaces the incurred loss impairment model, which recognizes losses when it becomes probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, credit quality, or term, as well as for changes in macroeconomic conditions, such as changes in unemployment rates, crude oil prices, property values or other relevant factors. The allowance for credit losses is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Reserves on loans that do not share risk characteristics are evaluated on an individual basis. In order to determine the allowance for credit losses, all loans are assigned a credit grade. Loans graded substandard or worse and greater than $500,000 are specifically reviewed for loss potential and when deemed appropriate are assigned a reserve based on an individual evaluation. For purposes of determining the pool-basis reserve, the remainder of the portfolio, representing all loans not assigned an individual reserve, is segregated first by portfolio segment, then by product type, to recognize differing risk profiles within portfolio segments, and finally by credit grade. Each credit grade within each product type is assigned a historical loss rate. These historical loss rates are then modified to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments using a Portfolio Level Qualitative Factor ("PLQF") and/or a Portfolio Segment Level Qualitative Factor ("SLQF"). These modified historical loss rates are multiplied by the outstanding principal balance of each loan to calculate a required reserve. A similar process is employed to calculate a reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and letters of credit, and any needed reserve is recorded in other liabilities. The PLQF and SLQF are utilized to address factors that are not present in historical loss rates and are otherwise unaccounted for in the quantitative process. The PLQF is used to apply a qualitative adjustment across the entire portfolio of loans, while the SLQF is designed to apply a qualitative adjustment across a single portfolio segment. Even though portions of the allowance may be allocated to specific loans, the entire allowance is available for any credit that, in management’s judgment, should be charged off. We generally use a two-year forecast period, based on a single consensus forecast scenario, using variables we believe are most relevant to each portfolio segment. For periods beyond which we are able to develop reasonable and supportable forecasts, we immediately revert to the average historical loss rate. The forecast period and scenario used is reviewed on a quarterly basis and 12 Table of Contents may be adjusted based on management's view of the current economic conditions and level of predictability the forecast can provide. Portfolio segments are used to pool loans with similar risk characteristics and align with our methodology for measuring expected credit losses. A summary of our primary portfolio segments is as follows: Commercial . Our commercial loan portfolio is comprised of lines of credit for working capital, term loans and leases to finance equipment and other business assets across a variety of industries. These loans are used for general corporate purposes including financing working capital, internal growth, acquisitions and business insurance premiums and are generally secured by accounts receivable, inventory, equipment and other assets of our clients’ businesses. Our commercial loan portfolio also includes consumer loans because our small portfolio of consumer loans is largely comprised of accommodation loans to individuals associated with our commercial clients. Energy . Our energy loan portfolio is primarily comprised of loans to exploration and production (“E&P”) companies that are generally collateralized with proven reserves based on appropriate valuation standards that take into account the risk of oil and gas price volatility. The majority of this portfolio is first lien, senior secured, reserve-based lending, which we believe is the lowest-risk form of energy lending. Energy loans are impacted by commodity price volatility, as well as changes in consumer and business demand. Mortgage finance . Mortgage finance loans relate to our mortgage warehouse lending operations in which we purchase mortgage loan ownership interests from unaffiliated mortgage originators that are generally held by us for a period of less than 30 days and more typically 10-20 days before they are sold to an approved investor. Volumes fluctuate based on the level of market demand for the product and the number of days between purchase and sale of the loans, which can be affected by changes in overall market interest rates and housing demand and tend to peak at the end of each month. Mortgage finance loans are consistently underwritten based on standards established by the approved investors. Market conditions or events of default by an investor or originator could require that we repurchase the remaining interests in the mortgage loans and hold them beyond the expected 10-20 days. Real estate . Our real estate portfolio is comprised of the following types of loans: Commercial real estate ("CRE") . Our CRE portfolio is comprised of both construction/development financing and limited term financing provided to professional real estate developers and owners/managers of commercial real estate projects and properties who have a demonstrated record of past success with similar properties. Collateral properties include office buildings, warehouse/distribution buildings, shopping centers, hotels/motels, senior living, apartment buildings and residential and commercial tract development. The primary source of repayment on these loans is expected to come from the sale, permanent financing or lease of the real property collateral. CRE loans are impacted by fluctuations in collateral values, as well as the ability of the borrower to obtain permanent financing. Residential homebuilder finance ("RBF") . The RBF portfolio is comprised of loans made to residential builders and developers. Loans to residential builders are typically in the form of uncommitted guidance lines and are for the purpose of developing lots into single-family homes, while loans to developers are typically in the form of borrowing base lines extended for the purpose of acquiring and developing raw land into lots that can be further sold to home builders. RBF loans, if not structured and monitored correctly, can be impacted by volatility in consumer demand, as well as fluctuation in housing prices. Secured by 1-4 family . This category of loans includes both first and second lien loans made for the purpose of purchasing or constructing 1-4 family residential dwellings, as well as home equity revolving lines of credit and loans to purchase lots for future construction of 1-4 family residential dwellings. Other . The "other" category is primarily comprised of real estate loans originated through a Small Business Administration (SBA) program where repayment is partially guaranteed by the SBA, as well as other loans secured by real estate where the primary source of repayment is not expected to come from the sale or lease of the real property collateral. We have several pass credit grades that are assigned to loans based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to watch credits which have all the characteristics of an acceptable credit risk but warrant more than the normal level of monitoring. Within our criticized/classified credit grades are special mention, substandard and doubtful. Special mention loans are those that are currently protected by the sound worth and paying capacity of the borrower, but that are potentially weak and constitute an additional credit risk. These loans have the potential to deteriorate to a substandard grade due to the existence of financial or administrative deficiencies. Substandard loans have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Some substandard loans are inadequately protected by the sound worth and paying capacity of the borrower and of the collateral pledged and may be considered impaired. Substandard loans can be accruing or can be on non-accrual depending on the circumstances of the individual loans. 13 Table of Contents Loans classified as doubtful have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection in full highly questionable and improbable. The possibility of loss is extremely high. All doubtful loans are on non-accrual. The methodology used in the estimation of the allowance, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and forecasted economic conditions. Changes are reflected in the pool-basis allowance and in reserves assigned on an individual basis as the collectability of classified loans is evaluated with new information. As our portfolio has matured, historical loss ratios have been closely monitored. The review of the appropriateness of the allowance is performed by executive management and presented to the audit and risk committees of our board of directors for their review. 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 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. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless either of the following applies: management has a reasonable expectation that a loan will be restructured, or the extension or renewal options are included in the borrower contract and are not unconditionally cancellable by us. We do not measure an allowance for credit losses on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when loans are placed on non-accrual status as discussed above. Investment Securities Available-for-Sale For available-for-sale debt securities in an unrealized loss position, we first assess whether we intend to sell, or it is more-likely-than-not that we will be required to sell, the securities before recovery of the amortized cost basis. If either of these criteria is met, the securities' amortized cost basis is written down to fair value as a current period expense. If either of the above criteria is not met, we evaluate whether the decline in fair value is the result of credit losses or other factors. In making this assessment, we may consider various factors including the extent to which fair value is less than amortized cost, performance of any underlying collateral and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess of the amortized cost basis over the present value of expected cash flows is recorded as an allowance for credit loss, limited to the amount by which the fair value is less than the amortized cost basis. Any impairment not recorded through an allowance for credit loss is recognized in other comprehensive income as a non credit-related impairment. We have made a policy election to exclude accrued interest from the amortized cost basis of available-for-sale debt securities and report accrued interest separately in accrued interest and other assets in the consolidated balance sheets. Available-for-sale debt securities are placed on non-accrual status when we no longer expect to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on non-accrual status. Accordingly, we do not recognize an allowance for credit loss against accrued interest receivable. 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. 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. 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 may be restricted from being transferred until a future date. 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 credit losses, the fair value of financial instruments and the status of contingencies are particularly susceptible to significant change. 14 Table of Contents (2) Earnings Per Share The following table presents the computation of basic and diluted earnings per share: Three months ended September 30, Nine months ended September 30, (in thousands except share and per share data) 2020 2019 2020 2019 Numerator: Net income $ 57,116 $ 88,082 $ 6,113 $ 247,595 Preferred stock dividends 2,438 2,438 7,313 7,313 Net income/(loss) available to common stockholders $ 54,678 $ 85,644 $ ( 1,200 ) $ 240,282 Denominator: Denominator for basic earnings per share—weighted average shares 50,446,691 50,305,844 50,417,563 50,273,485 Effect of employee stock-based awards(1) 126,382 110,558 103,984 119,277 Denominator for dilutive earnings per share—adjusted weighted average shares and assumed conversions 50,573,073 50,416,402 50,521,547 50,392,762 Basic earnings/(loss) per common share $ 1.08 $ 1.70 $ ( 0.02 ) $ 4.78 Diluted earnings/(loss) per common share $ 1.08 $ 1.70 $ ( 0.02 ) $ 4.77 (1) 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 Available-for-Sale Debt Securities The following is a summary of available-for-sale debt securities: (in thousands) Amortized Cost(1) Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value September 30, 2020 Available-for-sale debt securities: U.S. Government Agency Securities $ 125,000 $ — $ ( 1,052 ) $ 123,948 Residential mortgage-backed securities 1,004,279 490 ( 2,987 ) 1,001,782 Tax-exempt asset-backed securities 184,963 15,858 — 200,821 Credit risk transfer securities 14,713 — ( 3,655 ) 11,058 Total $ 1,328,955 $ 16,348 $ ( 7,694 ) $ 1,337,609 December 31, 2019 Available-for-sale debt securities: Residential mortgage-backed securities $ 4,991 $ 275 $ — $ 5,266 Tax-exempt asset-backed securities 183,225 13,802 — 197,027 Credit risk transfer securities 14,713 — ( 2,749 ) 11,964 Total $ 202,929 $ 14,077 $ ( 2,749 ) $ 214,257 (1) 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. 15 Table of Contents 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) Less Than One Year After One Through Five Years After Five Through Ten Years After Ten Years Total September 30, 2020 Available-for-sale: U.S. Government Agency Securities:(1) Amortized cost $ — $ — $ 125,000 $ — $ 125,000 Estimated fair value — — 123,948 — 123,948 Weighted average yield(3) — % — % 1.13 % — % 1.13 % Residential mortgage-backed securities:(1) Amortized cost $ — $ 653 $ 17,514 $ 986,112 $ 1,004,279 Estimated fair value — 719 17,521 983,542 1,001,782 Weighted average yield(3) — % 4.58 % 1.08 % 1.25 % 1.25 % Tax-exempt asset-backed securities:(1) Amortized Cost — — — 184,963 184,963 Estimated fair value — — — 200,821 200,821 Weighted average yield(2)(3) — % — % — % 4.92 % 4.92 % CRT securities:(1) Amortized Cost — — — 14,713 14,713 Estimated fair value — — — 11,058 11,058 Weighted average yield(3) — % — % — % 0.15 % 0.15 % Total available-for-sale debt securities: Amortized cost $ 1,328,955 Estimated fair value $ 1,337,609 December 31, 2019 Available-for-sale: Residential mortgage-backed securities:(1) Amortized cost $ — $ 1,005 $ — $ 3,986 $ 4,991 Estimated fair value — 1,088 — 4,178 5,266 Weighted average yield(3) — % 5.54 % — % 4.31 % 4.55 % Tax-exempt asset-backed securities:(1) Amortized Cost — — — 183,225 183,225 Estimated fair value — — — 197,027 197,027 Weighted average yield(2)(3) — % — % — % 5.32 % 5.32 % CRT securities:(1) Amortized Cost — — — 14,713 14,713 Estimated fair value — — — 11,964 11,964 Weighted average yield(3) — % — % — % 1.71 % 1.71 % Total available-for-sale debt securities: Amortized cost $ 202,929 Estimated fair value $ 214,257 (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. 16 Table of Contents The following table discloses 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: Less Than 12 Months 12 Months or Longer Total (in thousands) Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss September 30, 2020 U.S. Government Agency Securities $ 123,948 $ ( 1,052 ) $ — $ — $ 123,948 $ ( 1,052 ) Residential mortgage-backed securities $ 879,209 $ ( 2,987 ) $ — $ — $ 879,209 $ ( 2,987 ) CRT securities — — 11,058 ( 3,655 ) 11,058 ( 3,655 ) Total $ 1,003,157 $ ( 4,039 ) $ 11,058 $ ( 3,655 ) $ 1,014,215 $ ( 7,694 ) December 31, 2019 CRT securities $ 11,964 $ ( 2,749 ) $ — $ — $ 11,964 $ ( 2,749 ) 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 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 $ 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. Equity Securities Equity securities consist of Community Reinvestment Act funds and investments related to our non-qualified deferred compensation plan. 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 September 30, Nine months ended September 30, (in thousands) 2020 2019 2020 2019 Net gains recognized during the period $ 1,350 $ 37 $ 1,285 $ 1,876 Less: Realized net gains/(losses) recognized during the period on equity securities sold 177 111 ( 68 ) 87 Unrealized net gains/(losses) recognized during the period on equity securities still held $ 1,173 $ ( 74 ) $ 1,353 $ 1,789 (4) Loans Held for Investment and Allowance for Credit Losses on Loans Loans held for investment are summarized by portfolio segment as follows: (in thousands) September 30, 2020 December 31, 2019 Commercial $ 8,786,917 $ 9,133,444 Energy 968,993 1,425,309 Mortgage finance(1) 9,378,104 8,169,849 Real estate 6,112,672 6,008,040 Gross loans held for investment(2) 25,246,686 24,736,642 Deferred income (net of direct origination costs) ( 78,624 ) ( 90,380 ) Allowance for credit losses on loans ( 290,165 ) ( 195,047 ) Total loans held for investment, net(2) $ 24,877,897 $ 24,451,215 (1) Balances at September 30, 2020 and December 31, 2019 are stated net of $ 1.1 billion and $ 682.7 million of participations sold, respectively. (2) 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. 17 Table of Contents The following table summarizes our gross loans held for investment by year of origination and internally assigned credit grades: (in thousands) 2020 2019 2018 2017 2016 2015 and prior Revolving lines of credit Revolving lines of credit converted to term loans Total September 30, 2020 Commercial (1-7) Pass $ 1,104,589 $ 2,973,613 $ 661,999 $ 384,067 $ 207,610 $ 256,339 $ 2,764,619 $ 33,888 $ 8,386,724 (8) Special mention 319 36,072 21,423 35,407 9,208 9,371 14,067 9,226 135,093 (9) Substandard - accruing 17,476 30,923 46,453 40,670 11,875 9,737 43,533 1,922 202,589 (9+) Non-accrual 9,167 10,202 386 11,030 2,144 22,191 7,260 131 62,511 Total commercial $ 1,131,551 $ 3,050,810 $ 730,261 $ 471,174 $ 230,837 $ 297,638 $ 2,829,479 $ 45,167 $ 8,786,917 Energy (1-7) Pass $ 1,009 $ 14,500 $ 25,472 $ 10,423 $ 21,400 $ 68,284 $ 553,125 $ 250 $ 694,463 (8) Special mention — 27,909 22,394 — — 15,314 64,037 — 129,654 (9) Substandard - accruing — — 30,977 — — — 40,088 — 71,065 (9+) Non-accrual — — — 5,968 11,822 34,336 19,873 1,812 73,811 Total energy $ 1,009 $ 42,409 $ 78,843 $ 16,391 $ 33,222 $ 117,934 $ 677,123 $ 2,062 $ 968,993 Mortgage finance (1-7) Pass $ 628,926 $ 1,111,019 $ 824,564 $ 531,556 $ 148,745 $ 6,133,294 $ — $ — $ 9,378,104 (8) Special mention — — — — — — — — — (9) Substandard - accruing — — — — — — — — — (9+) Non-accrual — — — — — — — — — Total mortgage finance $ 628,926 $ 1,111,019 $ 824,564 $ 531,556 $ 148,745 $ 6,133,294 $ — $ — $ 9,378,104 Real estate CRE (1-7) Pass $ 257,066 $ 877,307 $ 949,785 $ 631,875 $ 229,186 $ 456,647 $ 100,067 $ 74,789 $ 3,576,722 (8) Special mention — 333 56,081 66,742 49,755 52,454 — 6,385 231,750 (9) Substandard - accruing — — 12,002 — — 34,610 — 1,250 47,862 (9+) Non-accrual — — 4,028 — — 237 — — 4,265 RBF (1-7) Pass 158,135 134,598 117,955 21,943 7,029 25,175 506,363 — 971,198 (8) Special mention — 577 — — — — — — 577 (9) Substandard - accruing — — — — — — — — — (9+) Non-accrual — — — — — — — — — Other (1-7) Pass 156,602 160,006 123,021 123,932 91,834 114,276 19,035 32,551 821,257 (8) Special mention — 11,423 8,604 26,952 9,351 27,740 — 1,018 85,088 (9) Substandard - accruing — — — 4,496 — 2,745 — — 7,241 (9+) Non-accrual — — — — 1,107 6,133 — 13,901 21,141 Secured by 1-4 family (1-7) Pass 46,521 63,274 48,779 61,165 85,470 32,718 4,725 — 342,652 (8) Special mention — — — — — 1,774 — — 1,774 (9) Substandard - accruing — — — 818 — 109 — — 927 (9+) Non-accrual — — — — — 218 — — 218 Total real estate $ 618,324 $ 1,247,518 $ 1,320,255 $ 937,923 $ 473,732 $ 754,836 $ 630,190 $ 129,894 $ 6,112,672 Total loans held for investment $ 2,379,810 $ 5,451,756 $ 2,953,923 $ 1,957,044 $ 886,536 $ 7,303,702 $ 4,136,792 $ 177,123 $ 25,246,686 18 Table of Contents The following table details activity in the allowance for credit losses on loans. 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 Energy Mortgage Finance Real Estate Additional Qualitative Reserve Total Nine months ended September 30, 2020 Allowance for credit losses on loans: Beginning balance $ 102,254 $ 60,253 $ 2,265 $ 30,275 $ — $ 195,047 Impact of CECL adoption ( 15,740 ) 24,154 2,031 ( 1,860 ) — 8,585 Provision for credit losses on loans 47,263 127,470 430 44,799 — 219,962 Charge-offs 35,376 100,239 — — — 135,615 Recoveries 883 1,303 — — — 2,186 Net charge-offs (recoveries) 34,493 98,936 — — — 133,429 Ending balance $ 99,284 $ 112,941 $ 4,726 $ 73,214 $ — $ 290,165 Nine months ended September 30, 2019 Allowance for credit losses on loans: Beginning balance $ 96,814 $ 34,882 $ — $ 52,595 $ 7,231 $ 191,522 Provision for credit losses on loans 30,309 42,243 1,966 ( 7,204 ) ( 7,231 ) 60,083 Charge-offs 30,869 31,828 — 177 — 62,874 Recoveries 1,300 107 — — — 1,407 Net charge-offs (recoveries) 29,569 31,721 — 177 — 61,467 Ending balance $ 97,554 $ 45,404 $ 1,966 $ 45,214 $ — $ 190,138 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 $ 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. 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. The following table summarizes collateral-dependent gross loans held for investment by collateral type as follows: Collateral Type (in thousands) Business Assets Real Property Oil/Gas Mineral Reserves Rolling Stock U.S. Government Guaranty Total September 30, 2020 Commercial $ 26,243 $ — $ — $ 774 $ 544 $ 27,561 Energy — — 41,102 — — 41,102 Real estate Other — 5,650 — — — 5,650 Total collateral-dependent loans held for investment $ 26,243 $ 5,650 $ 41,102 $ 774 $ 544 $ 74,313 19 Table of Contents The table below provides an age analysis of our loans held for investment: (in thousands) 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due(1) Total Past Due Non-accrual loans as of June 30, 2020(2) Current Total Non-accrual With No Allowance September 30, 2020 Commercial $ 25,387 $ 1,650 $ 12,248 $ 39,285 $ 62,511 $ 8,685,121 $ 8,786,917 $ 19,367 Energy 20,670 — 1,995 22,665 73,811 872,517 968,993 25,090 Mortgage finance loans — — — — — 9,378,104 9,378,104 — Real estate CRE 24,158 9,619 1,250 35,027 4,265 3,821,307 3,860,599 4,028 RBF — — — — — 971,775 971,775 — Other 1,018 — — 1,018 21,141 912,568 934,727 20,796 Secured by 1-4 family 897 497 403 1,797 218 343,556 345,571 — Total loans held for investment $ 72,130 $ 11,766 $ 15,896 $ 99,792 $ 161,946 $ 24,984,948 $ 25,246,686 $ 69,281 (1) Loans past due 90 days and still accruing includes premium finance loans of $ 11.9 million . These loans are generally secured by obligations of insurance carriers to refund premiums on canceled insurance policies. The receipt of the refund of premiums from the insurance carriers can take 180 days or longer from the cancellation date. (2) 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 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 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 Adjusted Payment Schedule Total (in thousands, except number of contracts) Number of Contracts Balance at Period End Number of Contracts Balance at Period End Number of Contracts Balance at Period End Nine months ended September 30, 2020 Commercial loans 2 $ 7,636 2 $ 14,663 4 $ 22,299 Energy loans 1 5,969 3 13,469 4 19,438 Total 3 $ 13,605 5 $ 28,132 8 $ 41,737 Nine months ended September 30, 2019 Commercial loans 1 $ 1,824 — $ — $ 1 $ 1,824 Energy loans 1 3,941 — — 1 3,941 Total 2 $ 5,765 — $ — 2 $ 5,765 Restructured loans generally include terms to temporarily place the loan on interest only, extend the payment terms or reduce the interest rate. We did not forgive any principal on the above restructured loans. 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. This program allows for a deferral of payments for 90 days, which we may extend for an additional 90 days, for a maximum of 180 days on a cumulative basis. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan. 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 20 Table of Contents 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: Nine Months Ended September 30, (in thousands) 2020 2019 Outstanding balance(1): Beginning balance $ 2,568,362 $ 1,949,785 Loans purchased and originated 8,963,499 7,288,823 Payments and loans sold ( 10,889,549 ) ( 6,571,942 ) Ending balance 642,312 2,666,666 Fair value adjustment: Beginning balance 8,772 19,689 Increase/(decrease) to fair value ( 3,075 ) ( 12,130 ) Ending balance 5,697 7,559 Loans held for sale at fair value $ 648,009 $ 2,674,225 (1) 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. Interest on these past due loans accrues at the debenture rate guaranteed by the U.S. government. 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 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. From time to time we retain the right to service the loans sold through our Mortgage Correspondent Aggregation ("MCA") program, creating mortgage servicing rights ("MSRs") which are recorded as assets on our balance sheet. A summary of MSR activity is as follows: Nine months ended September 30, (in thousands) 2020 2019 MSRs: Balance, beginning of year $ 70,707 $ 42,474 Capitalized servicing rights 76,905 22,610 Amortization ( 25,553 ) ( 7,599 ) Balance, end of period $ 122,059 $ 57,485 Valuation allowance: Balance, beginning of year $ 5,803 $ — Increase in valuation allowance 20,933 8,360 Balance, end of period $ 26,736 $ 8,360 MSRs, net $ 95,323 $ 49,125 MSRs, fair value $ 95,323 $ 49,125 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- 21 Table of Contents 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. MSRs typically do not trade in an active, open market with readily observable prices; as such, the fair value of MSRs is determined using a discounted cash flow model to calculate the present value of the estimated future net servicing income. The assumptions utilized in the discounted cash flow model are based on market data for comparable assets, where available. 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 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: September 30, 2020 December 31, 2019 Average discount rates 9.11 % 9.06 % Expected prepayment speeds 16.96 % 13.11 % Weighted-average life, in years 4.7 5.8 A sensitivity analysis of changes in the fair value of our MSR portfolio resulting from certain key assumptions is presented in the following table: (in thousands) September 30, 2020 December 31, 2019 50 bp adverse change in prepayment speed $ ( 11,049 ) $ ( 10,768 ) 100 bp adverse change in prepayment speed ( 13,100 ) ( 17,965 ) These sensitivities are hypothetical and actual results may differ materially due to a number of factors. The effect on fair value of a 10% variation in assumptions generally cannot be determined with confidence because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may be correlated with changes in other factors, which could impact the sensitivity analysis as presented. 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 $ 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 The table below presents our financial instruments with off-balance sheet risk, as well as the activity in the allowance for off-balance sheet credit losses related to those financial instruments. This allowance is recorded in other liabilities on the consolidated balance sheets. Three months ended September 30, Nine months ended September 30, (in thousands) 2020 2019 2020 2019 Beginning balance of allowance for off-balance sheet credit losses $ 12,268 $ 10,790 $ 8,640 $ 11,434 Impact of CECL adoption — — 563 — Provision for off-balance sheet credit losses 2,973 ( 1,439 ) 6,038 ( 2,083 ) Ending balance of allowance for off-balance sheet credit losses $ 15,241 $ 9,351 $ 15,241 $ 9,351 (in thousands) September 30, 2020 December 31, 2019 Commitments to extend credit - period end balance $ 8,356,525 $ 8,066,655 Standby letters of credit - period end balance $ 258,491 $ 261,405 22 Table of Contents (7) Regulatory Restrictions The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The Basel III regulatory capital framework (the "Basel III Capital Rules") adopted by U.S. federal regulatory authorities, among other things, (i) establishes the capital measure called "Common Equity Tier 1" ("CET1"), (ii) specifies that Tier 1 capital consist of CET1 and "Additional Tier 1 Capital" instruments meeting stated requirements, (iii) requires that most deductions/adjustments to regulatory capital measures be made to CET1 and not to other components of capital and (iv) defines the scope of the deductions/adjustments to the capital measures. Additionally, the Basel III Capital Rules require that we maintain a 2.5 % capital conservation buffer with respect to each of CET1, Tier 1 and total capital to risk-weighted assets, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers. In the first quarter of 2020, U.S. 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 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 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. The regulatory authorities can apply changes in classification of assets and such changes may retroactively subject the Company to changes in capital ratios. Any such change could reduce one or more capital ratios below well-capitalized status. In addition, a change may result in imposition of additional assessments by the FDIC or could result in regulatory actions that could have a material adverse effect on our financial condition and results of operations. Because our Bank had less than $ 15.0 billion in total consolidated assets as of December 31, 2009, we are allowed to continue to classify our trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1 capital. 23 Table of Contents The table below summarizes our actual and required capital ratios under the Basel III Capital Rules. The ratios presented below include the effects of our election to utilize the five-year CECL transition described above. Actual For Capital Adequacy Purposes Required to be Considered Well Capitalized (dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio September 30, 2020 CET1 Company $ 2,654,677 9.05 % $ 2,052,372 7.00 % N/A N/A Bank 2,688,350 9.18 % 2,049,511 7.00 % 1,903,117 6.50 % Total capital (to risk-weighted assets) Company 3,470,192 11.84 % 3,078,558 10.50 % N/A N/A Bank 3,345,075 11.42 % 3,074,266 10.50 % 2,927,873 10.00 % Tier 1 capital (to risk-weighted assets) Company 2,914,677 9.94 % 2,492,166 8.50 % N/A N/A Bank 2,848,350 9.73 % 2,488,692 8.50 % 2,342,298 8.00 % Tier 1 capital (to average assets)(1) Company 2,914,677 7.58 % 1,537,325 4.00 % N/A N/A Bank 2,848,350 7.41 % 1,536,902 4.00 % 1,921,127 5.00 % December 31, 2019 CET1 Company $ 2,653,999 8.88 % $ 2,091,591 7.00 % N/A N/A Bank 2,676,513 8.96 % 2,090,870 7.00 % 1,941,522 6.50 % Total capital (to risk-weighted assets) Company 3,398,345 11.37 % 3,137,926 10.50 % N/A N/A Bank 3,262,144 10.92 % 3,136,305 10.50 % 2,986,957 10.00 % Tier 1 capital (to risk-weighted assets) Company 2,912,529 9.75 % 2,540,226 8.50 % N/A N/A Bank 2,835,043 9.49 % 2,538,913 8.50 % 2,389,565 8.00 % Tier 1 capital (to average assets)(1) Company 2,912,529 8.42 % 1,383,640 4.00 % N/A N/A Bank 2,835,043 8.20 % 1,383,190 4.00 % 1,728,988 5.00 % (1) The Tier 1 capital ratio (to average assets) is not impacted by the Basel III Capital Rules; however, the Federal Reserve Board and the FDIC may require the Company and the Bank, respectively, to maintain a Tier 1 capital ratio (to average assets) above the required minimum. 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 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. Due to the actual risk profile and liquidity of this asset class, we manage capital allocated to mortgage finance loans based on changing trends in average balances and do not believe that the period-end balance is representative of risk characteristics that would justify higher allocations. However, we monitor our capital allocation to confirm that all capital levels remain above well-capitalized levels. Dividends that may be paid by banks are routinely restricted by various regulatory authorities. The amount that can be paid in any calendar year without prior approval of our Bank’s regulatory agencies cannot exceed the lesser of the net profits (as defined) for that year plus the net profits for the preceding two calendar years, or retained earnings. 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 nine months ended September 30, 2020 , or 2019 . 24 Table of Contents (8) Stock-based Compensation We have long-term incentive plans under which stock-based compensation awards are granted to employees and directors by the board of directors, or its designated committee. Grants are subject to vesting requirements and may include, among other things, nonqualified stock options, stock appreciation rights ("SARs"), restricted stock units ("RSUs"), restricted stock and performance units, or any combination thereof. There are 2,550,000 total shares authorized for grant under the plans. The table below summarizes our stock-based compensation expense: Three months ended September 30, Nine months ended September 30, (in thousands) 2020 2019 2020 2019 Stock-settled awards: SARs $ — $ — $ — $ 6 RSUs 4,794 3,015 11,326 8,532 Restricted stock 5 8 22 27 Cash-settled units 236 1,005 716 4,408 Total $ 5,035 $ 4,028 $ 12,064 $ 12,973 (in thousands except period data) September 30, 2020 Unrecognized compensation expense related to unvested stock-settled awards $ 33,314 Weighted average period over which expense is expected to be recognized, in years 2.9 (9) Fair Value Disclosures We determine the fair market values of our assets and liabilities measured at fair value on a recurring and nonrecurring basis using the fair value hierarchy as prescribed in ASC 820. The standard describes three levels of inputs that may be used to measure fair value as provided below. Level 1 Quoted prices in active markets for identical assets or liabilities. Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair values requires significant management judgment or estimation. 25 Table of Contents Assets and liabilities measured at fair value are as follows: Fair Value Measurements Using (in thousands) Level 1 Level 2 Level 3 September 30, 2020 Available-for-sale debt securities:(1) U.S. government agency securities $ — $ 123,948 $ — Residential mortgage-backed securities — 1,001,782 — Tax-exempt asset-backed securities — — 200,821 CRT securities — — 11,058 Equity securities(1)(2) 22,442 7,262 — Loans held for sale(3) — 632,071 6,974 Loans held for investment(4) — — 36,490 Derivative assets(5) — 124,627 — Derivative liabilities(5) — 114,259 — Non-qualified deferred compensation plan liabilities(6) 23,342 — — December 31, 2019 Available-for-sale debt securities:(1) Residential mortgage-backed securities $ — $ 5,266 $ — Tax-exempt asset-backed securities — — 197,027 CRT securities — — 11,964 Equity securities(1)(2) 18,484 7,130 — Loans held for sale(3) — 2,564,281 7,043 Loans held for investment(4) — — 109,585 Derivative assets(5) — 48,684 — Derivative liabilities(5) — 51,310 — Non-qualified deferred compensation plan liabilities(6) 18,484 — — (1) Securities are measured at fair value on a recurring basis, generally monthly, except for tax-exempt asset-backed securities and CRT securities which are measured quarterly. (2) Equity securities consist of Community Reinvestment Act funds and investments related to our non-qualified deferred compensation plan. (3) Loans held for sale purchased through our MCA program are measured at fair value on a recurring basis, generally monthly. (4) Includes certain collateral-dependent loans held for investment for which a specific allocation of the allowance for credit losses is based upon the fair value of the loan’s underlying collateral. These loans held for investment are measured on a nonrecurring basis, generally annually or more often as warranted by market and economic conditions. (5) Derivative assets and liabilities are measured at fair value on a recurring basis, generally quarterly. (6) Non-qualified deferred compensation plan liabilities represent the fair value of the obligation to the employee, which generally corresponds to the fair value of the invested assets, and are measured at fair value on a recurring basis, generally monthly. 26 Table of Contents Level 3 Valuations The following table presents a reconciliation of the level 3 fair value category measured at fair value on a recurring basis: Net Realized/Unrealized Gains (Losses) (in thousands) Balance at Beginning of Period Purchases / Additions Sales / Reductions Realized Unrealized Balance at End of Period Three months ended September 30, 2020 Available-for-sale debt securities:(1) Tax-exempt asset-backed securities $ 191,417 $ — $ ( 2,248 ) $ — $ 11,652 $ 200,821 CRT securities $ 10,953 $ — $ — $ — $ 105 $ 11,058 Loans held for sale(2) $ 6,159 $ 785 $ ( 170 ) $ 132 $ 68 $ 6,974 Three months ended September 30, 2019 Available-for-sale debt securities:(1) Tax-exempt asset-backed securities $ 201,339 $ — $ ( 4,116 ) $ — $ 390 $ 197,613 CRT securities $ 10,953 $ — $ — $ — $ 502 $ 11,455 Loans held for sale(2) $ 10,930 $ — $ ( 2,056 ) $ 102 $ 222 $ 9,198 Nine months ended September 30, 2020 Available-for-sale debt securities:(1) Tax-exempt asset-backed securities $ 197,027 $ 8,470 $ ( 6,733 ) $ — $ 2,057 $ 200,821 CRT securities $ 11,964 $ — $ — $ — $ ( 906 ) $ 11,058 Loans held for sale(2) $ 7,043 $ 1,105 $ ( 1,634 ) $ 248 $ 212 $ 6,974 Nine months ended September 30, 2019 Available-for-sale debt securities:(1) Tax-exempt asset-backed securities $ 95,804 $ 92,010 $ ( 4,254 ) $ — $ 14,053 $ 197,613 CRT securities $ — $ 15,044 $ — $ ( 331 ) $ ( 3,258 ) $ 11,455 Loans held for sale(2) $ 16,415 $ — $ ( 8,466 ) $ 450 $ 799 $ 9,198 (1) 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. (2) Realized and unrealized gains/(losses) on loans held for sale are recorded in gain/(loss) on sale of loans held for sale. Tax-exempt asset-backed securities 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 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. CRT securities 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 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. Loans held for sale The fair value of loans held for sale using Level 3 inputs include loans that cannot be sold through normal sale channels and thus require significant management judgment or estimation when determining the fair value. The fair value of such loans is generally based upon quoted prices of comparable loans with a liquidity discount applied. 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 . 27 Table of Contents 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 $ 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. Fair Value of Financial Instruments GAAP requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. This disclosure does not and is not intended to represent the fair value of the Company. A summary of the carrying amounts and estimated fair values of financial instruments is as follows: September 30, 2020 December 31, 2019 (in thousands) Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Financial assets: Level 1 inputs: Cash and cash equivalents $ 10,646,786 $ 10,646,786 $ 4,425,583 $ 4,425,583 Investment securities 22,442 22,442 18,484 18,484 Level 2 inputs: Investment securities 1,132,992 1,132,992 12,396 12,396 Loans held for sale 632,071 632,071 2,570,091 2,570,091 Derivative assets 124,627 124,627 48,684 48,684 Level 3 inputs: Investment securities 211,879 211,879 208,991 208,991 Loans held for sale 6,974 6,974 7,043 7,043 Loans held for investment, net 24,877,897 24,925,427 24,451,215 24,478,586 Financial liabilities: Level 2 inputs: Federal funds purchased 202,605 202,605 132,270 132,270 Customer repurchase agreements 5,578 5,578 9,496 9,496 Other borrowings 2,700,000 2,700,000 2,400,000 2,400,000 Subordinated notes 282,400 289,012 282,129 292,302 Trust preferred subordinated debentures 113,406 113,406 113,406 113,406 Derivative liabilities 114,259 114,259 51,310 51,310 Level 3 inputs: Deposits 31,959,487 31,960,471 26,478,593 26,486,090 The estimated fair value for cash and cash equivalents, variable rate loans and variable rate debt approximates carrying value. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Investment Securities Within the investment securities portfolio, we hold equity securities related to our non-qualified deferred compensation plan that are valued using quoted market prices for identical equity securities in an active market, and are classified as Level 1 assets in the fair value hierarchy. The fair value of the remaining equity securities and residential mortgage-backed securities in our investment portfolio are based on prices obtained from independent pricing services that are based on quoted market prices for the same or similar securities, and are characterized as Level 2 assets in the fair value hierarchy. We have obtained documentation from our primary pricing service regarding their processes and controls applicable to pricing investment securities, and on a quarterly basis we independently verify the prices that we receive from the service provider using two additional independent pricing sources. We also hold tax-exempt asset-backed securities and CRT securities that are valued 28 Table of Contents using a discounted cash flow model, which utilizes Level 3 inputs, and are classified as Level 3 assets in the fair value hierarchy. Loans Held for Sale Fair value for loans held for sale is derived from quoted market prices for similar loans, in which case they are characterized as Level 2 assets in the fair value hierarchy, or is derived from third party pricing models, in which case they are characterized as Level 3 assets in the fair value hierarchy. Derivatives The estimated fair value of interest rate swaps and caps is obtained from independent pricing services based on quoted market prices for similar derivative contracts and these financial instruments are characterized as Level 2 assets and liabilities in the fair value hierarchy. On a quarterly basis, we independently verify the fair value using an additional independent pricing source. Foreign currency forward contracts are valued based upon quoted market prices obtained from independent pricing services for similar derivative contracts. As such, these financial instruments are characterized as Level 2 assets and liabilities in the fair value hierarchy. The derivative instruments related to the loans held for sale portfolio include loan purchase commitments and forward sale commitments. Loan purchase commitments are valued based upon the fair value of the underlying mortgage loans to be purchased, which is based on observable market data for similar loans. Forward sale commitments are valued based upon quoted market prices from brokers. As such, these loan purchase commitments and forward sales commitments are characterized as Level 2 assets or liabilities in the fair value hierarchy. The derivative instruments related to our residential MSRs include interest rate swap futures and forward sale commitments. The interest rate swap futures are valued based on quoted market prices obtained from brokers for similar derivative contracts, while the forward sale commitments are valued based on the fair value of the underlying mortgage loans to be purchased, which is based on observable market data for similar loans. As such, these derivative instruments are characterized as Level 2 assets and liabilities in the fair value hierarchy. (10) Derivative Financial Instruments The notional amounts and estimated fair values of derivative positions outstanding are presented in the following table: September 30, 2020 December 31, 2019 Estimated Fair Value Estimated Fair Value (in thousands) Notional Amount Asset Derivative Liability Derivative Notional Amount Asset Derivative Liability Derivative Non-hedging derivatives: Financial institution counterparties: Commercial loan/lease interest rate swaps $ 1,919,938 $ — $ 108,977 $ 1,548,234 $ 182 $ 46,518 Commercial loan/lease interest rate caps 652,188 23 — 639,163 32 — Foreign currency forward contracts 2,229 7 98 2,219 169 — Customer counterparties: Commercial loan/lease interest rate swaps 1,919,938 108,977 — 1,548,234 46,518 182 Commercial loan/lease interest rate caps 652,188 — 23 639,163 — 32 Foreign currency forward contracts 2,229 98 7 2,219 — 169 Economic hedging derivatives to hedge: Residential MSRs: Interest rate swap futures 260,000 81 211 — — — Forward sale commitments 155,000 351 8 — — — Loans held for sale: Loan purchase commitments 1,295,374 15,090 86 214,012 1,965 4 Forward sale commitments 1,525,000 — 4,849 2,654,653 — 4,587 Gross derivatives 124,627 114,259 48,866 51,492 Offsetting derivative assets/liabilities — — ( 182 ) ( 182 ) Net derivatives included in the consolidated balance sheets $ 124,627 $ 114,259 $ 48,684 $ 51,310 During the second quarter of 2020, we initiated a strategy to mitigate exposure to potential impairment losses from adverse changes in the fair value of our residential MSR portfolio using interest rate derivative contracts, primarily interest rate swap futures and forward sale commitments of mortgage-backed securities. These derivative instruments are considered highly liquid and can be settled daily, which allows us to dynamically manage our exposure. The derivative instruments are used to 29 Table of Contents economically hedge the fair value of the residential MSR portfolio impacted by changes in anticipated prepayments resulting from mortgage interest rate movements and are classified as other assets and other liabilities on the consolidated balance sheets. Any unrealized or realized gains/(losses) related to derivatives economically hedging the residential MSR portfolio are recognized in servicing-related expenses along with changes to the MSR valuation allowance. The weighted-average received and paid interest rates for interest rate swaps outstanding were as follows: June 30, 2020 Weighted-Average Interest Rate December 31, 2019 Weighted-Average Interest Rate Received Paid Received Paid Non-hedging interest rate swaps 3.21 % 1.42 % 3.94 % 3.26 % 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 $ 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 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. We also enter into credit risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are either a participant or a lead bank. 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 $ 110.2 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 $ 166.3 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 ASU 2019-12 "Income Taxes (Topic 740)" ("ASU 2019-12") simplifies the accounting for income taxes by removing certain exceptions and improves the consistent application of GAAP by clarifying and amending other existing guidance. ASU 2019-012 will be effective for us on January 1, 2021 and is not expected to have any material impact on our consolidated financial statements. ASU 2020-01 "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)" ("ASU 2020-01") clarifies the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. ASU 2020-01 will be effective for us on January 1, 2021 and is not expected to have any material impact on our consolidated financial statements. ASU 2020-02 "Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842)" ("ASU 2020-02") incorporates SEC SAB 119 (updated from SAB 102) into the Accounting Standards Codification (the "Codification") by aligning SEC recommended policies and procedures with ASC 326. ASU 2020-02 was effective on January 1, 2020 and has not had a significant impact on our documentation requirements. ASU 2020-03 "Codification Improvements to Financial Instruments" ("ASU 2020-03") revised a wide variety of topics in the Codification with the intent to make the Codification easier to understand and apply by eliminating inconsistencies and 30 Table of Contents providing clarifications. ASU 2020-03 was effective immediately upon its release in March 2020 and did not have a material impact on our consolidated financial statements. ASU 2020-04, "Reference Rate Reform (Topic 848)" ("ASU 2020-04") provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. We anticipate this ASU will simplify any modifications we execute between the selected start date (yet to be determined) and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than extinguishment of the old contract resulting in writing off unamortized fees/costs. We are evaluating the impacts of this ASU and have not yet determined whether LIBOR transition and this ASU will have material effects on our business operations and consolidated financial statements. 31 Table of Contents