What changed in this filing

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Item 1. Financial Statements

2021-04-22 compared with 2020-10-22 · 303 added, 501 removed, 481 unchanged (63% of the section changed)

2 unchanged sentences

CONSOLIDATED BALANCE SHEETS

(in thousands except share data)

September 30, 2020

December 31, 2019

(in thousands except share data) March 31, 2021 December 31, 2020

Cash and due from banks $ 215,835 $ 173,573

Interest-bearing deposits in other banks 11,212,276 9,032,807

Federal funds sold and securities purchased under resale agreements

Investment securities 3,443,058 3,196,970

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

Loans held for sale ($ 176.3 million and $ 239.1 million at March 31, 2021 and December 31, 2020, respectively, at fair value)

176,286 283,165

Loans held for investment, mortgage finance 9,009,081 9,079,409

6 unchanged sentences

Goodwill and intangible assets, net 17,566 17,667

Total assets $ 40,054,433 $ 37,726,096

Liabilities and Stockholders’ Equity

6 unchanged sentences

Other borrowings 2,400,000 3,000,000

Subordinated notes, net

Trust preferred subordinated debentures

Long-term debt 664,968 395,896

Total liabilities 36,894,951 34,854,872

2 unchanged sentences

Authorized shares— 10,000,000

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

Issued shares— 6,300,000 shares issued at March 31, 2021 and 6,000,000 at December 31, 2020

450,000 150,000

Common stock, $ 0.01 par value:

Authorized shares— 100,000,000

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

Issued shares— 50,558,184 and 50,470,867 at March 31, 2021 and December 31, 2020, respectively

Additional paid-in capital 984,207 991,898

1 unchanged sentence

Treasury stock (shares at cost:

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

Accumulated other comprehensive income, net of taxes

417 at March 31, 2021 and December 31, 2020)

Accumulated other comprehensive income/(loss), net of taxes ( 56,437 ) 15,774

Total stockholders’ equity 3,159,482 2,871,224

2 unchanged sentences

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER

CONSOLIDATED STATEMENTS OF INCOME AND OTHER

COMPREHENSIVE INCOME/(LOSS) - UNAUDITED

Three months ended September 30,

Nine months ended September 30,

Three months ended March 31,

(in thousands except per share data) 2021 2020

6 unchanged sentences

Interest expense

Deposits 20,004 62,174

Federal funds purchased 75 669

Other borrowings 2,517 9,582

Subordinated notes

Trust preferred subordinated debentures

Long-term debt 5,743 5,264

Total interest expense 28,339 77,689

7 unchanged sentences

Servicing income 9,009 4,746

Swap fees 526 2,757

Net gain/(loss) on sale of loans held for sale 5,572 ( 13,000 )

Other 7,103 3,502

Total non-interest income 39,092 11,780

2 unchanged sentences

Net occupancy expense 8,274 8,712

Marketing 1,697 8,522

Legal and professional 8,277 17,466

3 unchanged sentences

Merger-related expenses — 7,270

Other 8,975 10,260

Total non-interest expense 150,316 165,417

Income before income taxes

Income tax expense

Income/(loss) before income taxes 94,849 ( 21,318 )

Income tax expense/(benefit) 22,911 ( 4,631 )

Net income/(loss) 71,938 ( 16,687 )

Preferred stock dividends 3,779 2,438

Net income/(loss) available to common stockholders $ 68,159 $ ( 19,125 )

Other comprehensive income/(loss)

Other comprehensive loss

Change in unrealized gain/(loss) on available-for-sale debt securities arising during period, before tax $ ( 91,407 ) $ ( 5,292 )

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

Other comprehensive income/(loss), net of tax

Comprehensive income

Income tax expense/(benefit) ( 19,196 ) ( 1,111 )

Other comprehensive loss, net of tax ( 72,211 ) ( 4,181 )

Comprehensive loss $ ( 273 ) $ ( 20,868 )

Basic earnings/(loss) per common share $ 1.35 $ ( 0.38 )

3 unchanged sentences

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED

Preferred Stock

Treasury Stock

Comprehensive

(in thousands except share data)

Balance at June 30, 2019

Comprehensive income:

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

Total comprehensive income

Stock-based compensation expense recognized in earnings

Preferred stock dividend

Issuance of stock related to stock-based awards

Balance at September 30, 2019

Balance at June 30, 2020

Comprehensive income:

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

Total comprehensive income

Stock-based compensation expense recognized in earnings

Preferred stock dividend

Issuance of stock related to stock-based awards

Balance at September 30, 2020

See accompanying notes to consolidated financial statements.

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED - CONTINUED

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/(Loss) Total

Balance at December 31, 2019 (audited) 6,000,000 $ 150,000 50,338,158 $ 503 $ 978,205 $ 1,663,671 ( 417 ) $ ( 8 ) $ 8,950 $ 2,801,321

Comprehensive income:

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

Total comprehensive income

Impact of adoption of new accounting standards, net of taxes (1) ( 7,154 ) — ( 7,154 )

Comprehensive loss:

Net loss — — — — — ( 16,687 ) — — — ( 16,687 )

Change in unrealized gain/(loss) on available-for-sale securities, net of taxes — — — — — — — — ( 4,181 ) ( 4,181 )

Total comprehensive loss ( 20,868 )

Stock-based compensation expense recognized in earnings

— — — — 3,227 — — — — 3,227

Preferred stock dividend — — — — — ( 2,438 ) — — — ( 2,438 )

Issuance of stock related to stock-based awards

Issuance of common stock related to warrants

Balance at September 30, 2019

— — 70,037 1 ( 1,493 ) — — — — ( 1,492 )

Balance at March 31, 2020 6,000,000 $ 150,000 50,408,195 $ 504 $ 979,939 $ 1,637,392 ( 417 ) $ ( 8 ) $ 4,769 $ 2,772,596

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

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

Comprehensive income:

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

Total comprehensive income

Comprehensive loss:

Net income — — — — — 71,938 — — — 71,938

Change in unrealized gain/(loss) on available-for-sale securities, net of taxes — — — — — — — — ( 72,211 ) ( 72,211 )

Total comprehensive loss ( 273 )

Stock-based compensation expense recognized in earnings

— — — — 5,461 — — — — 5,461

Issuance of preferred stock 300,000 300,000 — — ( 10,277 ) — — — — 289,723

Preferred stock dividend — — — — — ( 3,779 ) — — — ( 3,779 )

Issuance of stock related to stock-based awards

Balance at September 30, 2020

— — 87,317 1 ( 2,875 ) — — — — ( 2,874 )

Balance at March 31, 2021 6,300,000 $ 450,000 50,558,184 $ 505 $ 984,207 $ 1,781,215 ( 417 ) $ ( 8 ) $ ( 56,437 ) $ 3,159,482

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

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

See Note 1 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020 for more information.

See accompanying notes to consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

Nine months ended September 30,

Three months ended March 31,

(in thousands) 2021 2020

Operating activities

Net income $ 71,938 $ ( 16,687 )

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

2 unchanged sentences

Net (gain)/loss on sale of loans held for sale ( 5,572 ) 13,000

Increase in valuation allowance on mortgage servicing rights

Increase/(decrease) in valuation allowance on mortgage servicing rights ( 16,448 ) 10,015

Stock-based compensation expense 6,368 3,369

4 unchanged sentences

Accrued interest payable and other liabilities ( 27,335 ) 39,473

Net cash provided by/(used in) operating activities

Net cash provided by operating activities 198,431 1,785,744

Investing activities

2 unchanged sentences

Originations of mortgage finance loans ( 48,097,222 ) ( 37,932,501 )

( 157,016,926

Proceeds from pay-offs of mortgage finance loans 48,167,550 38,513,547

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

Net increase in loans held for investment, excluding mortgage finance loans ( 54,141 ) ( 438,869 )

Purchase of premises and equipment, net ( 924 ) ( 1,007 )

Proceeds from sale of other real estate owned, net

Net cash used in investing activities

Net cash provided by/(used in) investing activities ( 327,802 ) 144,007

Financing activities

1 unchanged sentence

Costs from issuance of stock related to stock-based awards and warrants ( 2,874 ) ( 1,492 )

Net proceeds from issuance of preferred stock 289,723 —

Preferred dividends paid ( 3,779 ) ( 2,438 )

Net increase/(decrease) in other borrowings ( 600,000 ) 2,500,000

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

Net increase in federal funds purchased and repurchase agreements 3,836 153,501

Net proceeds from issuance of long-term debt 268,815 —

Net cash provided by financing activities 2,351,102 3,305,241

15 unchanged sentences

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

On December 9, 2019, the Company and Independent Bank Group, Inc.

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

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

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

Basis of Presentation

6 unchanged sentences

Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Revision of Prior Period Financial Statements

During the second quarter of 2020, the Company identified an error in our historical financial statements related to the accounting for certain share-based liabilities of a consolidated entity that contained put features, whereby the liabilities were not remeasured to their puttable value at each period end.

The aggregate amount of the errors at each period end represented 1% or less of our stockholders' equity in all prior periods.

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

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

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

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

Revised Consolidated Balance Sheet as of December 31, 2019

( in thousands)

Other liabilities

Total liabilities

Retained Earnings

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

Three Months Ended September 30, 2019

Nine Months Ended September 30, 2019

(in thousands)

Salaries and employee benefits expense

Other non-interest expense

Total non-interest expense

Income before tax

Net income available to common stockholders

Comprehensive income

Revised Consolidated Statement of Stockholders' Equity

Three Months Ended September 30, 2019

Nine Months Ended September 30, 2019

(in thousands)

Beginning balance retained earnings

Beginning balance total equity

Ending balance retained earnings

Ending balance total equity

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

The terms of the agreements include a put feature that, when exercised, requires mandatory settlement by the Company of the share-based liability at a formulaic price.

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

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

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

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

Accounting Changes

On January 1, 2020, we adopted ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"), which replaces the incurred loss methodology for determining our provision for credit losses and allowance for credit losses with an expected loss methodology that is referred to as the Current Expected Credit Loss ("CECL") model.

The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities.

It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with ASU 2016-02 "Leases (Topic 842)" .

In addition, ASU 2016-13 made changes to the accounting for available-for-sale debt securities.

One such change is to require credit-related impairments to be recognized in the allowance for credit losses rather than as a write-down of the securities' amortized cost basis when management does not intend to sell or believes that it is not more likely than not that they will be required to sell the securities prior to recovery of the securities amortized cost basis.

We adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost, off-balance sheet credit exposures and net investments in leases.

Results for reporting periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP.

We adopted ASU 2016-13 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2020.

As a result, the amortized cost basis remains the same before and after the effective date of ASU 2016-13.

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

Loans held for investment (outstanding balance)

Mortgage finance

Equipment leases

Allowance for credit losses on loans

Total loans held for investment, net

Net deferred tax asset

Allowance for credit losses on off-balance sheet exposures

Retained earnings

In connection with our adoption of ASU 2016-13, changes were made to our primary portfolio segments to align with the methodology applied in determining the allowance under CECL.

These changes included segregating energy loans into a stand-alone portfolio segment and reclassifying consumer and equipment leases into the commercial loan portfolio segment.

Additionally, construction and real estate loans were combined into a single portfolio segment, referred to as real estate.

The real estate loan portfolio segment includes loans further categorized as commercial real estate, residential homebuilder finance, secured by 1-4 family and an "other" category.

See Allowance for Credit Losses - Loans below for further discussion of these portfolio segments.

Loans Held for Investment

Loans held for investment (including financing leases) are stated at the amount of unpaid principal reduced by deferred income (net of costs).

Interest on loans is recognized using the simple interest method on the daily balances of the principal amounts outstanding.

Loan origination fees, net of direct loan origination costs, and commitment fees are deferred and amortized as an adjustment to yield over the life of the loan, or over the commitment period, as applicable.

Restructured loans are loans on which, due to the borrower’s financial difficulties, we have granted a concession that we would not otherwise consider for borrowers of similar credit quality.

This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two.

Modifications of terms that could potentially qualify as a restructuring include reduction of contractual interest rate, extension of the maturity date at a contractual interest rate lower than the current rate for new debt with similar risk, a reduction of the face amount of debt or forgiveness of either principal or accrued interest.

A loan continues to qualify as restructured until a consistent payment history or change in the borrower’s financial condition has been evidenced, generally for no less than twelve months.

If the restructuring agreement specifies an interest rate at the time of the restructuring that is greater than or equal to the rate that we are willing to accept for a new extension of credit with comparable risk, then the loan is no longer considered a restructuring if it is in compliance with the modified terms in calendar years after the year of the restructure.

A loan is considered past due when a contractually due payment has not been received by the contractual due date.

We place a loan on non-accrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due.

When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed as a reduction of current period interest income.

Interest income is subsequently recognized on a cash basis as long as the remaining book balance of the asset is deemed to be collectible.

If collectability is questionable, then cash payments are applied to principal.

A loan is placed back on accrual status when both principal and interest are current and it is probable that we will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.

Loans held for investment includes legal ownership interests in mortgage loans that we purchase through our mortgage warehouse lending division.

The ownership interests are purchased from unaffiliated mortgage originators who are seeking additional funding through sale of the undivided ownership interests to facilitate their ability to originate loans.

The mortgage originator has no obligation to offer and we have no obligation to purchase these interests.

The originator closes mortgage loans consistent with underwriting standards established by approved investors, and, at the time of the sale to the investor, our ownership interest and that of the originator are delivered by us to the investor selected by the originator and approved by us.

We typically purchase up to a 99% ownership interest in each mortgage with the originator owning the remaining percentage.

These mortgage ownership interests are generally held by us for a period of less than 30 days and more typically 10-20 days.

Because of conditions in agreements with originators designed to reduce transaction risks, under ASC 860, Transfers and Servicing of Financial Assets (“ASC 860”), the ownership interests do not qualify as participating interests.

Under ASC 860, the ownership interests are deemed to be loans to the originators and payments we receive from investors are deemed to be payments made by or on behalf of the originator to repay the loan deemed made to the originator.

Because we have an actual, legal ownership interest in the underlying residential mortgage loan, these interests are reported as extensions of credit to the originators that are secured by the mortgage loans as collateral.

Due to market conditions or events of default by the investor or the originator, we could be required to purchase the remaining interests in the mortgage loans and hold them beyond the expected 10-20 days.

Mortgage loans acquired under these conditions would require mark-to-market adjustments to income and could require future allocations of the allowance for credit losses or be subject to charge-off in the event the loans become impaired.

Allowance for Credit Losses

The allowance for credit losses is an estimate of the expected credit losses in the loans held for investment and available-for-sale debt securities portfolios.

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.

Within our criticized/classified credit grades are special mention, substandard and doubtful.

Special mention loans are those that are currently protected by the sound worth and paying capacity of the borrower, but that are potentially weak and constitute an additional credit risk.

These loans have the potential to deteriorate to a substandard grade due to the existence of financial or administrative deficiencies.

Substandard loans have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt.

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

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

Substandard loans can be accruing or can be on non-accrual depending on the circumstances of the individual loans.

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

The possibility of loss is extremely high.

All doubtful loans are on non-accrual.

The methodology used in the estimation of the allowance, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and forecasted economic conditions.

Changes are reflected in the pool-basis allowance and in reserves assigned on an individual basis as the collectability of classified loans is evaluated with new information.

As our portfolio has matured, historical loss ratios have been closely monitored.

The review of the appropriateness of the allowance is performed by executive management and presented to the audit and risk committees of our board of directors for their review.

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

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

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

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate.

The contractual term excludes expected extensions, renewals and modifications unless either of the following applies:

management has a reasonable expectation that a loan will be restructured, or the extension or renewal options are included in the borrower contract and are not unconditionally cancellable by us.

We do not measure an allowance for credit losses on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when loans are placed on non-accrual status as discussed above.

Investment Securities

Available-for-Sale

For available-for-sale debt securities in an unrealized loss position, we first assess whether we intend to sell, or it is more-likely-than-not that we will be required to sell, the securities before recovery of the amortized cost basis.

If either of these criteria is met, the securities' amortized cost basis is written down to fair value as a current period expense.

If either of the above criteria is not met, we evaluate whether the decline in fair value is the result of credit losses or other factors.

In making this assessment, we may consider various factors including the extent to which fair value is less than amortized cost, performance of any underlying collateral and adverse conditions specifically related to the security, among other factors.

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess of the amortized cost basis over the present value of expected cash flows is recorded as an allowance for credit loss, limited to the amount by which the fair value is less than the amortized cost basis.

Any impairment not recorded through an allowance for credit loss is recognized in other comprehensive income as a non credit-related impairment.

We have made a policy election to exclude accrued interest from the amortized cost basis of available-for-sale debt securities and report accrued interest separately in accrued interest and other assets in the consolidated balance sheets.

Available-for-sale debt securities are placed on non-accrual status when we no longer expect to receive all contractual amounts due, which is generally at 90 days past due.

Accrued interest receivable is reversed against interest income when a security is placed on non-accrual status.

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

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

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

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

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

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

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

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

Subsequent Event

On April 20, 2021, we entered into an agreement to sell our portfolio of mortgage servicing rights to a third party.

The third party has also, in a separate letter of intent, agreed to extend employment opportunities to many of the Company’s Mortgage Correspondent Aggregation (“MCA”) employees and the Company has agreed to make best efforts to cooperate in transitioning its MCA client base to the third party, resulting in the wind-down of the Company’s MCA program.

The sale and transition of employees and clients is expected to be completed in the second quarter of 2021, subject to customary closing conditions, and will result in the Company recording an expected gain on sale of mortgage servicing rights ("MSRs") and severance costs in the second quarter of 2021, both of which are not expected to be material.

Use of Estimates

4 unchanged sentences

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

Three months ended September 30,

Nine months ended September 30,

Three months ended March 31,

(in thousands except share and per share data) 2021 2020

Net income/(loss) $ 71,938 $ ( 16,687 )

Preferred stock dividends 3,779 2,438

3 unchanged sentences

Denominator for dilutive earnings per share—adjusted weighted average shares and assumed conversions

51,069,511 50,474,802

Basic earnings/(loss) per common share $ 1.35 $ ( 0.38 )

Diluted earnings/(loss) per common share $ 1.33 $ ( 0.38 )

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

(1) SARs and RSUs outstanding of 80,263 at March 31, 2021 and 428,007 at March 31, 2020 have not been included in diluted earnings/(loss) per share because to do so would have been antidilutive for the periods presented.

(3) Investment Securities

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

(in thousands)

September 30, 2020

(in thousands) Amortized

Cost(1) Gross

Losses Estimated

March 31, 2021

Available-for-sale debt securities:

3 unchanged sentences

Credit risk transfer securities 14,713 — ( 3,248 ) 11,465

Total $ 3,480,098 $ 8,364 $ ( 79,804 ) $ 3,408,658

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

1 unchanged sentence

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

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

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

(1) Excludes accrued interest receivable of $ 6.3 million and $ 6.0 million at March 31, 2021 and December 31, 2020, respectively, that is recorded in accrued interest receivable and other assets on the consolidated balance sheets.

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)

September 30, 2020

(in thousands, except percentage data) Less Than

One Year After One

Five Years After Five

Ten Years After Ten

March 31, 2021

Available-for-sale:

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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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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

(in thousands)

Unrealized Loss

September 30, 2020

Less Than 12 Months 12 Months or Longer Total

(in thousands) Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss

March 31, 2021

government agency securities $ 119,840 $ ( 5,160 ) $ — $ — $ 119,840 $ ( 5,160 )

1 unchanged sentence

CRT securities — — 11,465 ( 3,248 ) 11,465 ( 3,248 )

Total $ 3,187,579 $ ( 76,556 ) $ 11,465 $ ( 3,248 ) $ 3,199,044 $ ( 79,804 )

December 31, 2020

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 )

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

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

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

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

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

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

At March 31, 2021, we had 108 securities in an unrealized loss position, comprised of 5 U.S.

government agency securities, 2 CRT securities and 101 residential mortgage-backed securities.

Based upon our March 31, 2021 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 accumulated other comprehensive income ("AOCI").

Available-for-sale debt securities with carrying values of approximately $ 28.1 million and $ 1.6 million were pledged to secure certain customer repurchase agreements and deposits, respectively, at March 31, 2021.

The comparative amounts at December 31, 2020 were $ 31.7 million and $ 1.9 million, respectively.

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

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

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

Three months ended September 30,

Nine months ended September 30,

At March 31, 2021 and December 31, 2020, we had $ 34.4 million and $ 33.8 million, respectively, in equity securities recorded at fair value.

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

Three months ended March 31,

(in thousands) 2021 2020

Net gains recognized during the period

Net gains/(losses) recognized during the period $ 378 $ ( 2,977 )

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

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

$ ( 20 ) $ ( 2,958 )

(4) Loans Held for Investment and Allowance for Credit Losses on Loans

Loans held for investment are summarized by portfolio segment as follows:

(in thousands)

September 30, 2020

December 31, 2019

(in thousands) March 31, 2021 December 31, 2020

Commercial $ 8,969,224 $ 8,861,580

Energy 691,806 766,217

Mortgage finance(1) 9,009,081 9,079,409

Real estate 5,810,590 5,794,624

Gross loans held for investment(2) 24,480,701 24,501,830

Deferred income (net of direct origination costs)

Unearned income (net of direct origination costs) ( 72,446 ) ( 70,970 )

Allowance for credit losses on loans ( 242,484 ) ( 254,615 )

Total loans held for investment, net(2) $ 24,165,771 $ 24,176,245

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

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

(1) Balances at March 31, 2021 and December 31, 2020 are stated net of $ 1.0 billion and $ 1.2 billion of participations sold, respectively.

(2) Excludes accrued interest receivable of $ 55.9 million and $ 56.5 million at March 31, 2021 and December 31, 2020, respectively, that is recorded in accrued interest receivable and other assets on the consolidated balance sheets.

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

(in thousands)

2015 and prior

Revolving lines of credit

Revolving lines of credit converted to term loans

September 30, 2020

(in thousands) 2021 2020 2019 2018 2017 2016 and prior Revolving lines of credit Revolving lines of credit converted to term loans Total

March 31, 2021

(1-7) Pass $ 341,043 $ 3,548,075 $ 602,736 $ 462,947 $ 290,409 $ 318,287 $ 2,989,607 $ 44,992 $ 8,598,096

(8) Special mention — 4,120 87,653 47,936 19,139 7,276 10,194 12,734 189,052

2 unchanged sentences

Total commercial $ 358,893 $ 3,561,233 $ 720,912 $ 540,102 $ 325,983 $ 365,250 $ 3,030,823 $ 66,028 $ 8,969,224

(1-7) Pass $ 15,515 $ — $ — $ 4,844 $ 8,893 $ 29,279 $ 515,359 $ — $ 573,890

(8) Special mention — — — — — 10,664 53,299 — 63,963

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(9+) Non-accrual 10,036 — 8,153 — — 11,179 — — 29,368

Total energy $ 25,551 $ — $ 8,153 $ 4,844 $ 8,893 $ 51,122 $ 593,243 $ — $ 691,806

Mortgage finance

(1-7) Pass $ 14,962 $ 716,845 $ 951,866 $ 799,447 $ 455,911 $ 6,070,050 $ — $ — $ 9,009,081

(8) Special mention — — — — — — — — —

2 unchanged sentences

Total mortgage finance $ 14,962 $ 716,845 $ 951,866 $ 799,447 $ 455,911 $ 6,070,050 $ — $ — $ 9,009,081

(1-7) Pass $ 60,652 $ 418,403 $ 935,071 $ 862,447 $ 370,347 $ 554,723 $ 50,041 $ 60,805 $ 3,312,489

(8) Special mention — 3,475 15,071 34,642 48,234 59,183 — — 160,605

1 unchanged sentence

(9+) Non-accrual — — — 458 — 4,991 — 1,247 6,696

(1-7) Pass 54,499 164,712 38,505 28,451 1,538 15,351 592,624 — 895,680

(8) Special mention — — — — — — — — —

1 unchanged sentence

(9+) Non-accrual — — — — — — — — —

(1-7) Pass 26,932 195,760 149,874 108,258 101,509 183,679 17,412 32,983 816,407

(8) Special mention — — 6,650 48 — 8,686 — 1,018 16,402

2 unchanged sentences

Secured by 1-4 family

(1-7) Pass 19,857 64,953 61,951 40,974 47,903 89,788 4,535 — 329,961

(8) Special mention — — — — — 1,770 — — 1,770

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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)

Additional Qualitative Reserve

Nine months ended September 30, 2020

(in thousands) Commercial Energy Mortgage

Three months ended March 31, 2021

Allowance for credit losses on loans:

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

Impact of CECL adoption

Provision for credit losses on loans ( 1,001 ) ( 5,852 ) 211 929 ( 5,713 )

Charge-offs 2,451 5,732 — — 8,183

Recoveries 1,050 715 — — 1,765

Net charge-offs (recoveries) 1,401 5,017 — — 6,418

Ending balance $ 70,659 $ 73,195 $ 4,910 $ 93,720 $ 242,484

Nine months ended September 30, 2019

Three months ended March 31, 2020

Allowance for credit losses on loans:

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

Impact of Current Expected Credit Loss ("CECL") adoption ( 15,740 ) 24,154 2,031 ( 1,860 ) 8,585

Provision for credit losses on loans 24,902 66,821 35 3,271 95,029

Charge-offs 20,653 37,730 — — 58,383

Recoveries 257 423 — — 680

Net charge-offs (recoveries) 20,396 37,307 — — 57,703

Ending balance $ 91,020 $ 113,921 $ 4,331 $ 31,686 $ 240,958

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

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

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

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

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

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

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

We recorded a $ 6.0 million negative provision for credit losses for the first quarter of 2021, compared to a provision of $ 96.0 million for the first quarter of 2020.

The decreased provision for credit losses in the first quarter of 2021 as compared to the first quarter of 2020 resulted primarily from a decrease in charge-offs and improvement in the economic outlook as the economy begins to recover from the impacts of the COVID-19 pandemic.

We recorded $ 6.4 million in net charge-offs during the first quarter of 2021, compared to $ 57.7 million during the first quarter of 2020.

Criticized loans totaled $ 945.1 million at March 31, 2021, compared to $ 675.9 million at March 31, 2020.

Criticized loan levels remain elevated when compared to pre-pandemic levels due to the downgrade of loans to borrowers that have been impacted by the COVID-19 pandemic.

1 unchanged sentence

Collateral Type

(in thousands)

Business Assets

Real Property

Oil/Gas Mineral Reserves

Rolling Stock

Government Guaranty

September 30, 2020

(in thousands) Real Property Rolling Stock Total

March 31, 2021

Commercial $ — $ 774 $ 774

CRE 4,619 — 4,619

Other 5,984 — 5,984

Total collateral-dependent loans held for investment

$ 10,603 $ 774 $ 11,377

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

(in thousands)

90 Days or More Past Due(1)

Non-accrual loans as of June 30, 2020(2)

Non-accrual With No Allowance

September 30, 2020

(in thousands) 30-59 Days

Past Due 60-89 Days

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

Due Non-accrual loans as of March 31, 2021 (2) Current Total Non-accrual With No Allowance

March 31, 2021

Commercial $ 15,563 $ 2,905 $ 3,885 $ 22,353 $ 38,194 $ 8,908,677 $ 8,969,224 $ 15,860

Energy — — — — 29,368 662,438 691,806 18,189

Mortgage finance loans

— — — — — 9,009,081 9,009,081 —

14,939 — 2,238 17,177 6,696 3,665,119 3,688,992 1,849

— — — — — 895,680 895,680 —

105 — — 105 23,254 867,524 890,883 7,864

Secured by 1-4 family

55 — 64 119 218 334,698 335,035 —

Total loans held for investment

$ 30,662 $ 2,905 $ 6,187 $ 39,754 $ 97,730 $ 24,343,217 $ 24,480,701 $ 43,762

(1) Loans past due 90 days and still accruing includes premium finance loans of $ 3.1 million.

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

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

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

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

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

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

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

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

(2) As of March 31, 2021 and December 31, 2020, 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 three months ended March 31, 2021.

Accrued interest of $ 339,000 was reversed during the three months ended March 31, 2021.

As of March 31, 2021 and December 31, 2020, we did not have any loans considered restructured that were not on non-accrual.

Of the non-accrual loans at March 31, 2021 and December 31, 2020, $ 33.7 million and $ 45.4 million, respectively, met the criteria for restructured.

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

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

Extended Maturity

Adjusted Payment Schedule

(in thousands, except number of contracts)

Number of Contracts

Balance at Period End

Number of Contracts

Balance at Period End

Number of Contracts

Balance at Period End

Nine months ended September 30, 2020

Commercial loans

Nine months ended September 30, 2019

Commercial loans

Restructured loans generally include terms to temporarily place the loan on interest only, extend the payment terms or reduce the interest rate.

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

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

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

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

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

This program allows for a deferral of payments for 90 days, which we may extend for an additional 90 days, for a maximum of 180 days on a cumulative basis.

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

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

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

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

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

We did not have any loans that were restructured during the three months ended March 31, 2021 or 2020.

As of March 31, 2021 and 2020, we did not have any loans that were restructured within the last 12 months that subsequently defaulted.

(5) Certain Transfers of Financial Assets

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

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands) 2021 2020

9 unchanged sentences

Loans held for sale at fair value $ 176,286 $ 774,064

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

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

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

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

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

No loans held for sale were on non-accrual as of March 31, 2021.

At December 31, 2020 we had $ 7.0 million 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 March 31, 2021 and December 31, 2020, we had $ 16.4 million and $ 16.7 million, respectively, of loans held for sale that were 90 days or more past due.

The $ 16.4 million in loans held for sale that were 90 days or more past due at March 31, 2021 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 $ 16.4 million were $ 12.9 million in loans that, pursuant to Ginnie Mae servicing guidelines, we have the unilateral right, but not the obligation, to repurchase if defined delinquent loan criteria are met, and therefore must record as held for sale on our balance sheet regardless of whether the repurchase option has been exercised.

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

At December 31, 2020, $ 3.3 million of the $ 16.7

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 $ 13.4 million were loans that we have the unilateral right, but not the obligation, to repurchase if defined delinquent loan criteria are met.

From time to time we retain the right to service the loans sold through our Mortgage Correspondent Aggregation ("MCA") program, creating mortgage servicing rights ("MSRs") which are recorded as assets on our balance sheet.

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 consolidated balance sheets.

A summary of MSR activity is as follows:

Nine months ended September 30,

Three months ended March 31,

(in thousands) 2021 2020

1 unchanged sentence

Capitalized servicing rights 11,867 20,615

Amortization ( 12,643 ) ( 4,885 )

Balance, end of period $ 130,615 $ 86,437

1 unchanged sentence

Balance, beginning of year $ 25,967 $ 5,803

Increase in valuation allowance

Change in valuation allowance ( 16,448 ) 10,015

Balance, end of period $ 9,519 $ 15,818

MSRs, net $ 121,096 $ 70,619

MSRs, fair value $ 132,580 $ 70,619

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

At March 31, 2021 and December 31, 2020, our servicing portfolio of residential mortgage loans had outstanding principal balances of $ 13.6 billion and $ 13.8 billion, respectively.

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

These escrow funds are segregated and held in separate non-

interest-bearing deposit accounts at the Bank.

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

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

MSRs typically do not trade in an active, open market with readily observable prices;

as such, the fair value of MSRs is determined using a discounted cash flow model to calculate the present value of the estimated future net servicing income.

The assumptions utilized in the discounted cash flow model are based on market data for comparable assets, where available.

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

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

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

These deposits, included in total non-interest-bearing deposits on the consolidated balance sheets, were $ 153.8 million at March 31, 2021 and $ 152.6 million at December 31, 2020.

At March 31, 2021, the estimated fair value of MSRs were positively impacted by decreased prepayment speeds as compared to December 31, 2020, which resulted in a $ 16.4 million release of impairment being recorded for the three months ended March 31, 2021, compared to a $ 10.0 million impairment charge for the first three months of 2020.

To mitigate exposure to potential impairment charges from adverse changes in the fair value of our residential MSR portfolio, we enter into certain derivative contracts, as is further discussed in Note 11 - Derivative Financial Instruments.

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

September 30, 2020

December 31, 2019

March 31, 2021 December 31, 2020

Average discount rates 9.08 % 9.09 %

2 unchanged sentences

A sensitivity analysis of changes in the fair value of our MSR portfolio resulting from certain key assumptions is presented in the following table:

(in thousands)

September 30, 2020

December 31, 2019

(in thousands) March 31, 2021 December 31, 2020

50 bp adverse change in prepayment speed $ ( 15,593 ) $ ( 12,203 )

5 unchanged sentences

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

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

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

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

Our estimated exposure related to those agreements totaled $ 648,000 and $ 621,000 at March 31, 2021 and December 31, 2020, respectively, and is recorded in other liabilities on the consolidated balance sheets.

$ 30,000 in make-whole obligation payments were made during the three months ended March 31, 2021 compared to $ 2.1 million during the three months ended March 31, 2020.

(6) Long-term Debt

From November 2002 to September 2006 various Texas Capital Statutory Trusts were created and subsequently issued floating rate trust preferred securities in various private offerings totaling $ 113.4 million.

For the three months ended March 31, 2021, the combined weighted-average interest rate on the trust preferred subordinated debentures was 2.19 % compared to 3.80 % for the same period in 2020.

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

Trust II Texas Capital

Trust III Texas Capital

Trust IV Texas Capital

Statutory Trust V

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 Floating Floating Floating Floating Floating

Interest rate on subordinated debentures 3 month LIBOR

3 month LIBOR

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.

The notes mature in September 2042 and bear interest at a rate of 6.50 % per annum, payable quarterly.

The indenture governing the notes contains customary covenants and restrictions.

On January 31, 2014, the Bank issued $ 175.0 million of subordinated notes in an offering to institutional investors exempt from registration under Section 3(a)(2) of the Securities Act of 1933 and 12 C.F.R.

The notes mature in January 2026 and bear interest at a rate of 5.25 % per annum, payable semi-annually.

The notes are unsecured and are subordinate to the Bank’s obligations to its depositors, its obligations under banker’s acceptances and letters of credit, certain obligations to Federal Reserve Banks and the FDIC and the Bank’s obligations to its other creditors, except any obligations which expressly rank on a parity with or junior to the notes.

The notes qualify as Tier 2 capital for regulatory capital purposes, subject to applicable limitations.

At the beginning of each of the last five years of the life of the notes, the amount that is eligible to be included in Tier 2 capital is reduced by 20% of the original amount of the notes (net of redemptions).

In 2021, the amount of the notes that qualify as Tier 2 capital has been reduced by 20%.

On March 9, 2021, the Bank issued and sold $ 275 million of senior unsecured credit-linked notes.

The notes mature on September 30, 2024, and accrue interest at a rate equal to the higher of LIBOR plus 4.50 % or 4.25 %, payable quarterly on each of March 31, June 30, September 30 and December 31.

For the three months ended March 31, 2021, the weighted-average interest rate on the notes was 5.54 %.

The notes effectively transfer the risk of first losses on a $ 2.2 billion reference pool of the Bank’s mortgage warehouse loans to the purchasers of the notes in an amount up to $ 275.0 million.

In the event of a failure to pay by the relevant mortgage originator, insolvency of the relevant mortgage originator, or restructuring of such loans that results in a loss on a loan included in the reference pool, the principal balance of the notes will be reduced to the extent of such loss and recognized as a debt extinguishment gain within non-interest income on our consolidated statements of income and other comprehensive income.

The purchasers of the notes have the option to acquire the underlying mortgage loan collateralizing the reference warehouse line of credit in lieu of a principal reduction on the notes.

Losses on our warehouse lines of credit have not generally been significant.

The notes are recorded in long-term debt on our consolidated balance sheets and accounted for at amortized cost.

The fair value of the credit-linked note is based on observable inputs, when available, and as such are categorized as Level 2 liabilities.

Because the notes are variable rate debt, the fair value approximates carrying value.

(7) Financial Instruments with Off-Balance Sheet Risk

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

Three months ended September 30,

Nine months ended September 30,

Three months ended March 31,

(in thousands) 2021 2020

Beginning balance of allowance for off-balance sheet credit losses

$ 17,434 $ 8,640

Impact of CECL adoption

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Ending balance of allowance for off-balance sheet credit losses

(in thousands)

September 30, 2020

December 31, 2019

$ 17,147 $ 10,174

(in thousands) March 31, 2021 December 31, 2020

Commitments to extend credit - period end balance $ 8,115,679 $ 8,530,453

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A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers.

In the first quarter of 2020, U.S.

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

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

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

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.

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

Management believes, as of March 31, 2021, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

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

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

As shown in the table below, the Company’s capital ratios exceeded the regulatory definition of adequately capitalized as of March 31, 2021 and December 31, 2020.

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

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Any such change could reduce one or more capital ratios below well-capitalized status.

In addition, a change may result in imposition of additional assessments by the FDIC or could result in regulatory actions that could have a material adverse effect on our financial condition and results of operations.

In addition, a change may result in

imposition of additional assessments by the FDIC or could result in regulatory actions that could have a material effect on our condition and results of operations.

Because our Bank had less than $ 15.0 billion in total consolidated assets as of December 31, 2009, we are allowed to continue to classify our trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1 capital.

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The ratios presented below include the effects of our election to utilize the five-year CECL transition described above.

For Capital Adequacy Purposes

Required to be Considered Well Capitalized

(dollars in thousands)

Capital Amount

September 30, 2020

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

March 31, 2021

Company $ 2,765,597 10.19 % $ 1,900,393 7.00 % N/A N/A

Bank 2,818,155 10.39 % 1,899,299 7.00 % 1,763,635 6.50 %

Total capital (to risk-weighted assets)

Company 3,811,962 14.04 % 2,850,590 10.50 % N/A N/A

Bank 3,405,679 12.55 % 2,848,948 10.50 % 2,713,284 10.00 %

Tier 1 capital (to risk-weighted assets)

Company 3,325,597 12.25 % 2,307,621 8.50 % N/A N/A

Bank 2,978,155 10.98 % 2,306,291 8.50 % 2,170,627 8.00 %

Tier 1 capital (to average assets)(1)

Company 3,325,597 8.32 % 1,598,426 4.00 % N/A N/A

Bank 2,978,155 7.46 % 1,597,924 4.00 % 1,997,405 5.00 %

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 12.08 % 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 %

(1) The Tier 1 capital ratio (to average assets) is not impacted by the Basel III Capital Rules;

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

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

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

Due to the actual risk profile and liquidity of this asset class, we manage capital allocated to mortgage finance loans based on changing trends in average balances and do not believe that the period-end balance is representative of risk characteristics that would justify higher allocations.

However, we monitor our capital allocation to confirm that all capital levels remain above well-capitalized levels.

Due to the actual risk profile and liquidity of this asset class, we do not believe that the period-end balance is representative of risk characteristics that would justify higher allocations, and while we manage capital allocated to mortgage finance loans based on changing trends in average balances, we do monitor our capital allocation to confirm that all capital levels remain above well-capitalized levels.

To better align the actual risk profile of this asset class to its required capital allocation, the Bank issued and sold senior unsecured credit-linked notes in the first quarter of 2021 that effectively transfer the risk of first losses on a $2.2 billion reference pool of the Bank's mortgage warehouse loans to the purchasers of the notes in an amount up to $275.0 million.

The issuance of these notes decreases the required risk-weight on the $2.2 billion reference pool, which significantly improves our reported ratios.

Dividends that may be paid by banks are routinely restricted by various regulatory authorities.

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

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

No dividends were declared or paid on our common stock during the three months ended March 31, 2021, or 2020.

(9) Stock-based Compensation

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The table below summarizes our stock-based compensation expense:

Three months ended September 30,

Nine months ended September 30,

Three months ended March 31,

(in thousands) 2021 2020

Stock-settled awards:

RSUs $ 5,460 $ 3,219

Restricted stock 1 8

Cash-settled units 907 142

(in thousands except period data)

September 30, 2020

Total $ 6,368 $ 3,369

(in thousands except period data) March 31, 2021

Unrecognized compensation expense related to unvested stock-settled awards $ 52,268

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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.

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.

See Note 1 - Operations and Summary of Significant Accounting Policies in our 2020 Form 10-K for information regarding the fair value hierarchy and a description of the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial instruments.

Assets and liabilities measured at fair value are as follows:

Fair Value Measurements Using

(in thousands)

September 30, 2020

(in thousands) Level 1 Level 2 Level 3

March 31, 2021

Available-for-sale debt securities:(1)

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Available-for-sale debt securities:(1)

government agency securities $ — $ 123,589 $ —

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

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Net Realized/Unrealized Gains (Losses)

(in thousands)

Balance at Beginning of Period

Purchases / Additions

Sales / Reductions

Balance at End of Period

Three months ended September 30, 2020

Available-for-sale debt securities:(1)

Tax-exempt asset-backed securities

CRT securities

Loans held for sale(2)

Three months ended September 30, 2019

Available-for-sale debt securities:(1)

Tax-exempt asset-backed securities

CRT securities

Loans held for sale(2)

Nine months ended September 30, 2020

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

Three months ended March 31, 2021

Available-for-sale debt securities:(1)

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Loans held for sale(2) 6,933 537 ( 279 ) 5 79 7,275

Nine months ended September 30, 2019

Three months ended March 31, 2020

Available-for-sale debt securities:(1)

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

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

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

At March 31, 2021, the discount rates utilized ranged from 2.95 % to 3.03 % and the weighted-average life ranged from 5.28 years to 5.30 years.

On a combined amortized cost weighted-average basis a discount rate of 2.99 % and weighted-average life of 5.29 years were utilized to determine the fair value of these securities at March 31, 2021.

At December 31, 2020, the combined weighted-average discount rate and weighted-average life utilized were 2.49 % and 5.53 years, respectively.

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

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

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

At March 31, 2021, the discount rates utilized ranged from 3.32 % to 8.27 % and the weighted-average life ranged from 6.4 years to 10.3 years.

On a combined amortized cost weighted-average basis a discount rate of 4.97 % and a weighted-average life of 7.7 years were utilized to determine the fair value of these securities at March 31, 2021.

At December 31, 2020, the combined weighted-average discount rate and combined weighted-average life utilized were 4.36 % and 7.49 years, respectively.

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

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

At March 31, 2021, the fair value of these loans was calculated using a weighted-average discounted price of 98.4 %, compared to 97.2 % at December 31, 2020.

Loans held for investment

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

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

The $ 9.1 million fair value of loans held for investment at March 31, 2021 reported above

includes loans held for investment with a carrying value of $ 11.4 million that were reduced by specific allowance allocations totaling $ 2.3 million based on collateral valuations utilizing Level 3 inputs.

The $ 21.2 million fair value of loans held for investment at December 31, 2020 reported above includes loans 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.

Fair Value of Financial Instruments

GAAP requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to estimate that value.

In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.

Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.

This disclosure does not and is not intended to represent the fair value of the Company.

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

September 30, 2020

December 31, 2019

(in thousands)

March 31, 2021 December 31, 2020

(in thousands) Carrying

Amount Estimated

Fair Value Carrying

Amount Estimated

Financial assets:

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Level 2 inputs:

Federal funds purchased

Customer repurchase agreements

Federal funds purchased and repurchase agreements 115,587 115,587 111,751 111,751

Other borrowings 2,400,000 2,400,000 3,000,000 3,000,000

Subordinated notes

Trust preferred subordinated debentures

Long-term debt 664,968 672,996 395,896 405,110

Derivative liabilities 69,283 69,283 99,255 99,255

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

Within the investment securities portfolio, we hold equity securities related to our non-qualified deferred compensation plan that are valued using quoted market prices for identical equity securities in an active market, and are classified as Level 1 assets in the fair value hierarchy.

The fair value of the remaining equity securities and residential mortgage-backed securities in our investment portfolio are based on prices obtained from independent pricing services that are based on quoted market prices for the same or similar securities, and are characterized as Level 2 assets in the fair value hierarchy.

We have obtained documentation from our primary pricing service regarding their processes and controls applicable to pricing investment securities, and on a quarterly basis we independently verify the prices that we receive from the service provider using two additional independent pricing sources.

We also hold tax-exempt asset-backed securities and CRT securities that are valued

using a discounted cash flow model, which utilizes Level 3 inputs, and are classified as Level 3 assets in the fair value hierarchy.

Loans Held for Sale

Fair value for loans held for sale is derived from quoted market prices for similar loans, in which case they are characterized as Level 2 assets in the fair value hierarchy, or is derived from third party pricing models, in which case they are characterized as Level 3 assets in the fair value hierarchy.

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.

Deposits 33,391,970 33,392,592 30,996,589 30,997,980

(11) Derivative Financial Instruments

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

September 30, 2020

December 31, 2019

Estimated Fair Value

(in thousands)

Asset Derivative

Liability Derivative

Asset Derivative

Liability Derivative

March 31, 2021 December 31, 2020

Estimated Fair Value Estimated Fair Value

(in thousands) Notional

Amount Asset Derivative Liability Derivative Notional

Amount Asset Derivative Liability Derivative

Non-hedging derivatives:

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Commercial loan/lease interest rate swaps

$ 1,826,115 $ 2,387 $ 66,363 $ 1,922,956 $ 71 $ 96,246

Commercial loan/lease interest rate caps

655,917 88 — 565,634 34 —

Foreign currency forward contracts

6,664 96 18 6,667 214 78

Customer counterparties:

Commercial loan/lease interest rate swaps

1,826,115 66,363 2,387 1,922,956 96,246 71

Commercial loan/lease interest rate caps

655,917 — 88 565,634 — 34

Foreign currency forward contracts

6,664 18 96 6,667 78 214

Economic hedging derivatives to hedge:

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Net derivatives included in the consolidated balance sheets

During the second quarter of 2020, we initiated a strategy to mitigate exposure to potential impairment losses from adverse changes in the fair value of our residential MSR portfolio using interest rate derivative contracts, primarily interest rate swap futures and forward sale commitments of mortgage-backed securities.

These derivative instruments are considered highly liquid and can be settled daily, which allows us to dynamically manage our exposure.

The derivative instruments are used to

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.

$ 70,387 $ 69,283 $ 102,720 $ 99,255

The weighted-average received and paid interest rates for interest rate swaps outstanding were as follows:

June 30, 2020

Weighted-Average Interest Rate

December 31, 2019 Weighted-Average Interest Rate

March 31, 2021

Weighted-Average Interest Rate December 31, 2020 Weighted-Average Interest Rate

Received Paid Received Paid

Non-hedging interest rate swaps 2.99 % 1.27 % 3.14 % 1.38 %

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

The weighted-average strike rate for outstanding interest rate caps was 3.07 % at March 31, 2021 and 3.41 % at December 31, 2020.

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

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

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

Our credit exposure associated with these instruments, net of any collateral pledged, was approximately $ 70.4 million at March 31, 2021, and approximately $ 102.7 million at December 31, 2020.

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

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

At March 31, 2021, we had $ 74.5 million in cash collateral pledged for these derivatives, of which $ 73.5 million was included in interest-bearing deposits in other banks and $ 1.0 million was included in accrued interest receivable and other assets.

At December 31, 2020, we had $ 108.3 million in cash collateral pledged for these derivatives, of which $ 104.4 million was included in interest-bearing deposits in other banks and $ 3.9 million was included in accrued interest receivable and other assets.

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

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

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

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

We are party to 9 risk participation agreements where we are a participant bank with a notional amount of $ 119.0 million at March 31, 2021, compared to 9 risk participation agreements having a notional amount of $ 119.5 million at December 31, 2020.

The maximum estimated exposure to these agreements, assuming 100% default by all obligors, was approximately $ 4.9 million at March 31, 2021 and $ 6.0 million at December 31, 2020.

The fair value of these exposures was insignificant to the consolidated financial statements at both March 31, 2021 and December 31, 2020.

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

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

We are party to 15 risk participation agreements where

we are the lead bank having a notional amount of $ 160.6 million at March 31, 2021, compared to 16 agreements having a notional amount of $ 165.9 million at December 31, 2020.

(12) Material Transactions Affecting Stockholders' Equity

On March 3, 2021, we completed an issuance of 5.75 % fixed rate non-cumulative perpetual preferred stock, Series B, with a liquidation preference of $ 1,000 per share (equivalent to $ 25 per depositary share) (the "Series B Preferred Stock") and an issuance and sale of 12,000,000 depositary shares, each representing a 1/40th interest in a share of the Series B Preferred Stock.

Dividends on the Series B Preferred Stock are not cumulative and will be paid when declared by our board of directors to the extent that we have legally available funds to pay dividends.

If declared, dividends will accrue and be payable quarterly, in arrears, on the liquidation preference amount, on a non-cumulative basis, at a rate of 5.75 % per annum.

Holders of preferred stock will not have voting rights, except with respect to certain changes in the terms of the preferred stock, certain dividend non-payments and as otherwise required by applicable law.

Net proceeds from the sale totaled $ 289.7 million.

The additional equity is being used for general corporate purposes, including funding regulatory capital infusions into the Bank, and may be used to redeem, in whole or in part and subject to receipt of all applicable regulatory approvals, our 6.5 % non-cumulative perpetual preferred stock Series A, par value $ 0.01 per share, in accordance with its terms.

(13) 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.

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

What changed 10-Q

Item 1. Financial Statements