TEXAS CAPITAL BANCSHARES INC/TX 10-Q

ITEM 1. FINANCIAL STATEMENTS TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS (in thousands except share data) March 31, 2021 December 31, 2020 (Unaudited) Assets Cash and due from banks $ 215,835 $ 173,573 Interest-bearing deposits in other banks 11,212,276 9,032,807 Investment securities 3,443,058 3,196,970 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 Loans held for investment (net of unearned income) 15,399,174 15,351,451 Less: Allowance for credit losses on loans 242,484 254,615 Loans held for investment, net 24,165,771 24,176,245 Mortgage servicing rights, net 121,096 105,424 Premises and equipment, net 23,346 24,546 Accrued interest receivable and other assets 679,199 715,699 Goodwill and intangible assets, net 17,566 17,667 Total assets $ 40,054,433 $ 37,726,096 Liabilities and Stockholders’ Equity Liabilities: Deposits: Non-interest-bearing $ 15,174,642 $ 12,740,947 Interest-bearing 18,217,328 18,255,642 Total deposits 33,391,970 30,996,589 Accrued interest payable 5,629 11,150 Other liabilities 316,797 339,486 Federal funds purchased and repurchase agreements 115,587 111,751 Other borrowings 2,400,000 3,000,000 Long-term debt 664,968 395,896 Total liabilities 36,894,951 34,854,872 Stockholders’ equity: Preferred stock, $ 0.01 par value, $ 1,000 liquidation value: Authorized shares— 10,000,000 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— 50,558,184 and 50,470,867 at March 31, 2021 and December 31, 2020, respectively 505 504 Additional paid-in capital 984,207 991,898 Retained earnings 1,781,215 1,713,056 Treasury stock (shares at cost: 417 at March 31, 2021 and December 31, 2020) ( 8 ) ( 8 ) Accumulated other comprehensive income/(loss), net of taxes ( 56,437 ) 15,774 Total stockholders’ equity 3,159,482 2,871,224 Total liabilities and stockholders’ equity $ 40,054,433 $ 37,726,096 See accompanying notes to consolidated financial statements. 4 Table of Contents TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME/(LOSS) - UNAUDITED Three months ended March 31, (in thousands except per share data) 2021 2020 Interest income Interest and fees on loans $ 215,592 $ 283,625 Investment securities 9,887 2,183 Federal funds sold and securities purchased under resale agreements 1 614 Interest-bearing deposits in other banks 2,932 19,586 Total interest income 228,412 306,008 Interest expense Deposits 20,004 62,174 Federal funds purchased 75 669 Other borrowings 2,517 9,582 Long-term debt 5,743 5,264 Total interest expense 28,339 77,689 Net interest income 200,073 228,319 Provision for credit losses ( 6,000 ) 96,000 Net interest income after provision for credit losses 206,073 132,319 Non-interest income Service charges on deposit accounts 4,716 3,293 Wealth management and trust fee income 2,855 2,467 Brokered loan fees 9,311 8,015 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 Non-interest expense Salaries and employee benefits 87,522 77,193 Net occupancy expense 8,274 8,712 Marketing 1,697 8,522 Legal and professional 8,277 17,466 Communications and technology 15,969 13,791 FDIC insurance assessment 6,613 5,849 Servicing-related expenses 12,989 16,354 Merger-related expenses — 7,270 Other 8,975 10,260 Total non-interest expense 150,316 165,417 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 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) ( 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 ) Diluted earnings/(loss) per common share $ 1.33 $ ( 0.38 ) See accompanying notes to consolidated financial statements. 5 Table of Contents TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED Preferred Stock Common Stock Additional Treasury Stock Accumulated Other Paid-in Retained Comprehensive (in thousands except share data) Shares Amount Shares Amount Capital Earnings Shares Amount Income/(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 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 — — 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 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 — — 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 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. 6 Table of Contents TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED 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: Provision for credit losses ( 6,000 ) 96,000 Depreciation and amortization 26,067 13,122 Net (gain)/loss on sale of loans held for sale ( 5,572 ) 13,000 Increase/(decrease) in valuation allowance on mortgage servicing rights ( 16,448 ) 10,015 Stock-based compensation expense 6,368 3,369 Purchases and originations of loans held for sale ( 1,133,239 ) ( 2,356,710 ) Proceeds from sales and repayments of loans held for sale 1,233,725 4,126,102 Changes in operating assets and liabilities: Accrued interest receivable and other assets 48,927 ( 141,940 ) Accrued interest payable and other liabilities ( 27,335 ) 39,473 Net cash provided by operating activities 198,431 1,785,744 Investing activities Purchases of investment securities ( 461,381 ) ( 1,951 ) Principal payments received on investment securities 118,316 4,788 Originations of mortgage finance loans ( 48,097,222 ) ( 37,932,501 ) Proceeds from pay-offs of mortgage finance loans 48,167,550 38,513,547 Net increase in loans held for investment, excluding mortgage finance loans ( 54,141 ) ( 438,869 ) Purchase of premises and equipment, net ( 924 ) ( 1,007 ) Net cash provided by/(used in) investing activities ( 327,802 ) 144,007 Financing activities Net increase in deposits 2,395,381 655,670 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 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 Net increase in cash and cash equivalents 2,221,731 5,234,992 Cash and cash equivalents at beginning of period 9,206,380 4,425,583 Cash and cash equivalents at end of period $ 11,428,111 $ 9,660,575 Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 33,860 $ 73,480 Cash paid during the period for income taxes 440 519 See accompanying notes to consolidated financial statements. 7 Table of Contents (1) Operations and Summary of Significant Accounting Policies Organization and Nature of Business Texas Capital Bancshares, Inc. (the "Company” or "TCBI"), a Delaware corporation, was incorporated in November 1996 and commenced banking operations in December 1998. The consolidated financial statements of the Company include the accounts of Texas Capital Bancshares, Inc. and its wholly owned subsidiary, Texas Capital Bank, National Association (the "Bank”). We serve the needs of commercial businesses and successful professionals and entrepreneurs located in Texas as well as operate several lines of business serving a regional or national clientele of commercial borrowers. We are primarily a secured lender, with the majority of our loans held for investment, excluding mortgage finance loans and other national lines of business, being made to businesses headquartered or with operations in Texas. Our national lines of business provide specialized lending products to businesses throughout the United States. Basis of Presentation Our accounting and reporting policies conform to accounting principles generally accepted in the United States ("GAAP") and to generally accepted practices within the banking industry. Certain prior period balances have been reclassified to conform to the current period presentation. The consolidated interim financial statements are unaudited and certain information and footnote disclosures presented in accordance with GAAP have been condensed or omitted. In the opinion of management, the interim financial statements include all normal and recurring adjustments and the disclosures made are adequate to make the interim financial information not misleading. The consolidated financial statements have been prepared in accordance with GAAP for interim financial information and the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2020, included in our Annual Report on Form 10-K for the year ended December 31, 2020 (the "2020 Form 10-K"). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period. 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 The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for credit losses, the fair value of financial instruments and the status of contingencies are particularly susceptible to significant change. 8 Table of Contents (2) Earnings Per Share The following table presents the computation of basic and diluted earnings per share: Three months ended March 31, (in thousands except share and per share data) 2021 2020 Numerator: 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 ) Denominator: Denominator for basic earnings per share—weighted average shares 50,513,277 50,373,580 Effect of employee stock-based awards(1) 556,234 101,222 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 ) (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 Available-for-Sale Debt Securities The following is a summary of available-for-sale debt securities: (in thousands) Amortized Cost(1) Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value March 31, 2021 Available-for-sale debt securities: U.S. government agency securities $ 125,000 $ — $ ( 5,160 ) $ 119,840 Residential mortgage-backed securities 3,166,816 367 ( 71,396 ) 3,095,787 Tax-exempt asset-backed securities 173,569 7,997 — 181,566 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: U.S. government agency securities $ 125,000 $ 1 $ ( 1,412 ) $ 123,589 Residential mortgage-backed securities 2,818,518 11,566 ( 1,128 ) 2,828,956 Tax-exempt asset-backed securities 184,940 14,236 — 199,176 Credit risk transfer securities 14,713 — ( 3,296 ) 11,417 Total $ 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. 9 Table of Contents The amortized cost and estimated fair value, excluding accrued interest receivable, and weighted average yield of available-for-sale debt securities are presented below by contractual maturity: (in thousands, except percentage data) Less Than One Year After One Through Five Years After Five Through Ten Years After Ten Years Total March 31, 2021 Available-for-sale: U.S. government agency securities:(1) Amortized cost $ — $ — $ 125,000 $ — $ 125,000 Estimated fair value — — 119,840 — 119,840 Weighted average yield(3) — % — % 1.13 % — % 1.13 % Residential mortgage-backed securities:(1) Amortized cost $ — $ 449 $ 17,368 $ 3,148,999 $ 3,166,816 Estimated fair value — 499 16,442 3,078,846 3,095,787 Weighted average yield(3) — % 4.59 % 1.08 % 1.16 % 1.16 % Tax-exempt asset-backed securities:(1) Amortized Cost $ — $ — $ — $ 173,569 $ 173,569 Estimated fair value — — — 181,566 181,566 Weighted average yield(2)(3) — % — % — % 4.95 % 4.95 % CRT securities:(1) Amortized Cost $ — $ — $ — $ 14,713 $ 14,713 Estimated fair value — — — 11,465 11,465 Weighted average yield(3) — % — % — % 0.11 % 0.11 % Total available-for-sale debt securities: Amortized cost $ 3,480,098 Estimated fair value $ 3,408,658 December 31, 2020 Available-for-sale: U.S. 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) Amortized cost $ — $ 545 $ 17,500 $ 2,800,473 $ 2,818,518 Estimated fair value — 605 17,490 2,810,861 2,828,956 Weighted average yield(3) — % 4.58 % 1.08 % 1.25 % 1.25 % Tax-exempt asset-backed securities:(1) Amortized Cost $ — $ — $ — $ 184,940 $ 184,940 Estimated fair value — — — 199,176 199,176 Weighted average yield(2)(3) — % — % — % 4.92 % 4.92 % CRT securities:(1) Amortized Cost $ — $ — $ — $ 14,713 $ 14,713 Estimated fair value — — — 11,417 11,417 Weighted average yield(3) — % — % — % 0.15 % 0.15 % Total available-for-sale debt securities: Amortized cost $ 3,143,171 Estimated fair value $ 3,163,138 (1) Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties. (2) Yields have been adjusted to a tax equivalent basis assuming a 21 % federal tax rate. (3) Yields are calculated based on amortized cost. 10 Table of Contents The following table discloses our available-for-sale debt securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months: Less Than 12 Months 12 Months or Longer Total (in thousands) Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss March 31, 2021 U.S. government agency securities $ 119,840 $ ( 5,160 ) $ — $ — $ 119,840 $ ( 5,160 ) Residential mortgage-backed securities 3,067,739 ( 71,396 ) — — 3,067,739 ( 71,396 ) 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 U.S. 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 ) 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. Equity Securities Equity securities consist of Community Reinvestment Act funds and investments related to our non-qualified deferred compensation plan. 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/(losses) recognized during the period $ 378 $ ( 2,977 ) Less: Realized net gains/(losses) recognized during the period on equity securities sold 398 ( 19 ) 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) 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 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 (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. 11 Table of Contents The following table summarizes our gross loans held for investment by year of origination and internally assigned credit grades: (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 Commercial (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 (9) Substandard - accruing 17,850 1,903 27,269 28,182 10,464 26,775 23,804 7,635 143,882 (9+) Non-accrual — 7,135 3,254 1,037 5,971 12,912 7,218 667 38,194 Total commercial $ 358,893 $ 3,561,233 $ 720,912 $ 540,102 $ 325,983 $ 365,250 $ 3,030,823 $ 66,028 $ 8,969,224 Energy (1-7) Pass $ 15,515 $ — $ — $ 4,844 $ 8,893 $ 29,279 $ 515,359 $ — $ 573,890 (8) Special mention — — — — — 10,664 53,299 — 63,963 (9) Substandard - accruing — — — — — — 24,585 — 24,585 (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 — — — — — — — — — (9) Substandard - accruing — — — — — — — — — (9+) Non-accrual — — — — — — — — — Total mortgage finance $ 14,962 $ 716,845 $ 951,866 $ 799,447 $ 455,911 $ 6,070,050 $ — $ — $ 9,009,081 Real estate CRE (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 (9) Substandard - accruing — — 318 47,240 53,504 92,750 — 15,390 209,202 (9+) Non-accrual — — — 458 — 4,991 — 1,247 6,696 RBF (1-7) Pass 54,499 164,712 38,505 28,451 1,538 15,351 592,624 — 895,680 (8) Special mention — — — — — — — — — (9) Substandard - accruing — — — — — — — — — (9+) Non-accrual — — — — — — — — — Other (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 (9) Substandard - accruing — — — 4,228 14,354 16,238 — — 34,820 (9+) Non-accrual — — — — 908 8,057 — 14,289 23,254 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 (9) Substandard - accruing — — — — 818 2,268 — — 3,086 (9+) Non-accrual — — — — — 218 — — 218 Total real estate $ 161,940 $ 847,303 $ 1,207,440 $ 1,126,746 $ 639,115 $ 1,037,702 $ 664,612 $ 125,732 $ 5,810,590 Total loans held for investment $ 561,346 $ 5,125,381 $ 2,888,371 $ 2,471,139 $ 1,429,902 $ 7,524,124 $ 4,288,678 $ 191,760 $ 24,480,701 12 Table of Contents The following table details activity in the allowance for credit losses on loans. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. (in thousands) Commercial Energy Mortgage Finance Real Estate Total Three months ended March 31, 2021 Allowance for credit losses on loans: Beginning balance $ 73,061 $ 84,064 $ 4,699 $ 92,791 $ 254,615 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 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 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. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table summarizes collateral-dependent gross loans held for investment by collateral type as follows: Collateral Type (in thousands) Real Property Rolling Stock Total March 31, 2021 Commercial $ — $ 774 $ 774 Real estate CRE 4,619 — 4,619 Other 5,984 — 5,984 Total collateral-dependent loans held for investment $ 10,603 $ 774 $ 11,377 13 Table of Contents The table below provides an age analysis of our loans held for investment: (in thousands) 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due(1) Total Past Due Non-accrual loans as of 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 — Real estate CRE 14,939 — 2,238 17,177 6,696 3,665,119 3,688,992 1,849 RBF — — — — — 895,680 895,680 — Other 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. These loans are generally secured by obligations of insurance carriers to refund premiums on canceled insurance policies. The receipt of the refund of premiums from the insurance carriers can take 180 days or longer from the cancellation date. (2) As of 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. 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: Three Months Ended March 31, (in thousands) 2021 2020 Outstanding balance(1): Beginning balance $ 281,137 $ 2,568,362 Loans purchased and originated 1,133,239 2,356,710 Payments and loans sold ( 1,236,738 ) ( 4,165,492 ) Ending balance 177,638 759,580 Fair value adjustment: Beginning balance 2,028 8,772 Increase/(decrease) to fair value ( 3,380 ) 5,712 Ending balance ( 1,352 ) 14,484 Loans held for sale at fair value $ 176,286 $ 774,064 (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. Interest on these past due loans accrues at the debenture rate guaranteed by the U.S. government. 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, 2020, $ 3.3 million of the $ 16.7 14 Table of Contents 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 MCA program, creating MSRs which are recorded as assets on our consolidated balance sheets. A summary of MSR activity is as follows: Three months ended March 31, (in thousands) 2021 2020 MSRs: Balance, beginning of year $ 131,391 $ 70,707 Capitalized servicing rights 11,867 20,615 Amortization ( 12,643 ) ( 4,885 ) Balance, end of period $ 130,615 $ 86,437 Valuation allowance: Balance, beginning of year $ 25,967 $ 5,803 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 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 $ 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: March 31, 2021 December 31, 2020 Average discount rates 9.08 % 9.09 % Expected prepayment speeds 12.10 % 16.37 % Weighted-average life, in years 6.3 4.9 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) March 31, 2021 December 31, 2020 50 bp adverse change in prepayment speed $ ( 15,593 ) $ ( 12,203 ) 100 bp adverse change in prepayment speed ( 27,503 ) ( 16,062 ) These sensitivities are hypothetical and actual results may differ materially due to a number of factors. The effect on fair value of a 10% variation in assumptions generally cannot be determined with confidence because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may be correlated with changes in other factors, which could impact the sensitivity analysis as presented. In conjunction with the sale and securitization of loans held for sale, we may be exposed to liability resulting from repurchase, indemnification and make-whole agreements. Our estimated exposure related to those agreements totaled $ 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. 15 Table of Contents (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 Bancshares Statutory Trust I Texas Capital Statutory Trust II Texas Capital Statutory Trust III Texas Capital Statutory 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 + 3.35 % 3 month LIBOR + 3.25 % 3 month LIBOR + 1.51 % 3 month LIBOR + 1.60 % 3 month LIBOR + 1.71 % 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. Part 16. 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. 16 Table of Contents (7) Financial Instruments with Off-Balance Sheet Risk The table below presents our financial instruments with off-balance sheet risk, as well as the activity in the allowance for off-balance sheet credit losses related to those financial instruments. This allowance is recorded in other liabilities on the consolidated balance sheets. Three months ended March 31, (in thousands) 2021 2020 Beginning balance of allowance for off-balance sheet credit losses $ 17,434 $ 8,640 Impact of CECL adoption — 563 Provision for off-balance sheet credit losses ( 287 ) 971 Ending balance of allowance for off-balance sheet credit losses $ 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 Standby letters of credit - period end balance $ 321,428 $ 268,894 (8) Regulatory Restrictions The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The Basel III regulatory capital framework (the "Basel III Capital Rules") adopted by U.S. federal regulatory authorities, among other things, (i) establishes the capital measure called "Common Equity Tier 1" ("CET1"), (ii) specifies that Tier 1 capital consist of CET1 and "Additional Tier 1 Capital" instruments meeting stated requirements, (iii) requires that most deductions/adjustments to regulatory capital measures be made to CET1 and not to other components of capital and (iv) defines the scope of the deductions/adjustments to the capital measures. Additionally, the Basel III Capital Rules require that we maintain a 2.5 % capital conservation buffer with respect to each of CET1, Tier 1 and total capital to risk-weighted assets, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers. In 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 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 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. The regulatory authorities can apply changes in classification of assets and such changes may retroactively subject the Company to changes in capital ratios. Any such change could reduce one or more capital ratios below well-capitalized status. In addition, a change may result in 17 Table of Contents 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. The table below summarizes our actual and required capital ratios under the Basel III Capital Rules. The ratios presented below include the effects of our election to utilize the five-year CECL transition described above. Actual 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 CET1 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 CET1 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; however, the Federal Reserve Board and the FDIC may require the Company and the Bank, respectively, to maintain a Tier 1 capital ratio (to average assets) above the required minimum. Our mortgage finance loan volumes can increase significantly at month-end, causing a meaningful difference between ending balance and average balance for any period. 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 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. The amount that can be paid in any calendar year without prior approval of our Bank’s regulatory agencies cannot exceed the lesser of the net profits (as defined) for that year plus the net profits for the preceding two calendar years, or retained earnings. The Basel III Capital Rules further limit the amount of dividends that may be paid by our Bank. No dividends were declared or paid on our common stock during the three months ended March 31, 2021, or 2020. 18 Table of Contents (9) Stock-based Compensation We have long-term incentive plans under which stock-based compensation awards are granted to employees and directors by the board of directors, or its designated committee. Grants are subject to vesting requirements and may include, among other things, nonqualified stock options, stock appreciation rights ("SARs"), restricted stock units ("RSUs"), restricted stock and performance units, or any combination thereof. There are 2,550,000 total shares authorized for grant under the plans. The table below summarizes our stock-based compensation expense: Three months ended March 31, (in thousands) 2021 2020 Stock-settled awards: RSUs $ 5,460 $ 3,219 Restricted stock 1 8 Cash-settled units 907 142 Total $ 6,368 $ 3,369 (in thousands except period data) March 31, 2021 Unrecognized compensation expense related to unvested stock-settled awards $ 52,268 Weighted average period over which expense is expected to be recognized, in years 2.4 (10) Fair Value Disclosures We determine the fair market values of our assets and liabilities measured at fair value on a recurring and nonrecurring basis using the fair value hierarchy as prescribed in ASC 820. 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) Level 1 Level 2 Level 3 March 31, 2021 Available-for-sale debt securities:(1) U.S. government agency securities $ — $ 119,840 $ — Residential mortgage-backed securities — 3,095,787 — Tax-exempt asset-backed securities — — 181,566 CRT securities — — 11,465 Equity securities(1)(2) 27,261 7,139 — Loans held for sale(3) — 169,011 7,275 Loans held for investment(4) — — 9,122 Derivative assets(5) — 70,387 — Derivative liabilities(5) — 69,283 — Non-qualified deferred compensation plan liabilities(6) 27,351 — — December 31, 2020 Available-for-sale debt securities:(1) U.S. government agency securities $ — $ 123,589 $ — Residential mortgage-backed securities — 2,828,956 — Tax-exempt asset-backed securities — — 199,176 CRT securities — — 11,417 Equity securities(1)(2) 26,593 7,239 — Loans held for sale(3) — 232,147 6,933 Loans held for investment(4) — — 21,209 Derivative assets(5) — 102,720 — Derivative liabilities(5) — 99,255 — Non-qualified deferred compensation plan liabilities(6) 26,593 — — 19 Table of Contents (1) Securities are measured at fair value on a recurring basis, generally monthly, except for tax-exempt asset-backed securities and CRT securities which are measured quarterly. (2) Equity securities consist of Community Reinvestment Act funds and investments related to our non-qualified deferred compensation plan. (3) Loans held for sale purchased through our MCA program are measured at fair value on a recurring basis, generally monthly. (4) Includes certain collateral-dependent loans held for investment for which a specific allocation of the allowance for credit losses is based upon the fair value of the loan’s underlying collateral. These loans held for investment are measured on a nonrecurring basis, generally annually or more often as warranted by market and economic conditions. (5) Derivative assets and liabilities are measured at fair value on a recurring basis, generally quarterly. (6) Non-qualified deferred compensation plan liabilities represent the fair value of the obligation to the employee, which generally corresponds to the fair value of the invested assets, and are measured at fair value on a recurring basis, generally monthly. Level 3 Valuations The following table presents a reconciliation of the level 3 fair value category measured at fair value on a recurring basis: Net Realized/Unrealized Gains (Losses) (in thousands) Balance at Beginning of Period Purchases / Additions Sales / Reductions Realized Unrealized Balance at End of Period Three months ended March 31, 2021 Available-for-sale debt securities:(1) Tax-exempt asset-backed securities $ 199,176 $ — $ ( 11,371 ) $ — $ ( 6,239 ) $ 181,566 CRT securities 11,417 — — — 48 11,465 Loans held for sale(2) 6,933 537 ( 279 ) 5 79 7,275 Three months ended March 31, 2020 Available-for-sale debt securities:(1) Tax-exempt asset-backed securities $ 197,027 $ — $ ( 4,353 ) $ — $ ( 1,200 ) $ 191,474 CRT securities 11,964 — — — ( 3,949 ) 8,015 Loans held for sale(2) 7,043 213 ( 684 ) 28 94 6,694 (1) Unrealized gains/(losses) on available-for-sale debt securities are recorded in AOCI and relate to assets that remain outstanding at period end. Realized gains/(losses) are recorded in other non-interest income. (2) Realized and unrealized gains/(losses) on loans held for sale are recorded in gain/(loss) on sale of loans held for sale. Tax-exempt asset-backed securities The fair value of tax-exempt asset-backed securities is based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs, the most significant of which were a discount rate and weighted-average life. At 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. CRT securities The fair value of CRT securities is based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs, the most significant of which were a discount rate and weighted-average life. At 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. Loans held for sale The fair value of loans held for sale using Level 3 inputs include loans that cannot be sold through normal sale channels and thus require significant management judgment or estimation when determining the fair value. The fair value of such loans is generally based upon quoted prices of comparable loans with a liquidity discount applied. At 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 $ 9.1 million fair value of loans held for investment at March 31, 2021 reported above 20 Table of Contents 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 A summary of the carrying amounts and estimated fair values of financial instruments is as follows: March 31, 2021 December 31, 2020 (in thousands) Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Financial assets: Level 1 inputs: Cash and cash equivalents $ 11,428,111 $ 11,428,111 $ 9,206,380 $ 9,206,380 Investment securities 27,261 27,261 26,593 26,593 Level 2 inputs: Investment securities 3,222,766 3,222,766 2,959,784 2,959,784 Loans held for sale 169,011 169,011 232,147 232,147 Derivative assets 70,387 70,387 102,720 102,720 Level 3 inputs: Investment securities 193,031 193,031 210,593 210,593 Loans held for sale 7,275 7,275 6,933 6,933 Loans held for investment, net 24,165,771 24,217,032 24,176,245 24,233,185 Financial liabilities: Level 2 inputs: 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 Long-term debt 664,968 672,996 395,896 405,110 Derivative liabilities 69,283 69,283 99,255 99,255 Level 3 inputs: Deposits 33,391,970 33,392,592 30,996,589 30,997,980 21 Table of Contents (11) Derivative Financial Instruments The notional amounts and estimated fair values of derivative positions outstanding are presented in the following table: 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: Financial institution counterparties: 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: Residential MSRs: Interest rate swap futures 170,000 — 954 320,000 474 — Forward sale commitments 75,000 77 615 155,000 551 — Loans held for sale: Loan purchase commitments 198,072 531 1,149 332,145 5,123 8 Forward sale commitments 342,218 3,214 — 485,326 — 2,675 Gross derivatives 72,774 71,670 102,791 99,326 Offsetting derivative assets/liabilities ( 2,387 ) ( 2,387 ) ( 71 ) ( 71 ) Net derivatives included in the consolidated balance sheets $ 70,387 $ 69,283 $ 102,720 $ 99,255 The weighted-average received and paid interest rates for interest rate swaps outstanding were as follows: 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 3.07 % 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 $ 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 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. We also enter into credit risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are either a participant or a lead bank. The risk participation agreements entered into by us as a participant bank provide credit protection to the financial institution counterparty should the borrower fail to perform on its interest rate derivative contract with that financial institution. We are party to 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 15 risk participation agreements where 22 Table of Contents 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 2020-04, "Reference Rate Reform (Topic 848)" ("ASU 2020-04") provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. We anticipate this ASU will simplify any modifications we execute between the selected start date (yet to be determined) and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than extinguishment of the old contract resulting in writing off unamortized fees/costs. We are evaluating the impacts of this ASU and have not yet determined whether LIBOR transition and this ASU will have material effects on our business operations and consolidated financial statements. 23 Table of Contents