What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-02-09 compared with 2020-02-12 · 603 added, 397 removed, 941 unchanged (52% of the section changed)

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Report of Ernst & Young LLP, Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Texas Capital Bancshares, Inc.

To the Stockholders and the Board of Directors of Texas Capital Bancshares, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Texas Capital Bancshares, Inc.

(the Company) as of December 31, 2019 and 2018, the related consolidated statements of income and other comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as “the consolidated financial statements”).

(the Company) as of December 31, 2020 and 2019, the related consolidated statements of income and other comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S.

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We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 9, 2021 expressed an unqualified opinion thereon.

Adoption of new accounting standard

As discussed in Note 1 to the consolidated financial statements, the Company changed its method for accounting for credit losses in 2020.

As explained below, auditing the Company’s allowance for credit losses, including adoption of the new accounting guidance related to the estimate of allowance for credit losses, was a critical audit matter.

Basis for Opinion

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The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosure to which it relates.

Allowance for Loan Losses (“ALL”)

Description of the Matter

The Company’s loans held for investment (“LHFI”) portfolio totaled $24.6 billion as of December 31, 2019, and the associated ALL was $195.0 million.

As discussed in both Notes 1 and 4 to the consolidated financial statements, the ALL is comprised of general reserves and specific reserves for impaired loans.

The Company’s ALL methodology for its general reserve employs a loss migration technique to determine historical loss percentages applicable to all defined credit risk grades and portfolio segments, whereby a segment weight is computed as a measure of the relative risk of loans in each segment compared to the entire LHFI portfolio.

The Company’s ALL methodology allows for management to adjust historical credit loss experience to be more reflective of losses inherent in its LHFI portfolio.

Management has identified certain measures in addition to historical credit loss experience that are believed to offer guidance as leading, concurrent and trailing indicators respectively of general economic health that in turn are thought to be relevant to the measure of incurred loss in the Company’s LHFI portfolio (individually referred to as “Q Factors”).

Ranges for individual Q Factors have been quantified and aggregated into a single adjustment (referred to as “the Q Factor adjustment”).

Within the LHFI portfolio, management may also adjust segment weights applied for specific portfolio segments whereby historical loss experience may not be a measure reflective of incurred losses for the specific portfolio segment.

Auditing management’s estimate of the ALL involved a high degree of subjectivity due to the judgmental nature of adjustments made to the historical loss experience through (1) the quantification and aggregation of the Q Factor adjustment applied to the portfolio as well as (2) the determination of segment loss weight adjustments applied to specific portfolio segments.

Such judgments (collectively referred to herein as “the judgmental adjustments”) could have a significant impact to the ALL.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls over the ALL process, including those over the identification and determination of individual Q Factors, the precision of management’s review and approval of the computation of the Q Factor adjustment, the identification and determination of segment weight adjustments, and the precision of management’s review and approval of the computed segment weight adjustments.

To test the judgmental adjustments made to historical loss experience in the ALL, our audit procedures included, among others, evaluating the Company’s ALL methodology and the underlying data used by management in developing the judgmental adjustments to the ALL.

We compared the judgmental adjustments made by management to both internal portfolio metrics and external macroeconomic data (as applicable) to support the judgmental adjustments and evaluate trends in such adjustments period over period.

We evaluated the data and information utilized by management to support the judgmental adjustments by independently obtaining internal and external data and information to assess the reliability and appropriateness of the data and information used by management.

We confirmed that the judgmental adjustments were appropriately input into the Company’s ALL computation by recomputing the impact of such adjustments.

We performed an analytical review of the ALL in aggregate using both internal and external information to evaluate the overall reasonableness of the ALL, including the judgmental adjustments.

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective or complex judgments.

Allowance for Credit Losses - Loans

Description of the Matter The Company’s loans held for investment portfolio totaled $24.4 billion as of December 31, 2020, and the associated allowance for credit losses (ACL) was $272.0 million.

As discussed above and in Note 1 and Note 4 of the Company’s Form 10-K, the Company adopted new accounting guidance related to the estimate of the ACL resulting in a pre-tax cumulative-effect transition adjustment increasing the ACL by $9.1 million.

The ACL represents management’s best estimate of expected credit losses over the contractual life of loans and for off-balance sheet commitments.

The ACL is estimated using relevant available information relating to past events, current conditions, and reasonable and supportable forecasts, as well as qualitative adjustments using a Portfolio Level Qualitative Factor and/or Portfolio Segment Level Qualitative Factor (collectively the “qualitative factors”).

The qualitative factors are used to bring the ACL to the level management believes is appropriate based on factors that are otherwise unaccounted for in the quantitative process.

The ACL also includes reserves for loans evaluated on an individual basis, such as certain loans graded substandard or worse.

Management applies judgment in the determination of the qualitative factors and reserves assigned on an individual basis to estimate the ACL.

Auditing management’s estimate of the ACL is complex due to the models utilized, and involves a high degree of subjectivity due to the judgment required in evaluating management’s determination of the qualitative factors and the reserve assumptions for loans evaluated on an individual basis.

How We Addressed the Matter in Our Audit Our considerations and procedures performed included evaluation of the process utilized by management to challenge the model results and determine the best estimate of the ACL as of the balance sheet date.

We obtained an understanding of the Company’s process for establishing the ACL, including determination of the qualitative factors and reserve assumptions for loans evaluated on an individual basis.

We evaluated the design and tested the operating effectiveness of the controls associated with the ACL process, including controls around the reliability and accuracy of data used in the model, management’s review and approval of the selected qualitative factors, the reserve assumptions for loans evaluated on an individual basis, the governance of the credit loss methodology, and management’s review and approval of the ACL.

We performed specific substantive tests of the models utilized, qualitative factors and the reserve assumptions for loans evaluated on an individual basis.

We involved EY specialists to assist in testing management models including evaluating model methodology and key modeling assumptions, as well as the appropriateness of management’s qualitative framework, and reserve assumptions for loans evaluated on an individual basis.

We evaluated if the qualitative factors were applied based on a comprehensive framework and compared the adjustments utilized by management to both internal portfolio metrics and external macroeconomic data (as applicable) to support the adjustments and evaluate trends in such adjustments.

We searched for and evaluated information that corroborates or contradicts management’s reasonable and supportable forecast as well as identification and measurement of qualitative factors.

Within our reserve testing for loans evaluated on an individual basis, we evaluated management’s assumptions including collateral valuations.

In addition, we evaluated the Company’s estimate of the overall ACL giving consideration to the Company’s borrowers, loan portfolio, and macroeconomic trends, independently obtained and compared such information to comparable financial institutions and considered whether new or contrary information existed.

We have served as the Company's auditor since 1999.

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Loans held for sale ($ 239.1 million and $ 2,571.3 million at December 2020 and 2019, respectively, at fair value)

283,165 2,577,134

Loans held for investment, mortgage finance 9,079,409 8,169,849

Loans held for investment (net of unearned income) 15,351,451 16,476,413

Allowance for loan losses

Allowance for credit losses on loans 254,615 195,047

Loans held for investment, net 24,176,245 24,451,215

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Goodwill and intangible assets, net 17,667 18,099

Total assets $ 37,726,096 $ 32,548,069

Liabilities and Stockholders’ Equity

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

150,000 150,000

Common stock, $ 0.01 par value:

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Interest expense

Deposits 146,117 293,537 185,116

Federal funds purchased 1,083 11,872 6,531

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Servicing income 27,029 13,439 18,307

Swap fees 5,182 4,387 5,625

Net gain/(loss) on sale of loans held for sale 58,026 ( 20,259 ) ( 15,934 )

Other 27,238 45,005 26,559

Total non-interest income 185,516 92,440 78,024

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Net occupancy expense 34,955 32,989 30,342

Marketing 23,581 53,355 39,335

Legal and professional 52,132 52,460 42,990

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Servicing-related expenses 64,625 22,573 14,934

Allowance and other carrying costs for other real estate owned

Merger-related expenses 17,756 1,370 —

Other 41,809 44,701 49,670

Total non-interest expense 704,396 600,850 532,533

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Income tax expense 25,657 84,295 79,964

Net income 66,289 312,015 293,387

Preferred stock dividends 9,750 9,750 9,750

Net income available to common stockholders $ 56,539 $ 302,265 $ 283,637

Other comprehensive income (loss)

Other comprehensive income

Change in unrealized gain (loss) on available-for-sale debt securities arising during period, before tax $ 8,639 $ 10,674 $ 7

Income tax expense (benefit) related to unrealized loss on available-for-sale debt securities

Other comprehensive income (loss), net of tax

Income tax expense/(benefit) 1,815 2,242 1

Other comprehensive income, net of tax 6,824 8,432 6

Comprehensive income $ 73,113 $ 320,447 $ 293,393

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Preferred Stock

Treasury Stock

Comprehensive

(in thousands except share data)

Preferred Stock Common Stock Additional Treasury Stock Accumulated

Paid-in Retained Comprehensive

(in thousands except share data) Shares Amount Shares Amount Capital Earnings Shares Amount Income Total

Balance at December 31, 2017 6,000,000 $ 150,000 49,643,761 $ 496 $ 961,305 $ 1,077,851 ( 417 ) $ ( 8 ) $ 428 $ 2,190,072

Impact of adoption of new accounting standards(1) — — — — — ( 82 ) — — 84 2

Comprehensive income:

Change in unrealized gain (loss) on available-for-sale debt securities, net of taxes of $6

Net income — — — — — 293,387 — — — 293,387

Change in unrealized gain (loss) on available-for-sale debt securities, net of taxes — — — — — — — — 6 6

Total comprehensive income 293,393

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Balance at December 31, 2018 6,000,000 $ 150,000 50,201,127 $ 502 $ 967,890 $ 1,361,406 ( 417 ) $ ( 8 ) $ 518 $ 2,480,308

Impact of adoption of new accounting standards(1)

Comprehensive income:

Change in unrealized gain (loss) on available-for-sale debt securities, net of taxes of $1

Net income — — — — — 312,015 — — — 312,015

Change in unrealized gain (loss) on available-for-sale debt securities, net of taxes — — — — — — — — 8,432 8,432

Total comprehensive income 320,447

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Balance at December 31, 2019 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(2) — — — — — ( 7,154 ) — — — ( 7,154 )

Comprehensive income:

Change in unrealized gain (loss) on available-for-sale debt securities, net of taxes of $2,242

Net income — — — — — 66,289 — — — 66,289

Change in unrealized gain (loss) on available-for-sale debt securities, net of taxes — — — — — — — — 6,824 6,824

Total comprehensive income 73,113

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Issuance of stock related to stock-based awards — — 132,709 1 ( 1,988 ) — — — — ( 1,987 )

Issuance of common stock related to warrants

Balance at December 31, 2020 6,000,000 $ 150,000 50,470,867 $ 504 $ 991,898 $ 1,713,056 ( 417 ) $ ( 8 ) $ 15,774 $ 2,871,224

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

(2) Represents the impact of adopting ASU 2016-13.

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

See accompanying notes to consolidated financial statements.

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Operating activities

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

Net income $ 66,289 $ 312,015 $ 293,387

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

Provision for credit losses 258,000 75,000 87,000

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Accrued interest payable and other liabilities 5,749 98,735 2,411

Net cash (used in)/provided by operating activities

Net cash provided by/(used in) operating activities 2,639,869 ( 240,268 ) ( 679,715 )

Investing activities

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Originations of mortgage finance loans ( 216,234,122 ) ( 138,759,289 ) ( 99,151,237 )

( 138,759,289

Proceeds from pay-offs of mortgage finance loans 215,324,562 136,466,964 98,581,873

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Texas Capital Bancshares, Inc.

(the "Company”), a Delaware corporation, was incorporated in November 1996 and commenced banking operations in December 1998.

(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.

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Our national lines of business provide specialized leading products to businesses throughout the United States.

On December 9, 2019, the Company entered into a merger agreement with IBTX, the holding company for Independent Bank, under which TCBI and IBTX will combine in an all-stock merger of equals.

Under the terms of the merger agreement, each share of TCBI common stock outstanding immediately prior to the effective time, other than certain shares held by TCBI or IBTX, will be converted into the right to receive the merger consideration of 1.0311 shares of IBTX common stock.

At the effective time, each outstanding share of TCBI preferred stock will be automatically converted into the right to receive one share of IBTX preferred stock having substantially the same terms as such share of TCBI preferred stock.

The name of the surviving entity will be Independent Bank Group, Inc.

and the name of the surviving bank will be Texas Capital Bank.

The surviving bank will be operated under the name Independent Financial in Colorado and under the name Texas Capital Bank in Texas.

The merger agreement was unanimously approved by the board of directors of TCBI and the board of directors of IBTX.

The merger is expected to close in mid-2020, subject to satisfaction of customary closing conditions, including receipt of customary regulatory approvals and approval of the merger agreement by the stockholders of TCBI and the shareholders of IBTX, respectively.

For more information on the merger agreement and the merger, see Part I, Item 1, Business-Merger with Independent Bank Group, Inc.

On December 9, 2019, the Company and IBTX entered into 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

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Certain prior period balances have been reclassified to conform to the current period presentation.

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 Annual Report on Form 10-K for the year ended December 31, 2019 to correct the immaterial error, as well as other previously identified immaterial errors.

A summary of revisions to certain previously reported financial information is presented below:

Revised Consolidated Balance Sheets

December 31, 2019 December 31, 2018 December 31, 2017

( in thousands)

As Reported Adjustment As Revised As Reported Adjustment As Revised As Reported Adjustment As Revised

Other liabilities $ 287,157 $ 30,937 $ 318,094 $ 194,238 $ 20,086 $ 214,324 $ 182,212 $ 12,649 $ 194,861

Total liabilities 29,715,811 30,937 29,746,748 25,757,373 20,086 $ 25,777,459 22,872,924 12,649 22,885,573

Retained Earnings 1,694,608 ( 30,937 ) 1,663,671 1,381,492 ( 20,086 ) $ 1,361,406 1,090,500 ( 12,649 ) 1,077,851

Total Equity 2,832,258 ( 30,937 ) 2,801,321 2,500,394 ( 20,086 ) $ 2,480,308 2,202,721 ( 12,649 ) 2,190,072

Revised Consolidated Statement of Income and Other Comprehensive Income

Year Ended December 31, 2019 Year Ended December 31, 2018 Year Ended December 31, 2017

(in thousands) As Reported Adjustment As Revised As Reported Adjustment As Revised As Reported Adjustment As Revised

Salaries and employee benefits expense $ 315,080 $ 13,403 $ 328,483 $ 291,768 $ 9,131 $ 300,899 $ 264,231 $ 2,230 $ 266,461

Other non-interest expense 47,253 ( 2,552 ) 44,701 51,364 ( 1,694 ) 49,670 49,296 ( 1,248 ) 48,048

Total non-interest expense 589,999 10,851 600,850 525,096 7,437 532,533 465,876 982 466,858

Income before tax 407,161 ( 10,851 ) 396,310 380,788 ( 7,437 ) 373,351 325,708 ( 982 ) 324,726

Net income 322,866 ( 10,851 ) 312,015 300,824 ( 7,437 ) 293,387 197,063 ( 982 ) 196,081

Net income available to common stockholders 313,116 ( 10,851 ) 302,265 291,074 ( 7,437 ) 283,637 187,313 ( 982 ) 186,331

Comprehensive income 331,298 ( 10,851 ) 320,447 300,830 ( 7,437 ) 293,393 197,076 ( 982 ) 196,094

Revised Consolidated Statement of Stockholders' Equity

Year Ended December 31, 2019 Year Ended December 31, 2018 Year Ended December 31, 2017

(in thousands) As Reported Adjustment As Revised As Reported Adjustment As Revised As Reported Adjustment As Revised

Beginning balance retained earnings $ 1,381,492 $ ( 20,086 ) $ 1,361,406 $ 1,090,500 $ ( 12,649 ) $ 1,077,851 $ 903,187 $ ( 11,667 ) $ 891,520

Beginning balance total equity 2,500,394 ( 20,086 ) 2,480,308 2,202,721 ( 12,649 ) 2,190,072 2,009,557 ( 11,667 ) 1,997,890

Ending balance retained earnings 1,694,608 ( 30,937 ) 1,663,671 1,381,492 ( 20,086 ) 1,361,406 1,090,500 ( 12,649 ) 1,077,851

Ending balance total equity 2,832,258 ( 30,937 ) 2,801,321 2,500,394 ( 20,086 ) 2,480,308 2,202,721 ( 12,649 ) 2,190,072

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 December 31, 2020, the carrying value of these share-based liabilities totaled $ 7.8 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.

Our accounting policies changed significantly upon the adoption of CECL on January 1, 2020.

Prior to January 1, 2020, the allowance for loan losses was based on incurred credit losses in accordance with accounting policies disclosed in Note 1 - Operations and Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year-ended December 31, 2019.

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.

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

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

Allowance for credit losses on off-balance sheet exposures 9,203 8,640 563

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 below for further discussion of these portfolio segments.

Use of Estimates

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Actual results could differ from those estimates.

The allowance for loan losses, the fair value of financial instruments and the status of contingencies are particularly susceptible to significant change.

The allowance for credit losses, the fair value of financial instruments and the status of contingencies are particularly susceptible to significant change.

Basic and Diluted Earnings Per Common Share

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Investment Securities

Investment securities include available-for-sale debt securities and equity securities at fair value.

Investment securities include debt securities and equity securities at fair value.

Debt Securities

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however, transfers between categories from this re-assessment are rare.

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

Trading Account

Debt securities acquired for resale in anticipation of short-term market movements are classified as trading, with realized and unrealized gains and losses recognized in income.

To date, we have not had any activity in our trading account.

Held-to-Maturity

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Available-for-Sale

Available-for-sale debt securities are stated at fair value, with the unrealized gains and losses reported as a separate component of AOCI, net of tax.

Available-for-sale debt securities are stated at fair value.

Unrealized gains are reported as a separate component of AOCI, net of tax.

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 AOCI, net of tax, as a non credit-related impairment.

The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security.

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The cost of securities sold is based on the specific identification method.

All debt securities are available-for-sale as of December 31, 2019 and 2018 .

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.

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 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.

Equity Securities

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Pursuant to Ginnie Mae servicing guidelines, we have the unilateral right, but not the obligation, to repurchase certain delinquent loans securitized in Ginnie Mae pools, if they meet defined delinquent loan criteria.

Once the delinquency criteria

have been met, and regardless of whether the repurchase option has been exercised, we account for these loans as if they had been repurchased and recognize the loans and a corresponding liability as held for sale and other liabilities, respectively, in the consolidated balance sheets.

Once the delinquency criteria have been met, and regardless of whether the repurchase option has been exercised, we account for these loans as if they had been repurchased and recognize the loans and a corresponding liability as held for sale and other liabilities, respectively, in the consolidated balance sheets.

If the loans are actually repurchased, the liability is extinguished and the loans continue to be reported as held for sale.

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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.

A loan held for investment is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due (both principal and interest) according to the terms of the loan agreement.

Reserves on impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral, less cost to sell.

Impaired loans, or portions thereof, are charged off when a confirmed loss exists.

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.

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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 borrower’s financial condition has been evidenced, generally for no less than twelve months.

Assuming that 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 no longer has to be considered a restructuring if it is in compliance with the modified terms in calendar years after the year of the restructure.

The accrual of interest on loans is discontinued 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.

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.

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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.

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.

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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 further allocations of the allowance for loan losses or be subject to charge off in the event the loans become impaired.

Allowance for Loan Losses

The allowance for loan losses is comprised of general reserves and specific reserves for impaired loans, all based on our estimate of losses inherent in the portfolio at the balance sheet date.

In order to determine the allowance for loan losses, all loans are assigned a credit grade.

Loan commitments graded substandard or worse and greater than $500,000 are specifically reviewed for loss potential.

Loans deemed to be impaired, as well as restructured loans and loans formerly reported as restructured, are assigned a specific reserve based on the losses expected to be realized from those loans.

For purposes of determining the general reserve, the remainder of the portfolio is segregated by product types to recognize differing risk profiles among portfolio segments, and then further segregated by credit grades.

Each credit grade is assigned a risk factor, or reserve allocation percentage.

These risk factors are multiplied by the outstanding principal balance of each loan and risk-weighted by product type to calculate a required reserve.

Mortgage loans acquired under these conditions would require mark-to-market adjustments to income and could require further 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 portfolio.

The following is our discussion of the allowance for credit losses on loans held for investment.

See "Investment Securities - Available-for-Sale" above for discussion of the allowance for credit losses on available-for-sale debt securities.

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 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:

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.

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.

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.

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They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.

Some substandard loans are inappropriately protected by the sound worth and paying capacity of the borrower and of the collateral pledged and may be considered impaired.

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.

Loans classified as doubtful have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection or liquidation in full highly questionable and improbable.

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 allowance allocation percentages assigned to each credit grade have been developed based primarily on an analysis of our historical loss rates.

The level of the allowance reflects management’s continuing evaluation of conditions likely to impact the amount of losses expected to be incurred in the Bank’s loan portfolio.

Such conditions include, without limitation, credit quality indicators such as amounts and percentages of loans classified as past due, criticized and non-performing, conditions internal to the Bank such as the skill and experience of lending and credit personnel and effectiveness of credit review processes, the rate of portfolio growth, the extent of hold limits and loan concentrations, such as loans to specific borrowers, loans to groups of affiliated borrowers, loans to borrowers in defined industry groups and loans to borrowers, and collateral, in defined geographic locations.

Conditions external to the Bank that may impact incurred losses that are also considered by management in the evaluation of the allowance include the general health of the national economy and regional economies where the Bank operates, international economic conditions, domestic and international political events that may impact the Bank’s loan portfolio, regulatory developments deemed relevant to risk assessment and classification of credits and circumstances that may have negative consequences for industries or specific borrowers where the Bank has exposure.

Management’s assessment of the allowance begins with a review of historical credit loss experience as a baseline before consideration of current environmental issues both internal and external to the Bank that might reasonably cause the measure of incurred loss to differ from historical experience.

The Bank’s allowance methodology employs a loss migration technique to determine historical loss percentages applicable to all defined credit risk grades.

The methodology also calculates historical loss percentages by portfolio segment and computes segment weights as a measure of the relative risk of loans in each segment compared to the entire portfolio.

Management may adjust segment weights by applying overlays to specific portfolio segments whereby historical loss experience may not be a measure reflective of incurred losses for the specific portfolio segment.

These overlays are quantified by management at the portfolio segment level and added or subtracted from historical loss rates.

These processes allow for a continuous review of not only absolute historical loss percentages but also an assessment of credit risk grade migration, positive and negative, and changes in portfolio composition as defined by portfolio segment.

Because credit risk grade migration, both positive and negative, can significantly trail triggering events such as change in economic conditions, commodity prices or interest rates, changes in collateral values or changes in regulatory interpretation or applicable laws or standards impacting the Bank's lending activities, management has identified certain measures that are believed to offer guidance as leading, concurrent and trailing indicators respectively of general economic health that in turn are thought to be relevant to the measure of incurred loss in the Bank’s loan portfolio (individually referred to as "Q Factors").

Each individual Q Factor is individually quantified by management and then aggregated into a single qualitative adjustment (referred to as the "Q Factor adjustment").

This Q Factor adjustment is added or subtracted from historical loss rates, as relevant, to compute an appropriate reserve based upon actual portfolio composition as defined by portfolio segment and credit risk grade composition.

The single Q Factor adjustment and application of any management overlay to model calculated segment weights reflects management’s determination that the allowance model is calculating an appropriate level of the allowance in the context of all known loan portfolio quality and concentration issues as well as other environmental factors that are reasonably believed to cause the measure of incurred loss, inclusive of unidentified losses inherent in the current portfolio, to differ from historical experience.

The methodology used in the periodic review of the appropriateness of the allowance, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality.

Changes are reflected in the general allowance and in specific reserves as the collectability of classified loans is evaluated with new information.

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.

Our reserve appropriateness relies primarily on our loss history.

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 the Company's consolidated financial statements.

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.

Other Real Estate Owned

Other real estate owned (“OREO”), which is included in other assets on the consolidated balance sheet, consists of real estate that has been foreclosed.

When foreclosure occurs, the acquired asset is recorded at fair value less selling costs, generally based on appraised value, which may result in partial charge-off of the loan through a charge to the allowance for loan losses, if necessary.

Subsequent write-downs required for declines in value are recorded through a valuation allowance, or taken directly to the asset, and are recorded in allowance and other carrying costs for OREO in the consolidated statements of income and other comprehensive income.

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MSR valuation allowance expense and servicing related expenses are recorded in servicing-related expenses in the consolidated statements of income and other comprehensive income.

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.

Goodwill and Other Intangible Assets, Net

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Depreciation is computed using the straight-line method over the estimated useful lives of the assets.

Furniture and equipment is generally depreciated over three to five years , while leasehold improvements are generally depreciated over the term of their respective lease.

Furniture and equipment is generally depreciated over three to five years ,

while leasehold improvements are generally depreciated over the term of their respective lease.

Gains or losses on disposals of premises and equipment are included in other non-interest income in the consolidated statements of income and other comprehensive income.

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The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

In conjunction with the sale and securitization of loans held for sale and their related servicing rights, we may be exposed to liability resulting from recourse and repurchase agreements.

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

If it is determined subsequent to our sale of a loan or its related servicing rights that a breach of the representations or warranties made in the applicable sale agreement has occurred, which may include guarantees that prepayments will not occur within a specified and customary time frame, we may have an obligation to either (a) repurchase the loan for the unpaid principal balance, accrued interest and related advances, (b) indemnify the purchaser against any loss it suffers or (c) make the purchaser whole for the economic benefits of the loan and its related servicing rights.

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Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease.

Operating lease agreements may contain extension options which typically range from 5 to 10 years at the then fair market rental rates.

As these extension options are not

generally considered reasonably certain of exercise, they are not included in the lease term.

ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate at the lease commencement date, which is based on our collateralized borrowing capabilities over a similar term as the related lease payments.

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We utilize the liability method in accounting for income taxes.

Under this method, deferred tax assets and liabilities are determined based upon the difference between the values of the assets and liabilities as reflected in the financial statements and their related tax basis using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled.

effect for the year in which the differences are expected to be recovered or settled.

As changes in tax law or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

A valuation allowance is provided against deferred tax assets unless it is more likely than not that such deferred tax assets will be realized.

Unrecognized tax benefits for the uncertain portion of recorded tax benefits and related interest may result from the application of complex tax laws, rules, regulations and interpretations.

Unrecognized tax benefits, as well as estimated penalties and interest, are assessed quarterly and may be adjusted through current income tax expense in future periods based on changing facts and circumstances, completion of examinations by taxing authorities or expiration of a statute of limitations.

Fair Values of Financial Instruments

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements.

In general, fair values of financial instruments are based upon quoted market prices, where available.

If such quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques.

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.

Also required are disclosures 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.

The disclosure of fair value information about financial instruments does not and is not intended to represent the fair value of the Company.

The following are descriptions of the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial instruments:

Cash and Cash Equivalents, Variable Rate Loans, and Variable Rate Debt

The fair value of these financial instruments approximates carrying value.

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.

We also hold Community Reinvestment Act equity securities that are valued using quoted market prices for identical equity securities in an inactive market that we classify as Level 2 assets in the fair value hierarchy.

The fair value of our U.S.

government agency and residential mortgage-backed securities 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 obtain documentation from our primary pricing service regarding their processes and controls applicable to pricing investment securities, and on a quarterly basis 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 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

The 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.

Derivative Assets and Liabilities

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.

Derivative Financial Instruments

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Because we act as an intermediary for our customer, changes in the fair value of the underlying derivative contracts substantially offset each other and do not have a material impact on our results of operations.

We also enter into foreign currency forward contracts that are not designed as hedging instruments.

We also enter into foreign currency forward contracts that are not designateed as hedging instruments.

These derivative instruments relate to transactions in which we enter into a contract with a customer to buy or sell a foreign currency at a future date for a specified price while at the same time entering into an offsetting contract with a financial institution to buy or sell the same currency at the same future date for a specified price.

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Because we act as an intermediary for our customer, changes in the fair value of the underlying derivative instruments substantially offset each other and do not have a material impact on our results of operations.

We also enter into loan purchase commitment contracts with mortgage originators to purchase residential mortgage loans at a future date, as well as forward sales commitment contracts to sell residential mortgage loans at a future date, as part of our MCA program.

As part of our MCA program, we enter into loan purchase commitment contracts with mortgage originators to purchase residential mortgage loans at a future date, as well as forward sales commitment contracts to sell residential mortgage loans or to deliver mortgage-backed securities at a future date.

The objective of these transactions is to mitigate our exposure to interest rate risk associated with the purchase of mortgage loans held for sale.

Any changes in fair value are recorded in other non-interest expense in the consolidated statements of income and other comprehensive income.

Any changes in fair value are recorded in gain/(loss) on sale of loans held for sale in the consolidated statements of income and other comprehensive income.

To mitigate exposure to potential impairment losses from adverse changes in the fair value of our residential MSR portfolio, we enter into 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 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.

Segment Reporting

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(in thousands except per share data) 2020 2019 2018

Net income $ 66,289 $ 312,015 $ 293,387

Preferred stock dividends 9,750 9,750 9,750

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The following is a summary of available-for-sale debt securities:

(in thousands)

(in thousands) Amortized

Cost(1) Gross

Losses Estimated

December 31, 2020

Available-for-sale debt securities:

government agency securities $ 125,000 $ 1 $ ( 1,412 ) $ 123,589

Residential mortgage-backed securities 2,818,518 11,566 ( 1,128 ) 2,828,956

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Credit risk transfer securities 14,713 — ( 3,296 ) 11,417

Total $ 3,143,171 $ 25,803 $ ( 5,836 ) $ 3,163,138

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

During the first quarter of 2019, we acquired a $ 92.0 million tax-exempt security backed with underlying cash flows from municipal revenue bonds, as well as $ 15.0 million in credit risk transfer ("CRT") securities.

The securities were all recorded as available-for-sale upon acquisition and subsequently marked to fair value as of December 31, 2019 .

CRT securities represent unsecured obligations issued by GSEs such as Freddie Mac and are designed to transfer mortgage credit risk from the GSE to private investors.

CRT securities are structured to be subject to the performance of a reference pool of mortgage loans in which we share in 50 % of the first losses with the GSE.

If the reference pool incurs losses, the amount we will recover on the notes is reduced by our share of the amount of such losses, which could potentially be up to 100 % of the amount outstanding.

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

The amortized cost and estimated fair value of available-for-sale debt securities are presented below by contractual maturity:

(in thousands, except percentage data)

Credit risk asset-backed securities 14,713 — ( 2,749 ) 11,964

Total $ 202,929 $ 14,077 $ ( 2,749 ) $ 214,257

(1) Excludes accrued interest receivable of $ 6.0 million and $ 1.6 million at December 31, 2020 and 2019, respectively, that is recorded in accrued interest receivable and other assets.

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

(in thousands, except percentage data) Less Than

One Year After One

Five Years After Five

Ten Years After Ten

December 31, 2020

Available-for-sale:

government agency securities:(1)

Amortized cost $ — $ — $ 125,000 $ — $ 125,000

Estimated fair value — — 123,589 — 123,589

Weighted average yield(3) — % — % 1.13 % — % 1.13 %

Residential mortgage-backed securities:(1)

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December 31, 2019

Available-for-sale:

Residential mortgage-backed securities:(1)

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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:

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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

December 31, 2020

Less Than 12 Months

12 Months or Longer

(in thousands)

Unrealized Loss

government agency securities $ 98,588 $ ( 1,412 ) $ — $ — $ 98,588 $ ( 1,412 )

Residential mortgage-backed securities 354,387 ( 1,128 ) — — 354,387 ( 1,128 )

CRT securities — — 11,417 ( 3,296 ) 11,417 ( 3,296 )

At December 31, 2019 , the CRT securities were the only available-for-sale debt securities in an unrealized loss position.

There were no available-for-sale debt securities in an unrealized loss position at December 31, 2018.

We conduct periodic reviews of securities with unrealized losses to evaluate whether the impairment is other-than-temporary.

Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in AOCI for available-for-sale debt securities.

When we have the intent to sell or we believe we will more likely than not be required to sell an available-for-sale debt security, the entire excess of its amortized cost basis over its fair value is recognized in earnings.

For available-for-sale debt securities that we do not intend to sell and are not likely to be required to sell, only the credit-related impairment is recognized in earnings and any non-credit-related impairment is recorded in AOCI.

Based on the results of our periodic review of available-for-sale debt securities in an unrealized loss position at March 31, 2019, we recorded a $ 331,000 other-than-temporary credit-related impairment on the CRT securities, reducing the amortized cost of the securities.

The loss was measured as the excess of the amortized cost basis of the security over the present value of cash flows expected to be collected and was recorded in other non-interest expense.

Based on the results of our periodic review at December 31, 2019, no additional other-than-temporary credit-related impairment was recorded on the CRT securities, as the remaining loss position is not believed to be other-than-temporary.

Our periodic review at December 31, 2019 included an evaluation of the near-term prospects of the investments in relation to the severity and duration of the unrealized losses.

Based on that evaluation we have determined that we have the ability and intent to hold the investments until recovery of fair value.

Total $ 452,975 $ ( 2,540 ) $ 11,417 $ ( 3,296 ) $ 464,392 $ ( 5,836 )

December 31, 2019

CRT securities $ 11,964 $ ( 2,749 ) $ — $ — $ 11,964 $ ( 2,749 )

Total $ 11,964 $ ( 2,749 ) $ — $ — $ 11,964 $ ( 2,749 )

Based upon our December 31, 2020 review of securities with unrealized losses we have determined that all losses resulted from factors not deemed credit-related.

We have evaluated the near-term prospects of each securities portfolio in relation to the severity of the 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 unrealized losses in AOCI.

Available-for-sale debt securities with carrying values of approximately $ 31.7 million and $ 1.9 million were pledged to secure certain customer repurchase agreements and deposits, respectively, at December 31, 2020.

9 unchanged sentences

Unrealized net gains/(losses) recognized during the period on equity securities still held $ 1,580 $ 2,264

(4) Loans Held for Investment and Allowance for Loan Losses

(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) 2020 2019

Commercial $ 8,861,580 $ 9,133,444

Energy 766,217 1,425,309

Mortgage finance(1) 9,079,409 8,169,849

Equipment leases

Real estate 5,794,624 6,008,040

Gross loans held for investment(2) 24,501,830 24,736,642

Deferred income (net of direct origination costs) ( 70,970 ) ( 90,380 )

Allowance for loan losses

Allowance for credit losses on loans ( 254,615 ) ( 195,047 )

Total loans held for investment, net(2) $ 24,176,245 $ 24,451,215

Balances at December 31, 2019 and December 31, 2018 are stated net of $ 682.7 million and $ 193.0 million of participations sold, respectively.

Summary of Loan Loss Experience

The following tables summarize the credit risk profile of our loans held for investment by internally assigned grades and non-accrual status:

(in thousands)

Equipment Leases

(1) Balances at December 31, 2020 and December 31, 2019 are stated net of $ 1.2 billion and $ 682.7 million of participations sold, respectively.

(2) Excludes accrued interest receivable of $ 56.5 million and $ 63.4 million at December 31, 2020 and December 31, 2019, respectively, that is recorded in accrued interest receivable and other assets.

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

(in thousands) 2020 2019 2018 2017 2016 2015 and prior Revolving lines of credit Revolving lines of credit converted to term loans Total

December 31, 2020

(1-7) Pass $ 1,259,949 $ 2,816,425 $ 543,438 $ 374,455 $ 192,060 $ 213,212 $ 3,020,353 $ 40,253 $ 8,460,145

(8) Special mention 2,664 115,015 38,751 26,423 1,983 290 19,971 22,797 227,894

(9) Substandard - accruing 15,773 15,854 18,068 32,241 15,297 19,639 22,932 1,641 141,445

Total loans held for investment

December 31, 2018

(9+) Non-accrual 1,820 8,360 377 1,292 802 15,157 3,836 452 32,096

Total commercial $ 1,280,206 $ 2,955,654 $ 600,634 $ 434,411 $ 210,142 $ 248,298 $ 3,067,092 $ 65,143 $ 8,861,580

(1-7) Pass $ — $ 12,020 $ 7,598 $ 26,931 $ — $ 23,750 $ 553,970 $ — $ 624,269

(8) Special mention — — — — — 13,358 76,866 — 90,224

(9) Substandard - accruing — — — — — — — — —

(9+) Non-accrual — — — 5,705 1,972 8,009 36,038 — 51,724

Total energy $ — $ 12,020 $ 7,598 $ 32,636 $ 1,972 $ 45,117 $ 666,874 $ — $ 766,217

Mortgage finance

(1-7) Pass $ 755,309 $ 1,063,641 $ 821,122 $ 483,436 $ 106,013 $ 5,849,888 $ — $ — $ 9,079,409

(8) Special mention — — — — — — — — —

(9) Substandard - accruing — — — — — — — — —

(9+) Non-accrual — — — — — — — — —

Total mortgage finance $ 755,309 $ 1,063,641 $ 821,122 $ 483,436 $ 106,013 $ 5,849,888 $ — $ — $ 9,079,409

(1-7) Pass $ 352,688 $ 892,831 $ 923,762 $ 444,587 $ 208,426 $ 451,283 $ 62,336 $ 61,133 $ 3,397,046

(8) Special mention 3,475 11,170 6,485 88,633 11,153 17,623 — 1,247 139,786

(9) Substandard - accruing — 327 47,708 11,601 32,645 30,766 — 15,940 138,987

(9+) Non-accrual — — — — 5,749 4,852 — — 10,601

(1-7) Pass 162,397 60,077 65,271 3,727 5,888 8,483 551,703 — 857,546

(8) Special mention — 353 — — — — — — 353

(9) Substandard - accruing — — — — — — — — —

(9+) Non-accrual — — — — — — — — —

(1-7) Pass 190,995 150,787 119,696 120,817 82,465 113,105 16,630 39,129 833,624

(8) Special mention — 6,700 2,240 — 1,843 7,195 — 1,018 18,996

(9) Substandard - accruing — — 2,567 14,452 3,301 14,453 — — 34,773

(9+) Non-accrual — — — 927 5,524 6,403 — 14,496 27,350

Secured by 1-4 family

(1-7) Pass 58,515 63,031 46,623 54,096 72,527 31,880 4,697 — 331,369

(8) Special mention 646 — — 635 — 1,768 — — 3,049

(9) Substandard - accruing — — — 817 — 109 — — 926

(9+) Non-accrual — — — — — 218 — — 218

Total real estate $ 768,716 $ 1,185,276 $ 1,214,352 $ 740,292 $ 429,521 $ 688,138 $ 635,366 $ 132,963 $ 5,794,624

Total loans held for investment $ 2,804,231 $ 5,216,591 $ 2,643,706 $ 1,690,775 $ 747,648 $ 6,831,441 $ 4,369,332 $ 198,106 $ 24,501,830

The allowance for loan losses is comprised of general reserves and specific reserves for impaired loans based on our estimate of losses inherent in the portfolio at the balance sheet date.

For further discussion of the components of the allowance for loan losses as well as details regarding how the estimate of inherent losses is determined, refer to the Allowance for Loan Losses subheading in Note 1 – Operations and Summary of Significant Accounting Policies.

We believe the allowance at December 31, 2019 to be appropriate, given management's assessment of losses inherent in the portfolio as of the evaluation date, the growth in the loan and lease portfolio, current economic conditions in our market areas and other factors.

The following table details activity in the allowance for loan losses, as well as the recorded investment in loans held for investment, by portfolio segment and disaggregated on the basis of our impairment methodology.

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)

Equipment Leases

Additional Qualitative Reserve

(in thousands) Commercial Energy Mortgage

Estate Additional Qualitative Reserve Total

Year ended December 31, 2020

Allowance for loan losses:

Beginning balance $ 102,254 $ 60,253 $ 2,265 $ 30,275 $ — $ 195,047

Provision for loan losses

Impact of CECL adoptions ( 15,740 ) 24,154 2,031 ( 1,860 ) — 8,585

Provision for credit losses on loans 58,630 126,180 403 64,556 — 249,769

Charge-offs 73,360 133,522 — 180 — 207,062

Recoveries 1,277 6,999 — — — 8,276

Net charge-offs (recoveries) 72,083 126,523 — 180 — 198,786

Ending balance $ 73,061 $ 84,064 $ 4,699 $ 92,791 $ — $ 254,615

Period end allowance for loan losses allocated to:

Loans individually evaluated for impairment

Loans collectively evaluated for impairment

Period end loans allocated to:

Loans individually evaluated for impairment

Loans collectively evaluated for impairment

Year ended December 31, 2019

Allowance for loan losses:

Beginning balance $ 96,814 $ 34,882 $ — $ 52,595 $ 7,231 $ 191,522

Provision for loan losses

Provision for credit losses on loans 46,738 57,680 2,265 ( 21,658 ) ( 7,231 ) 77,794

Charge-offs 44,352 32,625 — 662 — 77,639

Recoveries 3,054 316 — — — 3,370

Net charge-offs (recoveries) 41,298 32,309 — 662 — 74,269

Ending balance $ 102,254 $ 60,253 $ 2,265 $ 30,275 $ — $ 195,047

Period end allowance for loan losses allocated to:

Loans individually evaluated for impairment

Loans collectively evaluated for impairment

Period end loans allocated to:

Loans individually evaluated for impairment

Loans collectively evaluated for impairment

During 2019, we refined our methodology for calculating the allowance for loan losses to improve the specificity of the risk weights and the risk-weighting process for each product type assigned to the loans in our held for investment portfolio.

As a result of these refinements, we believe that management is better able to allocate inherent losses previously accounted for in the additional qualitative reserve component of our allowance for loan losses to specific product types and credit risk grades, thus eliminating the additional qualitative reserve component of our allowance for loan losses in 2019.

Additionally, this improved specificity and consideration of current mortgage market conditions resulted in the allocation of a portion of the company’s allowance and provision for loan losses to our mortgage finance loan portfolio for the first time in 2019.

The following tables detail our impaired loans held for investment by portfolio segment.

In accordance with ASC 310, Receivables , we have also included all restructured and formerly restructured loans in our impaired loan totals.

(in thousands)

December 31, 2019

With no related allowance recorded:

Business loans

Secured by 1-4 family

Equipment leases

Total impaired loans with no allowance recorded

With an allowance recorded:

Business loans

Secured by 1-4 family

Equipment leases

Total impaired loans with an allowance recorded

Business loans

Secured by 1-4 family

Equipment leases

Total impaired loans

(in thousands)

In 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 $ 258.0 million provision for credit losses for the year ended December 31, 2020, compared to $ 75.0 million for the same period of 2019.

We recorded $ 198.8 million in net charge-offs during the year ended December 31, 2020, compared to $ 74.3 million during the same period of 2019.

Criticized loans total $ 918.4 million at December 31, 2020 and $ 584.1 million at December 31, 2019.

Criticized loan levels have increased during 2020 as compared to 2019 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.

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 Total

December 31, 2020

With no related allowance recorded:

Business loans

Secured by 1-4 family

Equipment leases

Total impaired loans with no allowance recorded

With an allowance recorded:

Business loans

Secured by 1-4 family

Equipment leases

Total impaired loans with an allowance recorded

Business loans

Secured by 1-4 family

Equipment leases

Total impaired loans

Average impaired loans outstanding during the years ended December 31, 2019 , 2018 and 2017 totaled $ 128.5 million , $ 105.1 million and $ 130.8 million , respectively.

For the year ended December 31, 2019 , we recognized no interest income on non-accrual loans, compared to $ 133,000 and $ 6,000 , for the years ended December 31, 2018 and 2017 respectively.

Additional interest income that would have been recorded if the loans had been current during the years ended December 31, 2019 , 2018 and 2017 totaled $ 12.0 million , $ 8.5 million and $ 19.0 million , respectively.

As of December 31, 2019 and 2018 , none of our non-accrual loans were earning interest income on a cash basis.

Commercial $ 3,361 $ — $ — $ 774 $ 4,135

Energy — — 5,156 — 5,156

CRE — 4,619 — — 4,619

Other — 11,372 — — 11,372

Total collateral-dependent loans held for investment

$ 3,361 $ 15,991 $ 5,156 $ 774 $ 25,282

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

(in thousands)

90 Days or More Past Due(1)

(in thousands) 30-59 Days

Past Due 60-89 Days

Past Due 90 Days or More Past Due(1) Total Past

Due Non-accrual(2) Current Total Non-accrual With No Allowance

December 31, 2020

Business loans

Commercial $ 6,171 $ 2,602 $ 9,325 $ 18,098 $ 32,096 $ 8,811,386 $ 8,861,580 $ 6,917

Energy — — — — 51,724 714,493 766,217 17,759

Mortgage finance loans — — — — — 9,079,409 9,079,409 —

Secured by 1-4 family

CRE 2,926 297 — 3,223 10,601 3,672,596 3,686,420 5,749

RBF — — — — — 857,899 857,899 —

Other 3,471 493 — 3,964 27,350 883,429 914,743 13,263

Secured by 1-4 family 1,340 1,467 3,216 6,023 218 329,321 335,562 —

Equipment leases

Total loans held for investment $ 13,908 $ 4,859 $ 12,541 $ 31,308 $ 121,989 $ 24,348,533 $ 24,501,830 $ 43,688

2 unchanged sentences

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

(2) As of December 31, 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 year ended December 31, 2020.

Accrued interest of $ 1.3 million was reversed during the year ended December 31, 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 December 31, 2020 and December 31, 2019, we did not have any loans considered restructured that were not on non-accrual.

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The following table details the recorded investment at December 31, 2020 and 2019 of loans that have been restructured during the years ended December 31, 2020 and 2019 by type of modification:

Extended Maturity

Adjusted Payment Schedule

(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

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

Year Ended December 31, 2020

Business loans

Commercial 2 $ 7,390 2 $ 14,496 4 $ 21,886

Energy loans 1 5,705 3 12,935 4 18,640

Total 3 $ 13,095 5 $ 27,431 $ 8 $ 40,526

Year Ended December 31, 2019

Business loans

Commercial 1 $ 1,753 3 $ 21,193 $ 4 $ 22,946

Energy loans 1 3,935 — — 1 3,935

Total 2 $ 5,688 3 $ 21,193 $ 5 $ 26,881

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 December 31, 2019 , all of the above loans restructured in 2019 were on non-accrual.

The restructuring of the loans did not have a significant impact on our allowance for

loan losses at December 31, 2019 or 2018 .

At December 31, 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 December 31, 2020 or 2019.

As of December 31, 2020 and 2019, we did not have any loans that were restructured within the last 12 months that subsequently defaulted.

(5) OREO and Valuation Allowance for Losses on OREO

The table below presents a summary of the activity related to OREO:

Year ended December 31,

(in thousands)

Beginning balance

Valuation allowance for OREO

Direct write-downs

Ending balance

During 2017, we recorded a $ 6.1 million write-down on one asset.

In 2018, we sold this asset and recorded a $ 2.0 million gain on sale.

The gain on sale was recorded in other non-interest income.

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 December 31, 2020, we granted temporary modifications on 483 loans with a total outstanding balance of $ 1.3 billion, resulting in the deferral of $ 7.7 million in interest payments.

As of December 31, 2020, 48 loans with a total outstanding balance of $ 90.2 million remain on deferral, of which $ 50.7 million have been granted a second deferral.

Under the applicable guidance, none of these loans were considered restructured as of December 31, 2020.

(5) Certain Transfers of Financial Assets

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Loans held for sale at fair value $ 283,165 $ 2,577,134

Includes $ 5.8 million and $ 299,000 of loans held for sale that are carried at lower of cost or market as of December 31, 2019 and 2018 , respectively , as well as $ 3.3 million as of December 31, 2017.

No loans held for sale were on non-accrual as of December 31, 2019 or December 31, 2018 .

(1) Includes $ 44.1 million and $ 5.8 million of loans held for sale that are carried at lower of cost or market as of December 31, 2020 and 2019, respectively, as well as $ 299,000 as of December 31, 2018.

At December 31, 2020, we had $ 7.0 million in in non-accrual loans held for sale, comprised of one loan previously reported in loans held for investment that was transferred to loans held for sale as of December 31, 2020 and subsequently sold at carrying value.

At December 31, 2019 there were no non-accrual loans held for sale.

At December 31, 2020 and December 31, 2019, we had $ 16.7 million and $ 8.2 million, respectively, in loans held for sale that were 90 days or more past due.

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

The $ 16.7 million in loans held for sale that were 90 days or more past due at December 31, 2020 included $ 3.3 million of loans guaranteed by U.S.

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

1 unchanged sentence

Also included in the $ 16.7 million were $ 13.4 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, 2018 , $ 16.0 million of the $ 16.8 million in loans held for sale 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.

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 criteria are met.

From time to time we retain the right to service the loans sold through our MCA program, creating MSRs which are recorded as assets on our balance sheet.

4 unchanged sentences

Capitalized servicing rights 99,678 39,774

Amortization ( 38,994 ) ( 11,541 )

Balance, end of period $ 131,391 $ 70,707

3 unchanged sentences

Balance, end of period $ 25,967 $ 5,803

MSRs, net $ 105,424 $ 64,904

MSRs, fair value $ 105,424 $ 64,904

At December 31, 2020 and 2019, our servicing portfolio of residential mortgage loans had an outstanding principal balance of $ 13.8 billion and $ 6.7 billion, respectively.

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

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

In connection with the servicing of these loans, we hold segregated non-interested-bearing deposit accounts in the name of investors representing escrow funds for taxes and insurance, as well as collections in transit to the investors.

These deposits, included in total non-interest-bearing deposits on the consolidated balance sheets, were $ 152.6 million at December 31, 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 December 31, 2019 , the estimated fair value of MSRs was adjusted as a result of the decline in mortgage interest rates during the year, which resulted in an impairment charge of $ 5.8 million .

There was no impairment at December 31, 2018 .

At December 31, 2020, the estimated fair value of MSRs was negatively impacted by the increased prepayment speeds from continued low interest rates, which resulted in an impairment charge of $ 20.2 million being recorded for the year ended December 31, 2020, compared to a $ 5.8 million impairment charge for the year ended December 31, 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 are disclosed in Note 17 - Derivative Financial Instruments.

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

7 unchanged sentences

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 change in fair value may not be linear.

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.

1 unchanged sentence

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 $ 3.6 million and $ 1.6 million at December 31, 2019 and December 31, 2018 , respectively, and is recorded in other liabilities in the consolidated balance sheets.

We incurred $ 9.0 million in losses due to make-whole obligations during the year ended December 31, 2019 compared to $ 258,000 in 2018 .

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

Our estimated exposure related to those agreements totaled $ 621,000 and $ 3.6 million at December 31, 2020 and December 31, 2019, respectively, and is recorded in other liabilities in the consolidated

balance sheets.

$ 8.4 million in make-whole obligation payments were made during the year ended December 31, 2020 compared to $ 9.0 million in 2019.

Our leases relate primarily to office space and bank branches with remaining lease terms of generally 1 to 13 years.

Certain lease arrangements contain extension options which typically range from 5 to 10 years at the then fair market rental rates.

As these extension options are not generally considered reasonably certain of exercise, they are not included in the lease term.

As of December 31, 2019 , operating lease ROU assets and liabilities were $ 80.0 million and $ 95.9 million , respectively.

At December 31, 2020, operating lease ROU assets and liabilities were $ 67.0 million and $ 82.5 million, respectively, compared to $ 80.0 million and $ 95.9 million, respectively, at December 31, 2019.

We do not currently have any significant finance leases in which we are the lessee.

The table below summarizes our net lease cost:

Year Ended December 31,

(in thousands) 2020 2019

December 31, 2019

Operating lease cost $ 15,544 $ 14,844

7 unchanged sentences

Non-cash changes in lease liabilities(1) $ 784 $ 108,189

Includes $ 87.9 million in lease liabilities from new ROU assets obtained during the year ended December 31, 2019 .

(1) Includes $ 833,000 and $ 87.9 million in lease liabilities from new ROU assets obtained during the years ended December 31, 2020 and December 31, 2019, respectively.

The table below summarizes other information related to our operating leases:

December 31, 2019

Weighted-average remaining lease term - operating leases, in years 6.5 7.2

1 unchanged sentence

The table below summarizes the maturity of remaining lease liabilities:

(in thousands)

December 31, 2019

(in thousands) December 31, 2020

2021 $ 17,222

2026 and thereafter 22,849

Total lease payments 90,315

Interest ( 7,786 )

Present value of lease liabilities $ 82,529

1 unchanged sentence

Goodwill and other intangible assets are summarized as follows:

(in thousands)

Gross Goodwill

and Intangible

(in thousands) Gross Goodwill and Intangible Assets Accumulated

Amortization Net Goodwill and Intangible Assets

December 31, 2020

Goodwill $ 15,468 $ ( 374 ) $ 15,094

Intangible assets—customer relationships and trademarks 9,006 ( 6,433 ) 2,573

1 unchanged sentence

December 31, 2019

Goodwill $ 15,468 $ ( 374 ) $ 15,094

Intangible assets—customer relationships and trademarks 9,006 ( 6,001 ) 3,005

3 unchanged sentences

(in thousands)

Thereafter 845

Total $ 2,573

(8) Premises and Equipment

1 unchanged sentence

(in thousands) 2020 2019

Premises $ 32,231 $ 30,181

Furniture and equipment 41,627 42,176

Total cost 73,858 72,357

Accumulated depreciation ( 49,312 ) ( 41,145 )

1 unchanged sentence

Depreciation expense for the above premises and equipment was approximately $ 9.5 million, $ 9.2 million and $ 9.0 million in 2020, 2019 and 2018, respectively.

(10) Deposits

Deposits are summarized as follows:

2 unchanged sentences

Interest-bearing deposits:

Transaction 4,396,243 3,651,128

Savings 11,619,880 10,517,975

Time 2,239,519 2,871,031

Total interest-bearing deposits 18,255,642 17,040,134

2 unchanged sentences

(in thousands)

2021 $ 1,317,558

2026 and after 5

Total $ 2,239,519

At December 31, 2020 and 2019, interest-bearing time deposits of $250,000 or more were approximately $ 386.9 million and $ 347.7 million, respectively.

1 unchanged sentence

The following table summarizes our short-term and other borrowings:

(dollar amounts in thousands)

Federal Funds Purchased

Customer Repurchase Agreements

FHLB Borrowings

(dollar amounts in thousands) Federal Funds Purchased Customer Repurchase Agreements FHLB Borrowings

December 31, 2020

33 unchanged sentences

As of December 31, 2020, the details of the trust preferred subordinated debentures are summarized below:

(dollar amounts in thousands)

Texas Capital

Statutory Trust I

Texas Capital

(dollar amounts in thousands) Texas Capital

Statutory Trust I Texas Capital

Trust II Texas Capital

Trust III Texas Capital

Trust IV Texas Capital

Statutory Trust V

November 19, 2002

April 10, 2003

October 6, 2005

April 28, 2006

September 29, 2006

Date issued November 19, 2002 April 10, 2003 October 6, 2005 April 28, 2006 September 29, 2006

Trust preferred securities issued $ 10,310 $ 10,310 $ 25,774 $ 25,774 $ 41,238

Floating or fixed rate securities

Interest rate on subordinated debentures

3 month LIBOR

Floating or fixed rate securities Floating Floating Floating Floating Floating

Interest rate on subordinated debentures 3 month LIBOR

3 month LIBOR

2 unchanged sentences

3 month LIBOR

Maturity date

November 2032

December 2035

December 2036

Maturity date November 2032 April 2033 December 2035 June 2036 December 2036

On September 21, 2012, the Company issued $ 111.0 million of subordinated notes.

11 unchanged sentences

Beginning balance of allowance for off-balance sheet credit losses $ 8,640 $ 11,434

Impact of CECL adoption 563 —

Provision for off-balance sheet credit losses 8,231 ( 2,794 )

9 unchanged sentences

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.

The Basel III Capital Rules became effective for us on January 1, 2015 with certain transition provisions that became fully phased in on January 1, 2019.

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.

The capital conservation buffer was subject to a three year phase-in period that began on January 1, 2016 and became fully phased-in on January 1, 2019 at 2.5%.

The required capital conservation buffer during 2018 was 1.875%.

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.

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 February 2019, the federal bank regulatory agencies issued a final rule (the "2019 CECL Rule") that revised certain capital regulations to account for changes to credit loss accounting under GAAP.

The 2019 CECL Rule included a transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of adopting the new accounting standard related to the measurement of current expected credit losses on their regulatory capital ratios (three-year transition option).

In March 2020, the federal bank regulatory agencies issued an interim final rule that maintains the three-year transition option of the 2019 CECL Rule and also provides banking organizations that were required under GAAP to implement CECL before the end of 2020 the option to delay for two years an estimate of the effect of CECL on regulatory capital, relative to the incurred loss methodology's effect on regulatory capital, followed by a three-year transition period (five-year transition option).

We adopted CECL on January 1, 2020 and have elected to utilize the five-year transition option.

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.

1 unchanged sentence

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 "well capitalized" as of December 31, 2019 and 2018 .

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

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

4 unchanged sentences

The table below summarizes our actual and required capital ratios under the Basel III Capital Rules:

Minimum Capital Required - Basel III Phase-In Schedule

Minimum capital Required - Basel III Fully Phased-In

Required to be Considered Well Capitalized

(dollars in thousands)

Capital Amount

Actual Minimum capital Required - Basel III Fully Phased-In Required to be Considered Well Capitalized

(dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio

December 31, 2020

Company $ 2,708,150 9.35 % $ 2,026,400 7.00 % N/A N/A

Bank 2,744,211 9.48 % 2,025,417 7.00 % 1,880,745 6.50 %

Total capital (to risk-weighted assets)

Company 3,498,737 12.09 % 3,039,600 10.50 % N/A N/A

Bank 3,375,983 11.67 % 3,038,126 10.50 % 2,893,453 10.00 %

Tier 1 capital (to risk-weighted assets)

Company 2,968,150 10.25 % 2,460,628 8.50 % N/A N/A

Bank 2,904,211 10.04 % 2,459,435 8.50 % 2,314,763 8.00 %

Tier 1 capital (to average assets)(1)

Company 2,968,150 7.52 % 1,578,651 4.00 % N/A N/A

Bank 2,904,211 7.36 % 1,578,207 4.00 % 1,972,758 5.00 %

December 31, 2019

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;

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No dividends were declared or paid on our common stock during 2020, 2019 or 2018.

The required reserve balances at the Federal Reserve at December 31, 2019 and 2018 were approximately $ 283.4 million and $ 157.7 million, respectively.

On March 15, 2020, to encourage banks to lend all available funds during the COVID-19 pandemic, the Federal Reserve announced it had reduced the reserve requirement ratio to zero effective March 26, 2020 and continuing through December 31, 2020.

The required reserve balances at the Federal Reserve at December 31, 2019 was approximately $ 283.4 million.

(14) Stock-Based Compensation and Employee Benefits

8 unchanged sentences

The plan allows us to make discretionary contributions on behalf of a participant as well as matching contributions.

We made matching contributions of $ 1.0 million in both 2019 and 2018 and made discretionary contributions of $ 260,000 in 2017.

We made matching contributions of $ 1.0 million in each of 2020, 2019 and 2018.

All participant contributions to the plan and any related earnings are immediately vested and may be withdrawn upon the participant's separation from service, death or disability or upon a date specified by the participant.

3 unchanged sentences

Eligible employees may contribute a between 1 % and 10 % of eligible compensation up to the Section 423 of the Internal Revenue Code limit of $25,000.

Employee contributions to the ESPP were temporarily suspended throughout 2020.

On January 1, 2021, the suspension was removed and employee contributions commenced.

In 2006, stockholders approved the ESPP, which allocated 400,000 shares for purchase.

7 unchanged sentences

Grants of SARs include time-based vesting conditions that generally vest ratably over a period of five years .

December 31, 2019

December 31, 2018

December 31, 2017

Weighted Average Exercise Price

December 31, 2020 December 31, 2019 December 31, 2018

SARs Weighted Average Exercise Price SARs Weighted Average Exercise Price SARs Weighted Average Exercise Price

SARs outstanding at beginning of year 21,200 $ 33.95 41,350 $ 29.13 74,363 $ 30.12

9 unchanged sentences

Intrinsic value of SARs exercised $ 294,000 $ 724,000 $ 1,919,000

A s ummary of our RSU activity and related information is as follows.

A summary of our RSU activity and related information is as follows.

Grants of RSUs include time-based vesting conditions that generally vest ratably over a period of three to five years .

Additionally, from time to time, grants of RSUs with both time-based and performance-based vesting conditions are made that generally vest at the end of a three or four year period.

December 31, 2019

December 31, 2018

December 31, 2017

Grant Date Fair Value

December 31, 2020 December 31, 2019 December 31, 2018

RSUs Weighted

Grant Date Fair Value RSUs Weighted

Grant Date Fair Value

RSUs outstanding at beginning of year 558,312 $ 64.95 349,533 $ 69.11 423,732 $ 60.01

RSUs granted 631,092 39.37 386,913 59.28 95,891 88.07

RSUs vested ( 171,494 ) 65.17 ( 140,666 ) 59.97 ( 121,507 ) 54.97

RSUs forfeited ( 62,316 ) 56.92 ( 37,468 ) 62.73 ( 48,583 ) 63.60

7 unchanged sentences

Cash-settled units totaling 59,285 were outstanding at December 31, 2020, all of which are time-based and vest ratably over a period of four years .

We granted 138,773 and 121,260 cash-settled units in 2018 and 2017 , respectively.

No grants were made in 2019.

We granted 138,773 cash-settled units in 2018.

No grants were made in 2020 or 2019.

Since these units have a cash payout feature, they are accounted for under the liability method with related expense based on the stock price at period end.

4 unchanged sentences

(in thousands) 2020 2019 2018

Federal $ 32,701 $ 69,427 $ 82,556

State 920 4,072 3,808

Total 33,621 73,499 86,364

Federal ( 7,964 ) 10,796 ( 6,400 )

Total ( 7,964 ) 10,796 ( 6,400 )

Total expense:

The reconciliation of our effective income tax rate to the U.S.

federal statutory tax rate is as follows:

Federal 24,737 80,223 76,156

State 920 4,072 3,808

Total $ 25,657 $ 84,295 $ 79,964

The reconciliation of income tax at the U.S.

federal statutory tax rate to our income tax expense and effective tax rate is as follows:

Year ended December 31,

2020 2019 2018

Amount Rate Amount Rate Amount Rate

statutory rate $ 19,309 21 % $ 85,504 21 % $ 79,965 21 %

Non-deductible expenses

Deferred tax asset remeasurement write-off

Non-taxable income

State taxes 726 1 % 3,217 1 % 3,008 1 %

Tax-exempt income ( 3,356 ) ( 4 ) % ( 5,127 ) ( 1 ) % ( 4,855 ) ( 1 ) %

Tax credits ( 1,216 ) ( 1 ) % ( 2,052 ) ( 1 ) % ( 2,421 ) ( 1 ) %

Disallowed FDIC 3,920 4 % 2,468 1 % 2,418 1 %

Disallowed compensation 3,098 3 % 628 — % 400 — %

Other 3,176 4 % ( 343 ) — % 1,449 — %

Effective tax rate $ 25,657 28 % $ 84,295 21 % $ 79,964 21 %

Our 2020 effective tax rate was significantly impacted by the lower level of income before income taxes experienced in 2020.

The tax effect of unrealized gains and losses on available-for-sale debt securities is recorded to other comprehensive income and is not a component of income tax expense/(benefit).

At December 31, 2020, 2019 and 2018, we had unrecognized tax benefits of $ 1.1 million, $ 1.3 million and $ 1.6 million, respectively.

We are no longer subject to U.S.

2 unchanged sentences

Management believes it is more likely than not that all of the deferred tax assets will be realized.

In connection with our adoption of CECL, a $ 2.0 million increase to the deferred tax asset associated with our allowance for credit losses was recorded on January 1, 2020.

Our net deferred tax assets are included in other assets in the consolidated balance sheets.

7 unchanged sentences

Non-qualified deferred compensation 5,795 4,027

Other 3,136 2,544

Total deferred tax assets 102,532 88,442

1 unchanged sentence

Loan origination costs ( 2,997 ) ( 2,686 )

Leases ( 8,603 ) ( 7,912 )

Operating lease ROU assets ( 16,617 ) ( 19,644 )

MSRs ( 22,566 ) ( 13,818 )

Depreciation ( 14,968 ) ( 17,602 )

Unrealized gain on securities ( 4,193 ) ( 2,379 )

Other ( 3,381 ) ( 3,337 )

Total deferred tax liabilities ( 73,325 ) ( 67,378 )

2 unchanged sentences

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.

Quoted prices in active markets for identical assets or liabilities.

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.

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

See Note 1 - Operations and Summary of Significant Accounting Policies for information regarding the fair value hierarchy and a description of the methods and significant assumptions used by the Company is estimating its fair value disclosures for financial statements.

Assets and liabilities measured at fair value are as follows:

Fair Value Measurements Using

(in thousands)

(in thousands) Level 1 Level 2 Level 3

December 31, 2020

Available-for-sale debt securities:(1)

government agency securities $ — $ 123,589 $ —

Residential mortgage-backed securities — 2,828,956 —

11 unchanged sentences

Tax-exempt asset-backed securities — — 197,027

CRT Securities — — 11,964

Equity securities(1)(2) 18,484 7,130 —

7 unchanged sentences

(3) Loans held for sale purchased through our MCA program are measured at fair value on a recurring basis, generally monthly.

Includes impaired loans that have been measured for impairment at the fair value of the loan’s collateral.

OREO is transferred from loans to OREO at fair value less selling costs.

Loans held for investment and OREO are measured on a nonrecurring basis, generally annually or more often as warranted by market and economic conditions.

(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.

Non-qualified deferred compensation plan liabilities represent the fair value of the obligation to the employee, which generally correspond to the fair value of the invested assets, and are measured at fair value on a recurring basis, generally monthly.

(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.

Level 3 Valuations

1 unchanged sentence

Net Realized/Unrealized Gains (Losses)

(in thousands)

Balance at Beginning of Period

Purchases / Additions

Sales / Reductions

Balance at End of Period

(in thousands) Balance at Beginning of Period Purchases / Additions Sales / Reductions Realized Unrealized Balance at End of Period

Year ended December 31, 2020

4 unchanged sentences

Year ended December 31, 2019

Available-for-sale debt securities:(1)

Tax-exempt asset-backed securities $ 95,804 $ 92,010 $ ( 4,302 ) $ — $ 13,515 $ 197,027

CRT Securities $ — $ 15,044 $ — $ ( 331 ) $ ( 2,749 ) $ 11,964

Loans held for sale(2) $ 16,415 $ 321 $ ( 10,690 ) $ 190 $ 807 $ 7,043

Unrealized gains/(losses) on available-for-sale debt securities are recorded in AOCI.

(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 unchanged sentences

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 December 31, 2019 , a discount rate of 2.99 % and a weighted-average life of 7.0 years were utilized to determine the fair value of these securities, compared to 4.21 % and 9.2 years, respectively, at December 31, 2018 .

At December 31, 2020, the discount rates utilized ranged from 2.44 % to 2.53 % and the weighted-average life ranged from 5.51 years to 5.54 years.

On a combined amortized cost weighted-average basis a discount rate of 2.49 % and a weighted-average life of 5.53 years were utilized to determine the fair value of these securities at December 31, 2020.

At December 31, 2019, the combined weighted-average discount rate and weighted-average life utilized were 2.99 % and 7.00 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 December 31, 2019 , a discount rate of 4.54 % and a weighted-average life of 9.3 years were utilized to determine the fair value of these securities.

At December 31, 2020, the discount rates utilized ranged from 2.75 % to 7.59 % and the weighted-average life ranged from 5.97 years to 10.54 years.

On a combined amortized cost weighted-average basis a discount rate of 4.36 % and a weighted-average life of 7.49 years were utilized to determine the fair value of these securities at December 31, 2020.

At December 31, 2019, the combined weighted-average discount rate and weighted-average life utilized were 4.54 % and 9.33 years, respectively.

Loans held for sale

3 unchanged sentences

Loans held for investment

Certain impaired loans held for investment are reported at fair value through a specific valuation allowance allocation of the allowance for loan losses based upon the fair value of the underlying collateral.

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

The $ 29.9 million fair value of loans held for investment at December 31, 2018 reported above includes impaired loans with a carrying value of $ 32.2 million that were reduced by specific valuation allowance allocations totaling $ 2.3 million based on collateral valuations utilizing Level 3 inputs.

Certain foreclosed assets, upon initial recognition, are recorded at fair value less estimated selling costs.

At December 31, 2019 and 2018 , OREO had a carrying value of $ 0 and $ 79,000 , respectively, with no specific valuation allowance.

The fair value of OREO was computed based on third party appraisals, which are Level 3 valuation inputs.

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 $ 21.2 million fair value of loans held for investment at December 31, 2020 reported above includes loans held for investment with a carrying value of $ 25.3 million that were reduced by specific allowance allocations totaling $ 4.1 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 impaired 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:

December 31, 2019

December 31, 2018

(in thousands)

December 31, 2020 December 31, 2019

(in thousands) Carrying

Amount Estimated

Fair Value Carrying

Amount Estimated

Financial assets:

19 unchanged sentences

Level 3 inputs:

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

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.

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.

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 sales 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 sales 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.

Deposits 30,996,589 30,997,980 26,478,593 26,486,090

(17) Derivative Financial Instruments

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

December 31, 2019

December 31, 2018

Estimated Fair Value

(in thousands)

Asset Derivative

Liability Derivative

Asset Derivative

Liability Derivative

December 31, 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:

7 unchanged sentences

Foreign currency forward contracts 6,667 78 214 2,219 — 169

Economic hedging interest rate derivatives:

Economic hedging derivatives to hedge:

Residential MSRs:

Interest rate swap futures 320,000 474 — — — —

Forward sale commitments 155,000 551 — — — —

Loans held for sale:

Loan purchase commitments 332,145 5,123 8 214,012 1,965 4

5 unchanged sentences

December 31, 2020

Weighted-Average Interest Rate December 31, 2019

Weighted-Average Interest Rate

December 31, 2018 Weighted-Average Interest Rate

Received Paid Received Paid

Non-hedging interest rate swaps 3.14 % 1.38 % 3.94 % 3.26 %

2 unchanged sentences

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

$ 48.7 million at December 31, 2019 and approximately $ 18.7 million at December 31, 2018 .

Our credit exposure associated with these instruments, net of any collateral pledged, was approximately $ 102.7 million at December 31, 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.

14 unchanged sentences

Summarized financial information for Texas Capital Bancshares, Inc.

– Parent Company Only are as follows:

are as follows:

Balance Sheet

3 unchanged sentences

Investment in subsidiaries 2,930,843 2,847,393

Other assets 89,551 88,639

Total assets $ 3,085,366 $ 3,017,994

Liabilities and Stockholders’ Equity

4 unchanged sentences

Preferred stock 150,000 150,000

Common stock 504 503

Additional paid-in capital 1,002,050 988,357

4 unchanged sentences

Total liabilities and stockholders’ equity $ 3,085,366 $ 3,017,994

Statement of Earnings

Statement of Income

Year ended December 31,

2 unchanged sentences

Dividend income 10,400 10,400 10,400

Other income 96 151 142

Total income 13,898 13,952 13,940

Other non-interest income 3 17 7

8 unchanged sentences

Equity in undistributed income of subsidiary 68,100 312,932 293,321

Net income 64,105 309,831 291,203

Preferred stock dividends 9,750 9,750 9,750

4 unchanged sentences

Operating Activities

Net income $ 64,105 $ 309,831 $ 291,203

Adjustments to reconcile net income to net cash used in operating activities:

Equity in undistributed income of subsidiary ( 68,100 ) ( 312,932 ) ( 293,321 )

Amortization 101 101 101

Increase in other assets ( 912 ) ( 1,187 ) ( 1,152 )

2 unchanged sentences

Investing Activities

Net increase in loans held for investment

Net (increase)/decrease in loans held for investment 3,000 ( 3,000 ) —

Investments in and advances to subsidiaries — — ( 40,000 )

Net cash used in investing activities

Net cash provided by/(used in) investing activities 3,000 ( 3,000 ) ( 40,000 )

Financing Activities

2 unchanged sentences

Net cash used in financing activities ( 11,736 ) ( 11,209 ) ( 12,132 )

Net increase (decrease) in cash and cash equivalents

Net decrease in cash and cash equivalents ( 13,990 ) ( 18,099 ) ( 55,074 )

Cash and cash equivalents at beginning of year 71,462 89,561 144,635

3 unchanged sentences

2020 Selected Quarterly Financial Data

(in thousands, except per share data)

(in thousands, except per share data) Fourth Third Second First

Interest income $ 255,163 $ 243,731 $ 252,010 $ 306,008

5 unchanged sentences

Non-interest expense 150,886 165,741 222,352 165,417

Income before income taxes

Income tax expense

Income/(loss) before income taxes 83,010 72,176 ( 41,922 ) ( 21,318 )

Income tax expense/(benefit) 22,834 15,060 ( 7,606 ) ( 4,631 )

Net income/(loss) 60,176 57,116 ( 34,316 ) ( 16,687 )

Preferred stock dividends 2,437 2,438 2,437 2,438

Net income available to common stockholders

Basic earnings per share:

Diluted earnings per share:

Net income/(loss) available to common stockholders $ 57,739 $ 54,678 $ ( 36,753 ) $ ( 19,125 )

Basic earnings/(loss) per share:

$ 1.14 $ 1.08 $ ( 0.73 ) $ ( 0.38 )

Diluted earnings/(loss) per share:

$ 1.14 $ 1.08 $ ( 0.73 ) $ ( 0.38 )

2019 Selected Quarterly Financial Data

(in thousands, except per share data)

(in thousands, except per share data) Fourth Third Second First

Interest income $ 337,757 $ 355,101 $ 346,893 $ 325,561

7 unchanged sentences

Income tax expense 16,539 23,958 21,387 22,411

Net income 64,420 88,082 77,812 81,701

Preferred stock dividends 2,437 2,438 2,437 2,438

1 unchanged sentence

Basic earnings per share:

$ 1.23 $ 1.70 $ 1.50 $ 1.58

Diluted earnings per share:

$ 1.23 $ 1.70 $ 1.50 $ 1.58

(21) 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 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 this ASU will have material effects on our business operations and consolidated financial statements.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data