TEXAS CAPITAL BANCSHARES INC/TX 10-Q

ITEM 1. FINANCIAL STATEMENTS TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS - UNAUDITED (in thousands except share data) September 30, 2021 December 31, 2020 (Unaudited) Assets Cash and due from banks $ 217,125 $ 173,573 Interest-bearing deposits in other banks 8,317,926 9,032,807 Investment securities 3,663,874 3,196,970 Loans held for sale ($ 8.4 million and $ 239.1 million at September 30, 2021 and December 31, 2020, respectively, at fair value) 9,660 283,165 Loans held for investment, mortgage finance 8,528,313 9,079,409 Loans held for investment (net of unearned income) 15,221,404 15,351,451 Less: Allowance for credit losses on loans 221,957 254,615 Loans held for investment, net 23,527,760 24,176,245 Mortgage servicing rights, net 1,158 105,424 Premises and equipment, net 21,119 24,546 Accrued interest receivable and other assets 628,335 715,699 Goodwill and intangible assets, net 17,363 17,667 Total assets $ 36,404,320 $ 37,726,096 Liabilities and Stockholders’ Equity Liabilities: Deposits: Non-interest-bearing $ 14,970,462 $ 12,740,947 Interest-bearing 14,843,206 18,255,642 Total deposits 29,813,668 30,996,589 Accrued interest payable 8,920 11,150 Other liabilities 302,448 339,486 Federal funds purchased and repurchase agreements 3,470 111,751 Other borrowings 2,200,000 3,000,000 Long-term debt 928,062 395,896 Total liabilities 33,256,568 34,854,872 Stockholders’ equity: Preferred stock, $ 0.01 par value, $ 1,000 liquidation value: Authorized shares— 10,000,000 Issued shares— 300,000 and 6,000,000 at September 30, 2021 and December 31, 2020, respectively 300,000 150,000 Common stock, $ 0.01 par value: Authorized shares— 100,000,000 Issued shares— 50,606,043 and 50,470,867 at September 30, 2021 and December 31, 2020, respectively 506 504 Additional paid-in capital 1,000,509 991,898 Retained earnings 1,887,457 1,713,056 Treasury stock (shares at cost: 417 at September 30, 2021 and December 31, 2020) ( 8 ) ( 8 ) Accumulated other comprehensive income/(loss), net of taxes ( 40,712 ) 15,774 Total stockholders’ equity 3,147,752 2,871,224 Total liabilities and stockholders’ equity $ 36,404,320 $ 37,726,096 See accompanying notes to consolidated financial statements. 3 TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME/(LOSS) - UNAUDITED Three months ended September 30, Nine months ended September 30, (in thousands except per share data) 2021 2020 2021 2020 Interest income Interest and fees on loans $ 206,307 $ 237,179 $ 632,510 $ 768,399 Investment securities 10,235 3,674 31,040 7,881 Federal funds sold and securities purchased under resale agreements — 1 1 692 Interest-bearing deposits in other banks 3,606 2,877 9,499 24,777 Total interest income 220,148 243,731 673,050 801,749 Interest expense Deposits 14,719 27,830 50,994 122,298 Federal funds purchased 5 128 131 973 Other borrowings 743 3,365 3,711 17,516 Long-term debt 10,586 4,839 27,052 15,146 Total interest expense 26,053 36,162 81,888 155,933 Net interest income 194,095 207,569 591,162 645,816 Provision for credit losses 5,000 30,000 ( 20,000 ) 226,000 Net interest income after provision for credit losses 189,095 177,569 611,162 419,816 Non-interest income Service charges on deposit accounts 4,622 2,864 13,972 8,616 Wealth management and trust fee income 3,382 2,502 9,380 7,317 Brokered loan fees 6,032 15,034 22,276 33,813 Servicing income 292 7,329 15,236 18,195 Swap fees 568 484 1,628 4,709 Net gain/(loss) on sale of loans held for sale ( 1,185 ) 25,242 1,317 51,265 Other 7,509 6,893 26,605 18,698 Total non-interest income 21,220 60,348 90,414 142,613 Non-interest expense Salaries and employee benefits 87,503 84,096 261,855 262,080 Net occupancy expense 8,324 8,736 24,463 26,582 Marketing 2,123 3,636 5,720 20,146 Legal and professional 11,055 11,207 28,479 40,003 Communications and technology 28,374 31,098 58,695 87,649 Federal Deposit Insurance Corporation (“FDIC”) insurance assessment 4,500 6,374 16,339 19,363 Servicing-related expenses 2,396 12,287 27,740 48,741 Merger-related expenses — — — 17,756 Other 8,712 8,307 29,072 31,173 Total non-interest expense 152,987 165,741 452,363 553,493 Income before income taxes 57,328 72,176 249,213 8,936 Income tax expense 13,938 15,060 60,404 2,823 Net income 43,390 57,116 188,809 6,113 Preferred stock dividends 4,312 2,438 14,408 7,313 Net income/(loss) available to common stockholders $ 39,078 $ 54,678 $ 174,401 $ ( 1,200 ) Other comprehensive loss Change in unrealized gain/(loss) on available-for-sale debt securities, before tax $ ( 18,131 ) $ 8,053 $ ( 71,501 ) $ ( 2,674 ) Income tax expense/(benefit) ( 3,808 ) 1,692 ( 15,015 ) ( 561 ) Other comprehensive income/(loss), net of tax ( 14,323 ) 6,361 ( 56,486 ) ( 2,113 ) Comprehensive income $ 29,067 $ 63,477 $ 132,323 $ 4,000 Basic earnings/(loss) per common share $ 0.77 $ 1.08 $ 3.45 $ ( 0.02 ) Diluted earnings/(loss) per common share $ 0.76 $ 1.08 $ 3.41 $ ( 0.02 ) See accompanying notes to consolidated financial statements. 4 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 June 30, 2020 6,000,000 $ 150,000 50,436,089 $ 504 $ 983,144 $ 1,600,639 ( 417 ) $ ( 8 ) $ 476 $ 2,734,755 Comprehensive income: Net income — — — — — 57,116 — — — 57,116 Change in unrealized gain/(loss) on available-for-sale securities, net of taxes — — — — — — — — 6,361 6,361 Total comprehensive income 63,477 Stock-based compensation expense recognized in earnings — — — — 4,799 — — — — 4,799 Preferred stock dividend — — — — — ( 2,438 ) — — — ( 2,438 ) Issuance of stock related to stock-based awards — — 19,880 — ( 189 ) — — — — ( 189 ) Balance at September 30, 2020 6,000,000 $ 150,000 50,455,969 $ 504 $ 987,754 $ 1,655,317 ( 417 ) $ ( 8 ) $ 6,837 $ 2,800,404 Balance at June 30, 2021 300,000 $ 300,000 50,592,618 $ 506 $ 992,469 $ 1,848,379 ( 417 ) $ ( 8 ) $ ( 26,389 ) $ 3,114,957 Comprehensive income: Net income — — — — — 43,390 — — — 43,390 Change in unrealized gain/(loss) on available-for-sale securities, net of taxes — — — — — — — — ( 14,323 ) ( 14,323 ) Total comprehensive income 29,067 Stock-based compensation expense recognized in earnings — — — — 8,324 — — — — 8,324 Preferred stock dividend — — — — — ( 4,312 ) — — — ( 4,312 ) Issuance of stock related to stock-based awards — — 13,425 — ( 284 ) — — — — ( 284 ) Balance at September 30, 2021 300,000 $ 300,000 50,606,043 $ 506 $ 1,000,509 $ 1,887,457 ( 417 ) $ ( 8 ) $ ( 40,712 ) $ 3,147,752 See accompanying notes to consolidated financial statements. 5 TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED - CONTINUED Preferred Stock Common Stock Additional Treasury Stock Accumulated Other Paid-in Retained Comprehensive (in thousands except share data) Shares Amount Shares Amount Capital Earnings Shares Amount Income/(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 income Net income — — — — — 6,113 — — — 6,113 Change in unrealized gain/(loss) on available-for-sale securities, net of taxes — — — — — — — — ( 2,113 ) ( 2,113 ) Total comprehensive income 4,000 Stock-based compensation expense recognized in earnings — — — — 11,348 — — — — 11,348 Preferred stock dividend — — — — — ( 7,313 ) — — — ( 7,313 ) Issuance of stock related to stock-based awards — — 117,811 1 ( 1,799 ) — — — — ( 1,798 ) Balance at September 30, 2020 6,000,000 $ 150,000 50,455,969 $ 504 $ 987,754 $ 1,655,317 ( 417 ) $ ( 8 ) $ 6,837 $ 2,800,404 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 income: Net income — — — — — 188,809 — — — 188,809 Change in unrealized gain/(loss) on available-for-sale securities, net of taxes — — — — — — — — ( 56,486 ) ( 56,486 ) Total comprehensive income 132,323 Stock-based compensation expense recognized in earnings — — — — 22,100 — — — — 22,100 Issuance of preferred stock 300,000 300,000 — — ( 10,277 ) — — — — 289,723 Preferred stock dividend — — — — — ( 14,408 ) — — — ( 14,408 ) Issuance of stock related to stock-based awards — — 135,176 2 ( 3,212 ) — — — — ( 3,210 ) Redemption of preferred stock ( 6,000,000 ) ( 150,000 ) — — — — — — — ( 150,000 ) Balance at September 30, 2021 300,000 $ 300,000 50,606,043 $ 506 $ 1,000,509 $ 1,887,457 ( 417 ) $ ( 8 ) $ ( 40,712 ) $ 3,147,752 (1) Represents the impact of adopting Accounting Standard Update (“ASU”) 2016-13. See Note 1 - Operations and Summary of Significant Accounting Policies 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 TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED Nine months ended September 30, (in thousands) 2021 2020 Operating activities Net income $ 188,809 $ 6,113 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses ( 20,000 ) 226,000 Depreciation and amortization 65,943 51,716 Net (gain)/loss on sale of loans held for sale ( 1,317 ) ( 51,265 ) Increase/(decrease) in valuation allowance on mortgage servicing rights ( 16,448 ) 20,933 Stock-based compensation expense 23,192 12,064 Purchases and originations of loans held for sale ( 1,413,899 ) ( 8,963,499 ) Proceeds from sales and repayments of loans held for sale 1,675,246 10,859,458 Changes in operating assets and liabilities: Accrued interest receivable and other assets 86,707 ( 16,912 ) Accrued interest payable and other liabilities ( 41,920 ) 25,222 Net cash provided by operating activities 546,313 2,169,830 Investing activities Purchases of investment securities ( 952,982 ) ( 1,140,935 ) Principal payments received on investment securities 400,429 12,042 Originations of mortgage finance loans ( 128,503,055 ) ( 157,016,926 ) Proceeds from pay-offs of mortgage finance loans 129,054,151 155,808,671 Proceeds from sale of mortgage servicing rights 108,925 — Net increase/(decrease) in loans held for investment, excluding mortgage finance loans 118,166 553,026 Purchase of premises and equipment, net ( 2,619 ) ( 2,705 ) Net cash provided by/(used in) investing activities 223,015 ( 1,786,827 ) Financing activities Net increase/(decrease) in deposits ( 1,182,921 ) 5,480,894 Costs from issuance of stock related to stock-based awards and warrants ( 3,210 ) ( 1,798 ) Net proceeds from issuance of preferred stock 289,723 — Redemption of preferred stock ( 150,000 ) — Preferred dividends paid ( 14,408 ) ( 7,313 ) Net increase/(decrease) in other borrowings ( 800,000 ) 300,000 Net increase/(decrease) in federal funds purchased and repurchase agreements ( 108,281 ) 66,417 Net proceeds from issuance of long-term debt 639,440 — Redemption of long-term debt ( 111,000 ) — Net cash provided by/(used in) financing activities ( 1,440,657 ) 5,838,200 Net increase/(decrease) in cash and cash equivalents ( 671,329 ) 6,221,203 Cash and cash equivalents at beginning of period 9,206,380 4,425,583 Cash and cash equivalents at end of period $ 8,535,051 $ 10,646,786 Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 84,118 $ 154,019 Cash paid during the period for income taxes 99,915 21,747 See accompanying notes to consolidated financial statements. 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (1) Operations and Summary of Significant Accounting Policies Organization and Nature of Business Texas Capital Bancshares, Inc. (the “Company”), 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 the Company and its wholly owned subsidiary, Texas Capital Bank (the “Bank”). We serve the needs of commercial businesses and 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. In May 2021 the Bank applied to the Texas Department of Banking to convert from a national association to a Texas state-chartered bank. The application was approved during the third quarter and the conversion was effective at open of business on September 15, 2021. Effective as of the date of conversion, the Texas Department of Banking is the Bank’s primary regulator, the FDIC is the Bank’s primary federal regulator, and the Federal Reserve will continue to be the Company’s primary federal regulator. 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 disclosures in the notes to consolidated financial statements that are 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 U.S. Securities and Exchange Commission (“SEC”). Accordingly, the financial statements do not include all of the information and notes to the consolidated financial statements required by GAAP for complete annual 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. 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 (2) Earnings/(Loss) Per Share The following table presents the computation of basic and diluted earnings/(loss) per share: Three months ended September 30, Nine months ended September 30, (in thousands except share and per share data) 2021 2020 2021 2020 Numerator: Net income $ 43,390 $ 57,116 $ 188,809 $ 6,113 Preferred stock dividends 4,312 2,438 14,408 7,313 Net income/(loss) available to common stockholders $ 39,078 $ 54,678 $ 174,401 $ ( 1,200 ) Denominator: Denominator for basic earnings per share—weighted average shares 50,600,732 50,446,691 50,568,439 50,417,563 Effect of employee stock-based awards(1) 538,823 126,382 555,836 103,984 Denominator for dilutive earnings per share—adjusted weighted average shares and assumed conversions 51,139,555 50,573,073 51,124,275 50,521,547 Basic earnings/(loss) per common share $ 0.77 $ 1.08 $ 3.45 $ ( 0.02 ) Diluted earnings/(loss) per common share $ 0.76 $ 1.08 $ 3.41 $ ( 0.02 ) (1) SARs and RSUs outstanding of 208,813 at September 30, 2021 and 480,062 at September 30, 2020 have not been included in diluted earnings/(loss) per common share because to do so would have been antidilutive for the periods presented. (3) Investment Securities Available-for-Sale Debt Securities The following is a summary of available-for-sale debt securities: (in thousands) Amortized Cost(1) Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value September 30, 2021 Available-for-sale debt securities: U.S. government agency securities $ 125,000 $ — $ ( 3,080 ) $ 121,920 Residential mortgage-backed securities 3,363,930 331 ( 59,539 ) 3,304,722 Tax-exempt asset-backed securities 171,157 13,663 — 184,820 Credit risk transfer (“CRT”) securities 14,713 — ( 2,909 ) 11,804 Total $ 3,674,800 $ 13,994 $ ( 65,528 ) $ 3,623,266 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 CRT securities 14,713 — ( 3,296 ) 11,417 Total $ 3,143,171 $ 25,803 $ ( 5,836 ) $ 3,163,138 (1) Excludes accrued interest receivable of $ 6.7 million and $ 6.0 million at September 30, 2021 and December 31, 2020, respectively, that is recorded in accrued interest receivable and other assets on the consolidated balance sheets. 9 The amortized cost and estimated fair value, excluding accrued interest receivable, and weighted average yield of available-for-sale debt securities are presented below by contractual maturity: (in thousands, except percentage data) Less Than One Year After One Through Five Years After Five Through Ten Years After Ten Years Total September 30, 2021 Available-for-sale: U.S. government agency securities:(1) Amortized cost $ — $ — $ 125,000 $ — $ 125,000 Estimated fair value — — 121,920 — 121,920 Weighted average yield(3) — % — % 1.13 % — % 1.13 % Residential mortgage-backed securities:(1) Amortized cost $ 24 $ 252 $ 17,339 $ 3,346,315 $ 3,363,930 Estimated fair value 26 280 16,652 3,287,764 3,304,722 Weighted average yield(3) 3.99 % 4.66 % 1.08 % 1.13 % 1.13 % Tax-exempt asset-backed securities:(1) Amortized Cost $ — $ — $ — $ 171,157 $ 171,157 Estimated fair value — — — 184,820 184,820 Weighted average yield(2)(3) — % — % — % 4.96 % 4.96 % CRT securities:(1) Amortized Cost $ — $ — $ 14.713 $ — $ 14,713 Estimated fair value — — 11.804 — 11,804 Weighted average yield(3) — % — % 0.08 % — % 0.08 % Total available-for-sale debt securities: Amortized cost $ 3,674,800 Estimated fair value $ 3,623,266 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 The following table discloses our available-for-sale debt securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months: Less Than 12 Months 12 Months or Longer Total (in thousands) Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss September 30, 2021 U.S. government agency securities $ 24,348 $ ( 652 ) $ 97,572 $ ( 2,428 ) $ 121,920 $ ( 3,080 ) Residential mortgage-backed securities 3,279,426 ( 59,539 ) 97 — 3,279,523 ( 59,539 ) CRT securities — — 11,804 ( 2,909 ) 11,804 ( 2,909 ) Total $ 3,303,774 $ ( 60,191 ) $ 109,473 $ ( 5,337 ) $ 3,413,247 $ ( 65,528 ) 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 September 30, 2021, we had 118 securities in an unrealized loss position, comprised of five U.S. government agency securities, two CRT securities and 111 residential mortgage-backed securities. Based upon our September 30, 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 $ 24.0 million and $ 1.3 million were pledged to secure certain customer repurchase agreements and deposits, respectively, at September 30, 2021. The comparative amounts at December 31, 2020 were $ 31.7 million and $ 1.9 million, respectively. Equity Securities Equity securities consist of investments that qualify for consideration under the regulations implementing the Community Reinvestment Act and investments related to our non-qualified deferred compensation plan. At September 30, 2021 and December 31, 2020, we had $ 40.6 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 September 30, Nine months ended September 30, (in thousands) 2021 2020 2021 2020 Net gains/(losses) recognized during the period $ 850 $ 1,350 $ 4,496 $ 1,285 Less: Realized net gains/(losses) recognized during the period on equity securities sold 347 177 1,096 ( 68 ) Unrealized net gains/(losses) recognized during the period on equity securities still held $ 503 $ 1,173 $ 3,400 $ 1,353 (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, 2021 December 31, 2020 Commercial $ 9,377,274 $ 8,861,580 Energy 697,888 766,217 Mortgage finance(1) 8,528,313 9,079,409 Real estate 5,212,364 5,794,624 Gross loans held for investment(2) 23,815,839 24,501,830 Unearned income (net of direct origination costs) ( 66,122 ) ( 70,970 ) Allowance for credit losses on loans ( 221,957 ) ( 254,615 ) Total loans held for investment, net(2) $ 23,527,760 $ 24,176,245 (1) Balances at September 30, 2021 and December 31, 2020 are stated net of $ 677.6 million and $ 1.2 billion of participations sold, respectively. (2) Excludes accrued interest receivable of $ 50.3 million and $ 56.5 million at September 30, 2021 and December 31, 2020, respectively, that is recorded in accrued interest receivable and other assets on the consolidated balance sheets. 11 The following tables summarize 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 September 30, 2021 Commercial (1-7) Pass $ 919,405 $ 3,228,097 $ 572,505 $ 321,356 $ 194,921 $ 284,804 $ 3,535,016 $ 50,565 $ 9,106,669 (8) Special mention 691 8,061 46,942 9,233 — 13,561 9,579 6,495 94,562 (9) Substandard - accruing — 4,763 60,192 39,177 6,202 16,137 15,592 6,906 148,969 (9+) Non-accrual 1,218 1,624 2,305 727 2,105 10,444 8,185 466 27,074 Total commercial $ 921,314 $ 3,242,545 $ 681,944 $ 370,493 $ 203,228 $ 324,946 $ 3,568,372 $ 64,432 $ 9,377,274 Energy (1-7) Pass $ 22,309 $ — $ — $ 2,516 $ — $ 28,854 $ 566,387 $ — $ 620,066 (8) Special mention — — — — — — 37,782 — 37,782 (9) Substandard - accruing — — — — — — — — — (9+) Non-accrual — — — — — 20,715 19,325 — 40,040 Total energy $ 22,309 $ — $ — $ 2,516 $ — $ 49,569 $ 623,494 $ — $ 697,888 Mortgage finance (1-7) Pass $ 295,565 $ 834,008 $ 744,105 $ 696,945 $ 409,308 $ 5,548,382 $ — $ — $ 8,528,313 (8) Special mention — — — — — — — — — (9) Substandard - accruing — — — — — — — — — (9+) Non-accrual — — — — — — — — — Total mortgage finance $ 295,565 $ 834,008 $ 744,105 $ 696,945 $ 409,308 $ 5,548,382 $ — $ — $ 8,528,313 Real estate CRE (1-7) Pass $ 292,248 $ 545,204 $ 703,910 $ 566,771 $ 187,565 $ 482,033 $ 45,008 $ 25,361 $ 2,848,100 (8) Special mention — — 30,497 8,881 48,049 17,022 — — 104,449 (9) Substandard - accruing 17,850 — — 41,209 61,051 62,978 — 2,354 185,442 (9+) Non-accrual — — — — — 202 — — 202 RBF (1-7) Pass 166,828 70,338 15,180 9,392 66 14,483 566,799 — 843,086 (8) Special mention — — — — — — — — — (9) Substandard - accruing — — — — — — — — — (9+) Non-accrual — — — — — — — — — Other (1-7) Pass 88,370 161,048 136,836 107,251 83,282 167,252 45,174 30,210 819,423 (8) Special mention — 13,903 1,990 — — 5,055 — — 20,948 (9) Substandard - accruing — — — 1,637 23,952 21,125 — — 46,714 (9+) Non-accrual — — — — 3,536 2,566 — 13,929 20,031 Secured by 1-4 family (1-7) Pass 71,682 62,514 53,285 24,610 34,666 69,988 4,491 — 321,236 (8) Special mention — — — — — 294 — — 294 (9) Substandard - accruing — — — — — 2,254 — — 2,254 (9+) Non-accrual — — — — — 185 — — 185 Total real estate $ 636,978 $ 853,007 $ 941,698 $ 759,751 $ 442,167 $ 845,437 $ 661,472 $ 71,854 $ 5,212,364 Total loans held for investment $ 1,876,166 $ 4,929,560 $ 2,367,747 $ 1,829,705 $ 1,054,703 $ 6,768,334 $ 4,853,338 $ 136,286 $ 23,815,839 12 (in thousands) 2020 2019 2018 2017 2016 2015 and prior Revolving lines of credit Revolving lines of credit converted to term loans Total December 31, 2020 Commercial (1-7) Pass $ 1,259,949 $ 2,816,425 $ 543,438 $ 374,455 $ 192,060 $ 213,212 $ 3,020,353 $ 40,253 $ 8,460,145 (8) Special mention 2,664 115,015 38,751 26,423 1,983 290 19,971 22,797 227,894 (9) Substandard - accruing 15,773 15,854 18,068 32,241 15,297 19,639 22,932 1,641 141,445 (9+) Non-accrual 1,820 8,360 377 1,292 802 15,157 3,836 452 32,096 Total commercial $ 1,280,206 $ 2,955,654 $ 600,634 $ 434,411 $ 210,142 $ 248,298 $ 3,067,092 $ 65,143 $ 8,861,580 Energy (1-7) Pass $ — $ 12,020 $ 7,598 $ 26,931 $ — $ 23,750 $ 553,970 $ — $ 624,269 (8) Special mention — — — — — 13,358 76,866 — 90,224 (9) Substandard - accruing — — — — — — — — — (9+) Non-accrual — — — 5,705 1,972 8,009 36,038 — 51,724 Total energy $ — $ 12,020 $ 7,598 $ 32,636 $ 1,972 $ 45,117 $ 666,874 $ — $ 766,217 Mortgage finance (1-7) Pass $ 755,309 $ 1,063,641 $ 821,122 $ 483,436 $ 106,013 $ 5,849,888 $ — $ — $ 9,079,409 (8) Special mention — — — — — — — — — (9) Substandard - accruing — — — — — — — — — (9+) Non-accrual — — — — — — — — — Total mortgage finance $ 755,309 $ 1,063,641 $ 821,122 $ 483,436 $ 106,013 $ 5,849,888 $ — $ — $ 9,079,409 Real estate CRE (1-7) Pass $ 352,688 $ 892,831 $ 923,762 $ 444,587 $ 208,426 $ 451,283 $ 62,336 $ 61,133 $ 3,397,046 (8) Special mention 3,475 11,170 6,485 88,633 11,153 17,623 — 1,247 139,786 (9) Substandard - accruing — 327 47,708 11,601 32,645 30,766 — 15,940 138,987 (9+) Non-accrual — — — — 5,749 4,852 — — 10,601 RBF (1-7) Pass 162,397 60,077 65,271 3,727 5,888 8,483 551,703 — 857,546 (8) Special mention — 353 — — — — — — 353 (9) Substandard - accruing — — — — — — — — — (9+) Non-accrual — — — — — — — — — Other (1-7) Pass 190,995 150,787 119,696 120,817 82,465 113,105 16,630 39,129 833,624 (8) Special mention — 6,700 2,240 — 1,843 7,195 — 1,018 18,996 (9) Substandard - accruing — — 2,567 14,452 3,301 14,453 — — 34,773 (9+) Non-accrual — — — 927 5,524 6,403 — 14,496 27,350 Secured by 1-4 family (1-7) Pass 58,515 63,031 46,623 54,096 72,527 31,880 4,697 — 331,369 (8) Special mention 646 — — 635 — 1,768 — — 3,049 (9) Substandard - accruing — — — 817 — 109 — — 926 (9+) Non-accrual — — — — — 218 — — 218 Total real estate $ 768,716 $ 1,185,276 $ 1,214,352 $ 740,292 $ 429,521 $ 688,138 $ 635,366 $ 132,963 $ 5,794,624 Total loans held for investment $ 2,804,231 $ 5,216,591 $ 2,643,706 $ 1,690,775 $ 747,648 $ 6,831,441 $ 4,369,332 $ 198,106 $ 24,501,830 13 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 Nine months ended September 30, 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 26,549 ( 24,730 ) 1,729 ( 24,325 ) ( 20,777 ) Charge-offs 8,211 6,418 — 1,192 15,821 Recoveries 2,462 1,366 — 112 3,940 Net charge-offs (recoveries) 5,749 5,052 — 1,080 11,881 Ending balance $ 93,861 $ 54,282 $ 6,428 $ 67,386 $ 221,957 Nine months ended September 30, 2020 Allowance for credit losses on loans: Beginning balance $ 102,254 $ 60,253 $ 2,265 $ 30,275 $ 195,047 Impact of Current Expected Credit Loss (“CECL”) adoption ( 15,740 ) 24,154 2,031 ( 1,860 ) 8,585 Provision for credit losses on loans 47,263 127,470 430 44,799 219,962 Charge-offs 35,376 100,239 — — 135,615 Recoveries 883 1,303 — — 2,186 Net charge-offs (recoveries) 34,493 98,936 — — 133,429 Ending balance $ 99,284 $ 112,941 $ 4,726 $ 73,214 $ 290,165 We recorded a $ 20.0 million negative provision for credit losses for the nine months ended September 30, 2021, compared to a provision of $ 226.0 million for the same period in 2020. The decreased provision resulted primarily from decreases in charge-offs and non-accrual loans during the nine month ended and as of September 30, 2021, as well as improvement in the economic outlook as the economy continues to recover from the impacts of the COVID-19 pandemic. We recorded $ 11.9 million in net charge-offs during the nine months ended September 30, 2021, compared to $ 133.4 million during the same period in 2020. Criticized loans totaled $ 728.9 million at September 30, 2021, compared to $ 1.1 billion at September 30, 2020. 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. There were no loans that met these criteria at September 30, 2021. 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(2) Current Total Non-Accrual With No Allowance September 30, 2021 Commercial $ 19,395 $ 18,313 $ 2,256 $ 39,964 $ 27,074 $ 9,310,236 $ 9,377,274 $ 10,899 Energy — — — — 40,040 657,848 697,888 9,281 Mortgage finance loans — — — — — 8,528,313 8,528,313 — Real estate CRE 250 — — 250 202 3,137,741 3,138,193 — RBF — — — — — 843,086 843,086 — Other 1,225 — — 1,225 20,031 885,860 907,116 2,697 Secured by 1-4 family 553 — 1,149 1,702 185 322,082 323,969 — Total loans held for investment $ 21,423 $ 18,313 $ 3,405 $ 43,141 $ 87,532 $ 23,685,166 $ 23,815,839 $ 22,877 (1) Loans past due 90 days and still accruing includes premium finance loans of $ 2.3 million. These loans are generally secured by obligations of insurance carriers to refund premiums on canceled insurance policies. The receipt of the refund of premiums from the insurance carriers can take 180 days or longer from the cancellation date. (2) As of September 30, 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 nine months ended September 30, 2021. Accrued interest of $ 674,000 was reversed during the nine months ended September 30, 2021. 14 As of September 30, 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 September 30, 2021 and December 31, 2020, $ 23.7 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 nine months ended September 30, 2021. The following table details the recorded investment at September 30, 2020 of loans restructured during the nine months ended September 30, 2020: Extended Maturity Adjusted Payment Schedule Total (in thousands, except number of contracts) Number of Contracts Balance at Period End Number of Contracts Balance at Period End Number of Contracts Balance at Period End Nine months ended September 30, 2020 Commercial loans 2 $ 7,636 2 $ 14,663 4 $ 22,299 Energy loans 1 5,969 3 13,469 4 19,438 Total 3 $ 13,605 5 $ 28,132 8 $ 41,737 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, 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. As of September 30, 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 On April 20, 2021, we entered into an agreement to sell our portfolio of mortgage servicing rights (“MSRs”) and to transition the Mortgage Correspondent Aggregation (“MCA”) program to a third-party. The sale was completed on June 1, 2021 and the transfer of servicing on the underlying mortgage loans was completed on August 1, 2021. Transition activities began immediately following the execution of the agreement and are significantly complete as of September 30, 2021. At September 30, 2021, we have a remaining MSR balance of $ 1.2 million, which represents MSRs from loans sold after the cut-off date for the initial sale mentioned above. The sale of this MSR portfolio and the transfer of servicing on the underlying mortgage loans was completed on October 1, 2021 and all related hedges were closed as of September 30, 2021. The table below presents a reconciliation of the changes in loans held for sale: Nine Months Ended September 30, (in thousands) 2021 2020 Outstanding balance(1): Beginning balance $ 281,137 $ 2,568,362 Loans purchased and originated 1,413,899 8,963,499 Payments and loans sold ( 1,685,212 ) ( 10,889,549 ) Ending balance 9,824 642,312 Fair value adjustment: Beginning balance 2,028 8,772 Increase/(decrease) to fair value ( 2,192 ) ( 3,075 ) Ending balance ( 164 ) 5,697 Loans held for sale at fair value $ 9,660 $ 648,009 (1) Includes $ 1.3 million and $ 44.1 million of loans held for sale that are carried at lower of cost or market as of September 30, 2021 and December 31, 2020, respectively, as well as $ 9.0 million and $ 5.8 million as of September 30, 2020 and December 31, 2019, respectively. No loans held for sale were on non-accrual as of September 30, 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 September 30, 2021 and December 31, 2020, we had $ 3.8 million and $ 16.7 million, respectively, of loans held for sale that were 90 days or more past due. The $ 3.8 million in loans held for sale that were 90 days or more past due at September 30, 2021 was comprised 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. 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, 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. 15 Through the MCA program we retain the right to service the loans after they are sold, 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, (in thousands) 2021 2020 MSRs: Balance, beginning of year $ 131,391 $ 70,707 Capitalized servicing rights 15,990 76,905 Amortization ( 18,663 ) ( 25,553 ) Direct write-down ( 279 ) — Sales ( 127,281 ) — Balance, end of period $ 1,158 $ 122,059 Valuation allowance: Balance, beginning of year $ 25,967 $ 5,803 Change in valuation allowance ( 25,967 ) 20,933 Balance, end of period $ — $ 26,736 MSRs, net $ 1,158 $ 95,323 MSRs, fair value $ 1,158 $ 95,323 At September 30, 2021 and December 31, 2020, our portfolio of MSRs was comprised of residential mortgage loans with outstanding principal balances of $ 143.4 million 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 such 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 $2.4 million at September 30, 2021 and $ 152.6 million at December 31, 2020. The following tables summarize the assumptions used by management to determine the fair value of MSRs and a sensitivity analysis of changes in the fair value of our MSR portfolio resulting from certain key assumptions. The MSR balance at September 30, 2021 was valued utilizing the October 1, 2021 sale price, therefore only December 31, 2020 data is provided in the tables below. December 31, 2020 Average discount rates 9.09 % Expected prepayment speeds 16.37 % Weighted-average life, in years 4.9 (in thousands) December 31, 2020 50 bp adverse change in prepayment speed $ ( 12,203 ) 100 bp adverse change in prepayment speed ( 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 $ 619,000 and $ 621,000 at September 30, 2021 and December 31, 2020, respectively, and is recorded in other liabilities on the consolidated balance sheets. $ 76,000 in make-whole obligation payments were made during the nine months ended September 30, 2021 compared to $ 7.8 million during the nine months ended September 30, 2020. 16 (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 and nine months ended September 30, 2021, the combined weighted-average interest rate on the trust preferred subordinated debentures was 2.09 % and 2.14 %, respectively, compared to 2.28 % and 3.03 %, respectively, for the same periods in 2020. The details of the trust preferred subordinated debentures as of September 30, 2021 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. These notes were redeemed on June 21, 2021. 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 and nine months ended September 30, 2021, the weighted-average interest rate on the notes was 5.54 % and 5.58 %, respectively. 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. On May 6, 2021, the Company issued and sold $ 375.0 million of subordinated notes. The notes mature in May 2031 and bear interest at a fixed rate of 4.00 % per annum, payable semi-annually. Net proceeds from the transaction were $ 370.7 million providing additional capital to be used for general corporate purposes. A portion of the proceeds were also used to redeem the Company’s 6.50 % fixed rate subordinated notes, as is described above. The indenture governing the notes contains customary covenants and restrictions. 17 (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 September 30, Nine months ended September 30, (in thousands) 2021 2020 2021 2020 Beginning balance of allowance for off-balance sheet credit losses $ 16,747 $ 12,268 $ 17,434 $ 8,640 Impact of CECL adoption — — — 563 Provision for off-balance sheet credit losses 1,464 2,973 777 6,038 Ending balance of allowance for off-balance sheet credit losses $ 18,211 $ 15,241 $ 18,211 $ 15,241 (in thousands) September 30, 2021 December 31, 2020 Commitments to extend credit - period end balance $ 8,261,483 $ 8,530,453 Standby letters of credit - period end balance $ 340,896 $ 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 CECL transition option). In March 2020, the federal bank regulatory agencies issued an interim final rule that maintains the three-year CECL 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 CECL transition option). We adopted CECL on January 1, 2020 and have elected to utilize the five-year CECL 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, 2021, that the Company and the Bank meet all capital adequacy requirements to which they are subject. Financial institutions are categorized as well capitalized based on total risk-based, Tier 1 risk-based, CET1 and Tier 1 leverage ratios. As shown in the table below, the Company’s and the Bank’s capital ratios exceeded the regulatory definition of well capitalized as of September 30, 2021 and December 31, 2020. The regulatory authorities can apply changes in classification of assets and such changes may retroactively subject the Company and the Bank to changes in capital ratios. Any such change could reduce one or more capital ratios below well-capitalized status. In addition, a change may result in imposition of 18 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(2) Capital Required to be Well Capitalized (dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio September 30, 2021 CET1 Company $ 2,883,517 10.70 % $ 1,886,355 7.00 % N/A N/A Bank 2,950,866 10.97 % 1,882,136 7.00 % 1,747,697 6.50 % Total capital (to risk-weighted assets) Company 4,027,375 14.95 % 2,829,533 10.50 % 2,694,793 10.00 % Bank 3,523,923 13.11 % 2,823,203 10.50 % 2,688,765 10.00 % Tier 1 capital (to risk-weighted assets) Company 3,293,517 12.22 % 2,290,574 8.50 % 1,616,876 6.00 % Bank 3,110,866 11.57 % 2,285,450 8.50 % 2,151,012 8.00 % Tier 1 capital (to average assets)(1) Company 3,293,517 8.96 % 1,469,597 4.00 % N/A N/A Bank 3,110,866 8.47 % 1,468,949 4.00 % 1,836,186 5.00 % December 31, 2020 CET1 Company $ 2,708,150 9.35 % $ 2,026,806 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 % 3,040,209 10.50 % 2,895,437 10.00 % 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 % 2,461,121 8.50 % 1,737,262 6.00 % 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. (2) Percentages represent the minimum capital ratios plus, as applicable, the fully phased-in 2.5% CET1 capital buffer under the Basel III Capital Rules. Our mortgage finance loan volumes can increase significantly at month-end, causing a meaningful difference between ending and average balances 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 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, including federal banking law requirements concerning the payment of dividends. The Basel III Capital Rules further limit the amount of dividends that may be paid by us or our Bank. No dividends were declared or paid on our common stock during the nine months ended September 30, 2021, or during the year ended December 31, 2020. 19 (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 September 30, Nine months ended September 30, (in thousands) 2021 2020 2021 2020 Stock-settled awards: RSUs $ 8,324 $ 4,794 $ 22,099 $ 11,326 Restricted stock — 5 1 22 Cash-settled units 64 236 1,092 716 Total $ 8,388 $ 5,035 $ 23,192 $ 12,064 (in thousands except period data) September 30, 2021 Unrecognized compensation expense related to unvested stock-settled awards $ 39,463 Weighted average period over which expense is expected to be recognized, in years 2.5 20 (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 September 30, 2021 Available-for-sale debt securities:(1) U.S. government agency securities $ — $ 121,920 $ — Residential mortgage-backed securities — 3,304,722 — Tax-exempt asset-backed securities — — 184,820 CRT securities — — 11,804 Equity securities(1)(2) 33,511 7,097 — Loans held for sale(3) — 658 7,701 Derivative assets(5) — 56,940 — Derivative liabilities(5) — 56,940 — Non-qualified deferred compensation plan liabilities(6) 28,186 — — 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 — — (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 investments that qualify for consideration under the regulations implementing the Community Reinvestment Act and investments related to our non-qualified deferred compensation plan. (3) Loans held for sale purchased through the 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. 21 Level 3 Valuations The following table presents a reconciliation of the Level 3 fair value category measured at fair value on a recurring basis: Net Realized/Unrealized Gains (Losses) (in thousands) Balance at Beginning of Period Purchases / Additions Sales / Reductions Realized Unrealized Balance at End of Period Three months ended September 30, 2021 Available-for-sale debt securities:(1) Tax-exempt asset-backed securities $ 185,954 $ — $ ( 2,270 ) $ — $ 1,136 $ 184,820 CRT securities 11,713 — — — 91 11,804 Loans held for sale(2) 8,227 440 ( 870 ) — ( 96 ) 7,701 Three months ended September 30, 2020 Available-for-sale debt securities:(1) Tax-exempt asset-backed securities $ 191,417 $ — $ ( 2,248 ) $ — $ 11,652 $ 200,821 CRT securities 10,953 — — — 105 11,058 Loans held for sale(2) 6,159 785 ( 170 ) 132 68 6,974 Nine months ended September 30, 2021 Available-for-sale debt securities:(1) Tax-exempt asset-backed securities $ 199,176 $ — $ ( 13,783 ) $ — $ ( 573 ) $ 184,820 CRT securities 11,417 — — — 387 11,804 Loans held for sale(2) 6,933 2,125 ( 1,395 ) 5 33 7,701 Nine months ended September 30, 2020 Available-for-sale debt securities:(1) Tax-exempt asset-backed securities $ 197,027 $ 8,470 $ ( 6,733 ) $ — $ 2,057 $ 200,821 CRT securities 11,964 — — — ( 906 ) 11,058 Loans held for sale(2) 7,043 1,105 ( 1,634 ) 248 212 6,974 (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 a weighted-average life. At September 30, 2021, the discount rates utilized ranged from 2.25 % to 2.37 % and the weighted-average life ranged from 4.8 to 4.9 years. On a combined amortized cost weighted-average basis a discount rate of 2.30 % and weighted-average life of 4.8 years were utilized to determine the fair value of these securities at September 30, 2021. At December 31, 2020, the combined weighted-average discount rate and weighted-average life utilized were 2.49 % and 5.5 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 a weighted-average life. At September 30, 2021, the discount rates utilized ranged from 3.12 % to 7.99 % and the weighted-average life ranged from 5.0 years to 9.8 years. On a combined amortized cost weighted-average basis a discount rate of 4.74 % and a weighted-average life of 6.6 years were utilized to determine the fair value of these securities at September 30, 2021. At December 31, 2020, the combined weighted-average discount rate and combined weighted-average life utilized were 4.36 % and 7.5 years, respectively. Loans held for sale The fair value of loans held for sale using Level 3 inputs include loans that cannot be sold through normal sale channels and thus require significant management judgment or estimation when determining the fair value. The fair value of such loans is generally based upon quoted prices of comparable loans with a liquidity discount applied. At September 30, 2021, the fair value of these loans was calculated using a weighted-average discounted price of 97.9 %, compared to 97.2 % at December 31, 2020. 22 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. There were no collateral-dependent loans held for investment reported at fair value at September 30, 2021. 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: September 30, 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 $ 8,535,051 $ 8,535,051 $ 9,206,380 $ 9,206,380 Investment securities 33,511 33,511 26,593 26,593 Level 2 inputs: Investment securities 3,433,739 3,433,739 2,959,784 2,959,784 Loans held for sale 658 658 232,147 232,147 Derivative assets 56,940 56,940 102,720 102,720 Level 3 inputs: Investment securities 196,624 196,624 210,593 210,593 Loans held for sale 7,701 7,701 6,933 6,933 Loans held for investment, net 23,527,760 23,575,556 24,176,245 24,233,185 Financial liabilities: Level 2 inputs: Federal funds purchased and repurchase agreements 3,470 3,470 111,751 111,751 Other borrowings 2,200,000 2,200,000 3,000,000 3,000,000 Long-term debt 928,062 953,859 395,896 405,110 Derivative liabilities 56,940 56,940 99,255 99,255 Level 3 inputs: Deposits 29,813,668 29,814,204 30,996,589 30,997,980 23 (11) Derivative Financial Instruments The notional amounts and estimated fair values of derivative positions outstanding are presented in the following table. All derivative positions related to residential MSRs and loans held for sale were closed as of September 30, 2021 as a result of the sale of our MSR portfolio and transition of the MCA program to a third-party. September 30, 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 $ 1,857,977 $ 1,320 $ 56,884 $ 1,922,956 $ 71 $ 96,246 Commercial loan/lease interest rate caps 204,655 56 — 565,634 34 — Foreign currency forward contracts — — — 6,667 214 78 Customer counterparties: Commercial loan/lease interest rate swaps 1,857,977 56,884 1,320 1,922,956 96,246 71 Commercial loan/lease interest rate caps 204,655 — 56 565,634 — 34 Foreign currency forward contracts — — — 6,667 78 214 Economic hedging derivatives to hedge: Residential MSRs: Interest rate swap futures — — — 320,000 474 — Forward sale commitments — — — 155,000 551 — Loans held for sale: Loan purchase commitments — — — 332,145 5,123 8 Forward sale commitments — — — 485,326 — 2,675 Gross derivatives 58,260 58,260 102,791 99,326 Offsetting derivative assets/liabilities ( 1,320 ) ( 1,320 ) ( 71 ) ( 71 ) Net derivatives included in the consolidated balance sheets $ 56,940 $ 56,940 $ 102,720 $ 99,255 The weighted-average received and paid interest rates for interest rate swaps outstanding were as follows: September 30, 2021 Weighted-Average Interest Rate December 31, 2020 Weighted-Average Interest Rate Received Paid Received Paid Non-hedging interest rate swaps 2.74 % 1.15 % 3.14 % 1.38 % The weighted-average strike rate for outstanding interest rate caps was 2.67 % at September 30, 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 $ 56.9 million at September 30, 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, 2021, we had $ 62.1 million in cash collateral pledged for these derivatives that is included in interest-bearing deposits in other banks. 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 eight risk participation agreements where we are a participant bank with a notional amount of $ 109.2 million at September 30, 2021, compared to nine 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 $ 3.2 million at September 30, 2021 and $ 6.0 million at December 31, 2020. The fair value of these exposures was insignificant to the consolidated financial statements at both September 30, 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 24 we are the lead bank having a notional amount of $ 167.4 million at September 30, 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, providing additional capital to be used for general corporate purposes. A portion of the proceeds were also used to redeem, in whole, our 6.50 % non-cumulative perpetual preferred stock Series A, par value $ 0.01 per share, in accordance with its terms. On June 15, 2021 we redeemed all 6,000,000 outstanding shares of our 6.50 % non-cumulative perpetual preferred stock, Series A. (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. The adoption of this ASU did not significantly impact our consolidated financial statements. ASU 2021-05, “Leases (Topic 842) (“ASU 2021-05”) amends guidance to allow lessors to classify as an operating lease any lease that would otherwise be classified as a sales-type or direct financing lease and that would result in the recognition of a day-one loss at lease commencement, provided that the lease includes variable lease payments that does not depend on an index or rate. ASU 2021-05 will be effective for us on January 1, 2022 and is not expected to have an impact on our consolidated financial statements. 25