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, 2024 December 31, 2023 Assets Cash and due from banks $ 297,048 $ 200,493 Interest bearing cash and cash equivalents 3,894,537 3,042,357 Available-for-sale debt securities 3,518,662 3,225,892 Held-to-maturity debt securities 812,432 865,477 Equity securities 74,426 51,825 Investment securities 4,405,520 4,143,194 Loans held for sale 9,022 44,105 Loans held for investment, mortgage finance 5,529,659 3,978,328 Loans held for investment 16,764,512 16,362,230 Less: Allowance for credit losses on loans 273,143 249,973 Loans held for investment, net 22,021,028 20,090,585 Premises and equipment, net 81,577 32,366 Accrued interest receivable and other assets 919,071 801,670 Goodwill and intangibles, net 1,496 1,496 Total assets $ 31,629,299 $ 28,356,266 Liabilities and Stockholders’ Equity Liabilities: Non-interest bearing deposits $ 9,070,804 $ 7,328,276 Interest bearing deposits 16,794,451 15,043,563 Total deposits 25,865,255 22,371,839 Accrued interest payable 18,679 33,234 Other liabilities 696,149 392,904 Short-term borrowings 1,035,000 1,500,000 Long-term debt 660,172 859,147 Total liabilities 28,275,255 25,157,124 Stockholders’ equity: Preferred stock, $ 0.01 par value, $ 1,000 liquidation value: Authorized shares - 10,000,000 Issued shares - 300,000 at September 30, 2024 and December 31, 2023 300,000 300,000 Common stock, $ 0.01 par value: Authorized shares - 100,000,000 Issued shares - 51,494,260 and 51,142,979 at September 30, 2024 and December 31, 2023, respectively 515 511 Additional paid-in capital 1,054,614 1,045,576 Retained earnings 2,428,940 2,435,393 Treasury stock - 5,286,503 and 3,905,067 shares at cost at September 30, 2024 and December 31, 2023, respectively ( 301,868 ) ( 220,334 ) Accumulated other comprehensive loss, net of taxes ( 128,157 ) ( 362,004 ) Total stockholders’ equity 3,354,044 3,199,142 Total liabilities and stockholders’ equity $ 31,629,299 $ 28,356,266 See accompanying notes to consolidated financial statements. 3 Table of Contents TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME - UNAUDITED Three Months Ended September 30, Nine Months Ended September 30, (in thousands except per share data) 2024 2023 2024 2023 Interest income Interest and fees on loans $ 361,407 $ 345,138 $ 1,037,537 $ 975,443 Investment securities 38,389 27,070 104,117 79,840 Interest bearing cash and cash equivalents 52,737 53,561 150,325 157,568 Total interest income 452,533 425,769 1,291,979 1,212,851 Interest expense Deposits 190,255 160,117 547,135 417,602 Short-term borrowings 13,784 19,576 39,316 52,573 Long-term debt 8,392 14,005 33,835 43,270 Total interest expense 212,431 193,698 620,286 513,445 Net interest income 240,102 232,071 671,693 699,406 Provision for credit losses 10,000 18,000 49,000 53,000 Net interest income after provision for credit losses 230,102 214,071 622,693 646,406 Non-interest income Service charges on deposit accounts 6,307 5,297 18,557 15,477 Wealth management and trust fee income 4,040 3,509 11,306 10,653 Brokered loan fees 2,400 2,532 6,442 6,842 Investment banking and advisory fees 34,753 23,099 78,225 56,764 Trading income 5,786 6,092 16,148 18,693 Available-for-sale debt securities gains/(losses), net ( 179,581 ) — ( 179,581 ) 489 Other 11,524 6,343 25,875 21,368 Total non-interest income ( 114,771 ) 46,872 ( 23,028 ) 130,286 Non-interest expense Salaries and benefits 121,138 110,010 368,705 351,730 Occupancy expense 12,937 9,910 33,340 29,011 Marketing 5,863 4,757 17,895 20,168 Legal and professional 11,135 17,614 38,603 47,797 Communications and technology 25,951 19,607 69,078 57,655 Federal Deposit Insurance Corporation insurance assessment 4,906 5,769 18,897 11,632 Other 13,394 12,224 39,608 37,569 Total non-interest expense 195,324 179,891 586,126 555,562 Income/(loss) before income taxes ( 79,993 ) 81,052 13,539 221,130 Income tax expense/(benefit) ( 18,674 ) 19,373 7,054 52,139 Net income/(loss) ( 61,319 ) 61,679 6,485 168,991 Preferred stock dividends 4,313 4,313 12,938 12,938 Net income/(loss) available to common stockholders $ ( 65,632 ) $ 57,366 $ ( 6,453 ) $ 156,053 Other comprehensive income/(loss) Change in unrealized gain/(loss) $ 109,849 $ ( 102,330 ) $ 53,567 $ ( 158,619 ) Amounts reclassified into net income/(loss) 199,599 19,285 239,132 48,531 Other comprehensive income/(loss) 309,448 ( 83,045 ) 292,699 ( 110,088 ) Income tax expense/(benefit) 69,873 ( 17,441 ) 58,852 ( 23,119 ) Other comprehensive income/(loss), net of tax 239,575 ( 65,604 ) 233,847 ( 86,969 ) Comprehensive income/(loss) $ 178,256 $ ( 3,925 ) $ 240,332 $ 82,022 Basic earnings/(loss) per common share $ ( 1.42 ) $ 1.19 $ ( 0.14 ) $ 3.24 Diluted earnings/(loss) per common share $ ( 1.41 ) $ 1.18 $ ( 0.14 ) $ 3.20 See accompanying notes to consolidated financial statements. 4 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 June 30, 2023 300,000 $ 300,000 51,087,965 $ 511 $ 1,035,063 $ 2,362,189 ( 3,095,444 ) $ ( 175,528 ) $ ( 440,308 ) $ 3,081,927 Comprehensive income/(loss): Net income — — — — — 61,679 — — — 61,679 Change in other comprehensive income/(loss), net of taxes — — — — — — — — ( 65,604 ) ( 65,604 ) Total comprehensive loss ( 3,925 ) Stock-based compensation expense recognized in earnings — — — — 4,441 — — — — 4,441 Preferred stock dividend — — — — — ( 4,313 ) — — — ( 4,313 ) Issuance of stock related to stock-based awards — — 22,482 — ( 430 ) — — — — ( 430 ) Balance at September 30, 2023 300,000 $ 300,000 51,110,447 $ 511 $ 1,039,074 $ 2,419,555 ( 3,095,444 ) $ ( 175,528 ) $ ( 505,912 ) $ 3,077,700 Balance at June 30, 2024 300,000 $ 300,000 51,474,581 $ 515 $ 1,050,114 $ 2,494,572 ( 5,286,503 ) $ ( 301,868 ) $ ( 367,732 ) $ 3,175,601 Comprehensive income/(loss): Net loss — — — — — ( 61,319 ) — — — ( 61,319 ) Change in other comprehensive income/(loss), net of taxes — — — — — — — — 239,575 239,575 Total comprehensive income 178,256 Stock-based compensation expense recognized in earnings — — — — 4,957 — — — — 4,957 Preferred stock dividend — — — — — ( 4,313 ) — — — ( 4,313 ) Issuance of stock related to stock-based awards — — 19,679 — ( 457 ) — — — — ( 457 ) Balance at September 30, 2024 300,000 $ 300,000 51,494,260 $ 515 $ 1,054,614 $ 2,428,940 ( 5,286,503 ) $ ( 301,868 ) $ ( 128,157 ) $ 3,354,044 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, 2022 (audited) 300,000 $ 300,000 50,867,298 $ 509 $ 1,025,593 $ 2,263,502 ( 2,083,535 ) $ ( 115,310 ) $ ( 418,943 ) $ 3,055,351 Comprehensive income/(loss): Net income — — — — — 168,991 — — — 168,991 Change in other comprehensive income/(loss), net of taxes — — — — — — — — ( 86,969 ) ( 86,969 ) Total comprehensive income 82,022 Stock-based compensation expense recognized in earnings — — — — 17,948 — — — — 17,948 Preferred stock dividend — — — — — ( 12,938 ) — — — ( 12,938 ) Issuance of stock related to stock-based awards — — 243,149 2 ( 4,467 ) — — — — ( 4,465 ) Repurchase of common stock — — — — — — ( 1,011,909 ) ( 60,218 ) — ( 60,218 ) Balance at September 30, 2023 300,000 $ 300,000 51,110,447 $ 511 $ 1,039,074 $ 2,419,555 ( 3,095,444 ) $ ( 175,528 ) $ ( 505,912 ) $ 3,077,700 Balance at December 31, 2023 (audited) 300,000 $ 300,000 51,142,979 $ 511 $ 1,045,576 $ 2,435,393 ( 3,905,067 ) $ ( 220,334 ) $ ( 362,004 ) $ 3,199,142 Comprehensive income/(loss): Net income — — — — — 6,485 — — — 6,485 Change in other comprehensive income/(loss), net of taxes — — — — — — — — 233,847 233,847 Total comprehensive income 240,332 Stock-based compensation expense recognized in earnings — — — — 18,229 — — — — 18,229 Preferred stock dividend — — — — — ( 12,938 ) — — — ( 12,938 ) Issuance of stock related to stock-based awards — — 351,281 4 ( 9,191 ) — — — — ( 9,187 ) Repurchase of common stock — — — — — — ( 1,381,436 ) ( 81,534 ) — ( 81,534 ) Balance at September 30, 2024 300,000 $ 300,000 51,494,260 $ 515 $ 1,054,614 $ 2,428,940 ( 5,286,503 ) $ ( 301,868 ) $ ( 128,157 ) $ 3,354,044 See accompanying notes to consolidated financial statements. 6 Table of Contents TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, (in thousands) 2024 2023 Operating activities Net income $ 6,485 $ 168,991 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 49,000 53,000 Depreciation and amortization 38,917 30,870 Net (gain)/loss recognized on investment securities 173,708 ( 1,423 ) Stock-based compensation expense 21,208 17,948 Purchases and originations of loans held for sale — ( 706 ) Proceeds from sales and repayments of loans held for sale 53,494 8,980 Changes in operating assets and liabilities: Accrued interest receivable and other assets ( 60,683 ) ( 76,697 ) Accrued interest payable and other liabilities 180,584 ( 14,890 ) Net cash provided by operating activities 462,713 186,073 Investing activities Purchases of available-for-sale debt securities ( 1,793,339 ) ( 849,392 ) Proceeds from sales of available-for-sale debt securities 1,057,159 56,923 Proceeds from maturities, redemptions and pay-downs of available-for-sale debt securities 514,159 169,938 Proceeds from maturities, redemptions and pay-downs of held-to-maturity debt securities 55,696 57,009 Sales/(purchases) of equity securities, net ( 16,728 ) ( 5,610 ) Originations of loans held for investment, mortgage finance ( 60,379,814 ) ( 59,161,293 ) Proceeds from pay-offs of loans held for investment, mortgage finance 58,828,483 58,821,837 Net increase in loans held for investment, excluding mortgage finance loans ( 446,916 ) ( 1,150,655 ) Purchase of premises and equipment, net ( 57,435 ) ( 12,649 ) Net cash used in investing activities ( 2,238,735 ) ( 2,073,892 ) Financing activities Net increase in deposits 3,493,416 1,022,098 Issuance of stock related to stock-based awards ( 9,187 ) ( 4,465 ) Preferred dividends paid ( 12,938 ) ( 12,938 ) Repurchase of common stock ( 81,534 ) ( 60,218 ) Net increase/(decrease) in short-term borrowings ( 465,000 ) 198,858 Redemption of long-term debt ( 200,000 ) ( 75,000 ) Net cash provided by financing activities 2,724,757 1,068,335 Net increase/(decrease) in cash and cash equivalents 948,735 ( 819,484 ) Cash and cash equivalents at beginning of period 3,242,850 5,012,260 Cash and cash equivalents at end of period $ 4,191,585 $ 4,192,776 Supplemental disclosures of cash flow information Cash paid during the period for interest $ 672,199 $ 506,296 Cash paid during the period for income taxes 48,040 56,161 Transfers of loans from held for investment to held for sale 18,411 126,990 See accompanying notes to consolidated financial statements. 7 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (1) Operations and Summary of Significant Accounting Policies Organization and Nature of Business Texas Capital Bancshares, Inc. (“TCBI” or the “Company”), a Delaware corporation, was incorporated in 1996 and commenced banking operations in 1998. The consolidated financial statements include the accounts of TCBI and its wholly owned subsidiary, Texas Capital Bank (the “Bank”). TCBI is a full-service financial services firm that delivers customized solutions to businesses, entrepreneurs and individual customers. The Company is headquartered in Dallas, with primary banking offices in Austin, Dallas, Fort Worth, Houston and San Antonio, and has built a network of clients across the country. Basis of Presentation The Company’s 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 unaudited 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 present a fair presentation of the Company’s financial position and results of operations. 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 and the notes to the consolidated unaudited financial statements required by GAAP for complete annual financial statements do not include all of the information and should be read in conjunction with the consolidated financial statements, and notes thereto, for the year ended December 31, 2023, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 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. (2) Earnings Per Share The following table presents the computation of basic and diluted earnings per share: Three Months Ended September 30, Nine Months Ended September 30, (in thousands except share and per share data) 2024 2023 2024 2023 Numerator: Net income/(loss) $ ( 61,319 ) $ 61,679 $ 6,485 $ 168,991 Preferred stock dividends 4,313 4,313 12,938 12,938 Net income/(loss) available to common stockholders $ ( 65,632 ) $ 57,366 $ ( 6,453 ) $ 156,053 Denominator: Basic earnings per common share—weighted average common shares 46,201,518 48,007,466 46,674,034 48,168,486 Effect of dilutive outstanding stock-settled awards 407,224 521,232 379,683 555,542 Dilutive earnings per common share—weighted average diluted common shares 46,608,742 48,528,698 47,053,717 48,724,028 Basic earnings/(loss) per common share $ ( 1.42 ) $ 1.19 $ ( 0.14 ) $ 3.24 Diluted earnings/(loss) per common share $ ( 1.41 ) $ 1.18 $ ( 0.14 ) $ 3.20 Anti-dilutive outstanding stock-settled awards 622 87,738 62,560 319,021 8 Table of Contents (3) Investment Securities The following is a summary of the Company’s investment securities: (in thousands) Amortized Cost(1) Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value September 30, 2024 Available-for-sale debt securities: U.S. Treasury securities $ 278,200 $ — $ ( 2,396 ) $ 275,804 Residential mortgage-backed securities 3,323,351 19,768 ( 112,263 ) 3,230,856 CRT securities 12,791 — ( 789 ) 12,002 Total available-for-sale debt securities 3,614,342 19,768 ( 115,448 ) 3,518,662 Held-to-maturity debt securities: Residential mortgage-backed securities 812,432 — ( 84,689 ) 727,743 Total held-to-maturity debt securities 812,432 — ( 84,689 ) 727,743 Equity securities 74,426 Total investment securities(2) $ 4,405,520 December 31, 2023 Available-for-sale debt securities: U.S. Treasury securities $ 651,112 $ — $ ( 14,639 ) $ 636,473 U.S. government agency securities 125,000 — ( 18,408 ) 106,592 Residential mortgage-backed securities 2,782,734 540 ( 312,442 ) 2,470,832 CRT securities 13,636 — ( 1,641 ) 11,995 Total available-for-sale debt securities 3,572,482 540 ( 347,130 ) 3,225,892 Held-to-maturity securities: Residential mortgage-backed securities 865,477 — ( 101,633 ) 763,844 Total held-to-maturity securities 865,477 — ( 101,633 ) 763,844 Equity securities 51,825 Total investment securities(2) $ 4,143,194 (1) Excludes accrued interest receivable of $ 13.9 million and $ 9.5 million at September 30, 2024 and December 31, 2023, respectively, related to available-for-sale debt securities and $ 1.3 million and $ 1.4 million at September 30, 2024 and December 31, 2023, respectively, related to held-to-maturity debt securities that is recorded in accrued interest receivable and other assets on the consolidated balance sheets. (2) Includes available-for-sale debt securities and equity securities at estimated fair value and held-to-maturity debt securities at amortized cost. Debt Securities During the third quarter of 2024, the Company sold available-for-sale debt securities with an amortized cost basis of $ 1.2 billion, realizing a loss of $ 179.6 million, and repositioned the proceeds into a purchase of available-for-sale residential mortgage-backed securities with an amortized cost basis of $ 1.1 billion. In the first quarter of 2023, the Company sold available-for-sale U.S. Treasury securities with an amortized cost of $ 56.4 million and realized a gain of $ 489,000 . The amortized cost and estimated fair value as of September 30, 2024, excluding accrued interest receivable, of available-for-sale and held-to-maturity debt securities are presented below by contractual maturity. Actual maturities may differ from contractual maturities of mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without prepayment penalties. Available-for-sale Held-to-maturity (in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Due within one year $ 58,784 $ 58,315 $ — $ — Due after one year through five years 219,416 217,489 — — Due after five years through ten years 13,774 13,001 — — Due after ten years 3,322,368 3,229,857 812,432 727,743 Total $ 3,614,342 $ 3,518,662 $ 812,432 $ 727,743 9 Table of Contents The table below presents the weighted average yields for the Company’s available-for-sale debt securities for the nine months ended September 30, 2024. Weighted average yields are calculated based on amortized cost on a tax-exempt basis assuming a 21% federal tax rate, where applicable. U.S. Treasury securities U.S. government agency securities Residential mortgage-backed securities CRT securities Due within one year 3.15 % — % — % — % Due after one year through five years 3.12 — — — Due after five years through ten years — — 3.91 4.95 Due after ten years — — 4.68 — Total 3.13 % — % 4.68 % 4.95 % The following table discloses the Company’s 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, 2024 U.S. Treasury securities $ — $ — $ 275,804 $ ( 2,396 ) $ 275,804 $ ( 2,396 ) U.S. government agency securities — — — — — — Residential mortgage-backed securities 458,752 ( 873 ) 1,404,200 ( 111,390 ) 1,862,952 ( 112,263 ) CRT securities — — 12,002 ( 789 ) 12,002 ( 789 ) Total $ 458,752 $ ( 873 ) $ 1,692,006 $ ( 114,575 ) $ 2,150,758 $ ( 115,448 ) December 31, 2023 U.S. Treasury securities $ — $ — $ 636,473 $ ( 14,639 ) $ 636,473 $ ( 14,639 ) U.S. government agency securities — — 106,592 ( 18,408 ) 106,592 ( 18,408 ) Residential mortgage-backed securities 910,999 ( 19,751 ) 1,501,340 ( 292,691 ) 2,412,339 ( 312,442 ) CRT securities — — 11,995 ( 1,641 ) 11,995 ( 1,641 ) Total $ 910,999 $ ( 19,751 ) $ 2,256,400 $ ( 327,379 ) $ 3,167,399 $ ( 347,130 ) At September 30, 2024, the Company had 43 available-for-sale debt securities in an unrealized loss position, comprised of 6 U.S. Treasury securities, 35 residential mortgage-backed securities and two CRT securities. The unrealized losses on the available-for-sale debt securities were the result of changes in market interest rates compared to the date the securities were acquired rather than the credit quality of the issuers or underlying loans. The Company does not currently intend to sell and based on current conditions it does not believe it is likely that the Company will be required to sell these available-for-sale debt securities before recovery of the amortized cost of such securities in an unrealized loss position and has therefore recorded the unrealized losses related to this portfolio in accumulated other comprehensive income/(loss), net (“AOCI”). Held-to-maturity securities consist of government guaranteed securities for which no loss is expected. At September 30, 2024 and December 31, 2023, no allowance for credit losses was established for available-for-sale or held-to-maturity debt securities. At September 30, 2024 and December 31, 2023, debt securities with carrying values of approximately $ 425,000 and $ 1.6 million, respectively, were pledged to secure certain customer deposits. Equi ty Securities Equity securities consist of investments that qualify for consideration under the regulations implementing the Community Reinvestment Act and investments in exchange traded funds. The following is a summary of unrealized and realized gains/(losses) recognized on equity securities included in other non-interest income on the consolidated statements of income and other comprehensive income: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2024 2023 2024 2023 Net gains/(losses) recognized during the period $ 2,752 $ ( 1,262 ) $ 6,727 $ 934 Less: Realized net gains/(losses) recognized on securities sold 482 ( 70 ) 853 ( 676 ) Unrealized net gains/(losses) recognized on securities still held $ 2,270 $ ( 1,192 ) $ 5,874 $ 1,610 10 Table of Contents (4) Loans and Allowance for Credit Losses on Loans Loans are summarized by portfolio segment as follows: (in thousands) September 30, 2024 December 31, 2023 Loans held for investment(1): Commercial $ 10,967,807 $ 10,410,766 Mortgage finance 5,529,659 3,978,328 Commercial real estate 5,314,814 5,500,774 Consumer 568,962 530,948 Gross loans held for investment 22,381,242 20,420,816 Unearned income (net of direct origination costs) ( 87,071 ) ( 80,258 ) Total loans held for investment 22,294,171 20,340,558 Allowance for credit losses on loans ( 273,143 ) ( 249,973 ) Total loans held for investment, net $ 22,021,028 $ 20,090,585 Loans held for sale: Mortgage loans, at fair value $ — $ 706 Non-mortgage loans, at lower of cost or fair value 9,022 43,399 Total loans held for sale $ 9,022 $ 44,105 (1) Excludes accrued interest receivable of $ 114.8 million and $ 118.1 million at September 30, 2024 and December 31, 2023, respectively, that is recorded in accrued interest receivable and other assets on the consolidated balance sheets. During the third quarter of 2024, the Company purchased a $ 332.0 million commercial loan portfolio, which included certain loans that had experienced a more than insignificant deterioration in credit quality since origination (“PCD loans”). PCD loans are recorded at fair value at the acquisition date along with an allowance for credit losses determined using the same methodology as originated loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a non-credit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through provision for credit losses. The following table provides a summary of PCD loans purchased and the associated credit loss reserve at acquisition date: (in thousands) Total Par value (unpaid principal balance) $ 20,139 Allowance for credit losses on loans at acquisition ( 2,579 ) Non-credit premium 2,448 Purchase price $ 20,008 11 Table of Contents The following tables summarize gross loans held for investment by year of origination and internally assigned credit grades: (in thousands) 2024 2023 2022 2021 2020 2019 and prior Revolving lines of credit Revolving lines of credit converted to term loans Total September 30, 2024 Commercial (1-7) Pass $ 1,206,729 $ 1,189,307 $ 1,330,253 $ 336,556 $ 90,941 $ 194,600 $ 5,939,588 $ 12,458 $ 10,300,432 (8) Special mention 20,805 39,957 146,912 22,833 40 6,754 197,723 — 435,024 (9) Substandard - accruing — 45,275 60,646 8,107 341 3,435 28,734 — 146,538 (9+) Non-accrual — 9,370 2,593 287 897 24,810 47,549 307 85,813 Total commercial $ 1,227,534 $ 1,283,909 $ 1,540,404 $ 367,783 $ 92,219 $ 229,599 $ 6,213,594 $ 12,765 $ 10,967,807 Mortgage finance (1-7) Pass $ — $ — $ — $ — $ — $ — $ 5,529,659 $ — $ 5,529,659 (8) Special mention — — — — — — — — — (9) Substandard - accruing — — — — — — — — — (9+) Non-accrual — — — — — — — — — Total mortgage finance $ — $ — $ — $ — $ — $ — $ 5,529,659 $ — $ 5,529,659 Commercial real estate (1-7) Pass $ 193,065 $ 844,988 $ 1,751,369 $ 913,488 $ 333,252 $ 755,864 $ 275,717 $ 18,933 $ 5,086,676 (8) Special mention 589 5,001 77,796 — 322 59,922 — 898 144,528 (9) Substandard - accruing — — 44,607 15,831 — 20,989 — — 81,427 (9+) Non-accrual — — 2,183 — — — — — 2,183 Total commercial real estate $ 193,654 $ 849,989 $ 1,875,955 $ 929,319 $ 333,574 $ 836,775 $ 275,717 $ 19,831 $ 5,314,814 Consumer (1-7) Pass $ 34,545 $ 28,741 $ 53,741 $ 76,839 $ 46,699 $ 109,562 $ 216,621 $ — $ 566,748 (8) Special mention — — — — — — 250 — 250 (9) Substandard - accruing — — — — — — 1,000 — 1,000 (9+) Non-accrual — — — — — 964 — — 964 Total consumer $ 34,545 $ 28,741 $ 53,741 $ 76,839 $ 46,699 $ 110,526 $ 217,871 $ — $ 568,962 Total $ 1,455,733 $ 2,162,639 $ 3,470,100 $ 1,373,941 $ 472,492 $ 1,176,900 $ 12,236,841 $ 32,596 $ 22,381,242 Gross charge-offs $ — $ 7,542 $ 550 $ 3,775 $ — $ 7,212 $ 10,266 $ 44 $ 29,389 (in thousands) 2023 2022 2021 2020 2019 2018 and prior Revolving lines of credit Revolving lines of credit converted to term loans Total December 31, 2023 Commercial (1-7) Pass $ 1,546,257 $ 1,408,672 $ 279,266 $ 144,699 $ 142,301 $ 157,808 $ 6,284,464 $ 16,580 $ 9,980,047 (8) Special mention 22,148 118,991 35,619 285 823 13,385 40,647 89 231,987 (9) Substandard - accruing 12,477 50,876 9,334 18,547 — 78 38,372 — 129,684 (9+) Non-accrual 9,395 34,229 340 2,085 15,080 7,840 79 — 69,048 Total commercial $ 1,590,277 $ 1,612,768 $ 324,559 $ 165,616 $ 158,204 $ 179,111 $ 6,363,562 $ 16,669 $ 10,410,766 Mortgage finance (1-7) Pass $ — $ — $ — $ — $ — $ — $ 3,978,328 $ — $ 3,978,328 (8) Special mention — — — — — — — — — (9) Substandard - accruing — — — — — — — — — (9+) Non-accrual — — — — — — — — — Total mortgage finance $ — $ — $ — $ — $ — $ — $ 3,978,328 $ — $ 3,978,328 Commercial real estate (1-7) Pass $ 561,801 $ 1,689,325 $ 1,042,953 $ 419,703 $ 317,480 $ 559,026 $ 575,928 $ 28,175 $ 5,194,391 (8) Special mention — 136,801 32,937 24,440 34,181 22,833 7,895 — 259,087 (9) Substandard - accruing — 2,232 — — — 28,573 4,141 — 34,946 (9+) Non-accrual — — 12,350 — — — — — 12,350 Total commercial real estate $ 561,801 $ 1,828,358 $ 1,088,240 $ 444,143 $ 351,661 $ 610,432 $ 587,964 $ 28,175 $ 5,500,774 Consumer (1-7) Pass $ 31,876 $ 56,425 $ 78,096 $ 47,423 $ 14,141 $ 102,691 $ 199,171 $ — $ 529,823 (8) Special mention — — — — — — 100 41 141 (9) Substandard - accruing — — — — — 984 — — 984 (9+) Non-accrual — — — — — — — — — Total Consumer $ 31,876 $ 56,425 $ 78,096 $ 47,423 $ 14,141 $ 103,675 $ 199,271 $ 41 $ 530,948 Total $ 2,183,954 $ 3,497,551 $ 1,490,895 $ 657,182 $ 524,006 $ 893,218 $ 11,129,125 $ 44,885 $ 20,420,816 Gross charge-offs $ 8,364 $ 5,090 $ 25,578 $ — $ 15,243 $ 883 $ 698 $ 871 $ 56,727 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 does not preclude its availability to absorb losses in other categories. (in thousands) Commercial Mortgage Finance Commercial Real Estate Consumer Total Nine Months Ended September 30, 2024 Beginning balance $ 171,437 $ 4,173 $ 71,829 $ 2,534 $ 249,973 Allowance established for acquired PCD loans 2,579 — — — 2,579 Provision for credit losses on loans 54,529 1,290 ( 6,840 ) 414 49,393 Charge-offs 23,661 — 5,698 30 29,389 Recoveries 587 — — — 587 Net charge-offs (recoveries) 23,074 — 5,698 30 28,802 Ending balance $ 205,471 $ 5,463 $ 59,291 $ 2,918 $ 273,143 Nine Months Ended September 30, 2023 Beginning balance $ 185,303 $ 10,745 $ 54,268 $ 3,153 $ 253,469 Provision for credit losses on loans 20,569 ( 4,438 ) 12,935 ( 543 ) 28,523 Charge-offs 42,830 — — 41 42,871 Recoveries 5,776 — — 5 5,781 Net charge-offs (recoveries) 37,054 — — 36 37,090 Ending balance $ 168,818 $ 6,307 $ 67,203 $ 2,574 $ 244,902 The Company recor ded a $ 49.4 million provision for credit losses on loans for the nine months ended September 30, 2024, compared to $ 28.5 million for the same period of 2023. T he $ 49.4 million provision for credit losses on loans resulted primarily from growth in loans held for investment and $ 28.8 million in net charge-offs du ring the nine months ended September 30, 2024. Net charge-offs of $ 28.8 million were recorded during the nine months ended September 30, 2024, compared to net charge-offs of $ 37.1 million during the same period of 2023. Criticized loans totaled $ 897.7 million at September 30, 2024, compared to $ 738.2 million at December 31, 2023. 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. At September 30, 2024, the Company had $ 44.0 million in collateral-dependent commercial loans, collateralized by business assets, and $ 2.2 million and $ 1.0 million in collateral-dependent commercial real estate and consumer loans, respectively, both of which are collateralized by real estate. The table below provides an age analysis of gross loans held for investment: (in thousands) 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Past Due Non-accrual(1) Current Total Non-accrual With No Allowance September 30, 2024 Commercial $ 1,933 $ 40,718 $ 5,281 $ 47,932 $ 85,813 $ 10,834,062 $ 10,967,807 $ 12,086 Mortgage finance — — — — — 5,529,659 5,529,659 — Commercial real estate 501 648 — 1,149 2,183 5,311,482 5,314,814 — Consumer 1,966 — — 1,966 964 566,032 568,962 964 Total $ 4,400 $ 41,366 $ 5,281 $ 51,047 $ 88,960 $ 22,241,235 $ 22,381,242 $ 13,050 (1) As of September 30, 2024, $ 1.1 million of non-accrual loans were earning interest income on a cash basis compared to $ 358,000 as of December 31, 2023. Additionally, $ 272,000 of interest income was recognized on non-accrual loans for the nine months ended September 30, 2024 compared to $ 37,000 for the same period in 2023. Accrued interest of $ 917,000 and $ 1.7 million was reversed during the nine months ended September 30, 2024 and September 30, 2023, respectively. 13 Table of Contents Modifications to Borrowers Experiencing Financial Difficulty The table below details gross loans held for investment as of September 30, 2024 and September 30, 2023 made to borrowers experiencing financial difficulty that were modified during the three and nine months ended September 30, 2024 and September 30, 2023, by type of modification granted and the financial effect of those modifications: Financial Statement Impact ($ in thousands) Payment Deferral Term Extension Payment Deferral and Term Extension Interest Rate Reduction and Term Extension Total Percentage of Loans Held for Investment Interest Rate Reduction Term Extension (in months) Payment Deferrals Three Months Ended September 30, 2024 Commercial $ 360 $ — $ — $ — $ 360 — % — % 0 $ 42 Total $ 360 $ — $ — $ — $ 360 — % Three Months Ended September 30, 2023 Commercial $ 271 $ 6,372 $ — $ — $ 6,643 0.03 % — % 1 $ 59 Total $ 271 $ 6,372 $ — $ — $ 6,643 0.03 % Nine Months Ended September 30, 2024 Commercial $ 6,762 $ 974 $ 6,929 $ — $ 14,665 0.07 % — % 12 to 13 $ 826 Commercial real estate — 15,831 — — 15,831 0.07 % — % 3 — Total $ 6,762 $ 16,805 $ 6,929 $ — $ 30,496 0.14 % Nine Months Ended September 30, 2023 Commercial $ 31,327 $ 7,065 $ 5,893 $ 14,332 $ 58,617 0.28 % 0.70 % 1 to 36 $ 5,139 Total $ 31,327 $ 7,065 $ 5,893 $ 14,332 $ 58,617 0.28 % The table below details gross loans held for investment as of September 30, 2024 and September 30, 2023 that experienced a default during the periods presented subsequent to being granted a modification in the prior twelve months. Default is defined as movement to nonperforming status, foreclosure or charge-off, whichever occurs first. (in thousands) Payment Deferral Term Extension Payment Deferral and Term Extension Total Three Months Ended September 30, 2024 Commercial $ 2,902 $ — $ — $ 2,902 Total $ 2,902 $ — $ — $ 2,902 Three Months Ended September 30, 2023 Commercial $ — $ — $ — $ — Commercial $ — $ — $ — $ — Nine Months Ended September 30, 2024 Commercial $ 2,902 $ — $ 1,370 $ 4,272 Total $ 2,902 $ — $ 1,370 $ 4,272 Nine Months Ended September 30, 2023 Commercial $ — $ 161 $ — $ 161 Commercial $ — $ 161 $ — $ 161 14 Table of Contents The table below provides an age analysis of gross loans held for investment as of September 30, 2024 made to borrowers experiencing financial difficulty that were modified in the prior twelve months, and as of September 30, 2023 for loans that were modified since January 1, 2023, the date of adoptions of Accounting Standards Update 2022-02: (in thousands) 30-89 Days Past Due 90+ Days Past Due Non-Accrual Current Total September 30, 2024 Commercial $ — $ — $ 10,191 $ 4,474 $ 14,665 Commercial real estate — — — 15,831 15,831 Total $ — $ — $ 10,191 $ 20,305 $ 30,496 September 30, 2023 Commercial $ — $ — $ 5,893 $ 52,724 $ 58,617 Total $ — $ — $ 5,893 $ 52,724 $ 58,617 (5) Short-Term Borrowings and Long-Term Debt The table below presents a summary of short-term borrowings: (in thousands) September 30, 2024 December 31, 2023 Federal Home Loan Bank borrowings $ 1,035,000 $ 1,500,000 Total short-term borrowings $ 1,035,000 $ 1,500,000 The table below presents a summary of long-term debt: (in thousands) September 30, 2024 December 31, 2023 Bank-issued floating rate senior unsecured credit-linked notes due 2024 $ — $ 199,499 Bank-issued 5.25 % fixed rate subordinated notes due 2026 174,652 174,457 Company-issued 4.00 % fixed rate subordinated notes due 2031 372,114 371,785 Trust preferred floating rate subordinated debentures due 2032 to 2036 113,406 113,406 Total long-term debt $ 660,172 $ 859,147 During the second quarter of 2024, the bank-issued senior unsecured credit-linked notes were redeemed in full. (6) Financial Instruments with Off-Balance Sheet Risk The table below presents the Company’s 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. (in thousands) Commercial Mortgage Finance Commercial Real Estate Consumer Total Nine Months Ended September 30, 2024 Beginning balance $ 36,040 $ 6 $ 10,147 $ 169 $ 46,362 Provision for off-balance sheet credit losses 5,701 26 ( 6,100 ) ( 20 ) ( 393 ) Ending balance $ 41,741 $ 32 $ 4,047 $ 149 $ 45,969 Nine Months Ended September 30, 2023 Beginning balance $ 16,550 $ — $ 5,222 $ 21 $ 21,793 Provision for off-balance sheet credit losses 15,799 13 8,533 132 24,477 Ending balance $ 32,349 $ 13 $ 13,755 $ 153 $ 46,270 (in thousands) September 30, 2024 December 31, 2023 Commitments to extend credit - period end balance $ 9,476,459 $ 9,749,085 Standby letters of credit - period end balance 534,570 595,079 15 Table of Contents (7) Regulatory Ratios and Capital 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 Capital Rules adopted by U.S. federal banking agencies, among other things, (i) establish the capital measure called “Common Equity Tier 1” (“CET1”), (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 Capital” instruments meeting stated requirements, (iii) require that most deductions/adjustments to regulatory capital measures be made to CET1 and not to other components of capital and (iv) define the scope of the deductions/adjustments to the capital measures. Additionally, the Basel III Capital Rules require that the Company maintain a 2.5 % capital conservation buffer comprised of CET1, with respect to each of CET1, Tier 1 and total capital to risk-weighted asset ratios. 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. No dividends were declared or paid on the Company’s common stock during the nine months ended September 30, 2024 or during 2023. On January 17, 2024, the Company’s board of directors authorized a new share repurchase program under which the Company could repurchase up to $ 150.0 million in shares of its outstanding common stock, which is set to expire on January 31, 2025. During the nine months ended September 30, 2024, the Company repurchased 1,381,436 shares of its common stock for an aggregate price, including excise tax expense, of $ 81.5 million, at a weighted average price of $ 58.57 per share. 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). The Company adopted CECL on January 1, 2020 and has elected to utilize the five-year transition option. The ratios presented below include the effects of the election to utilize the five-year CECL transition described above. Because the Bank had less than $ 15.0 billion in total consolidated assets as of December 31, 2009, it is allowed to continue to classify the trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1 capital. At the beginning of each of the last five years of the life of the Bank-issued fixed rate subordinated notes due 2026, 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 2024, the amount of the notes that qualify as Tier 2 capital has been reduced by 80%. 16 Table of Contents The table below summarizes the Company’s and the Bank’s actual and required capital ratios under the Basel III Capital Rules and other standards. As shown in the table below, the Company’s and Bank’s capital ratios exceeded the regulatory definition of well capitalized as of September 30, 2024 and December 31, 2023. September 30, 2024 December 31, 2023 (dollars in thousands) Minimum Capital Required(2) Capital Required to be Well Capitalized Capital Amount Ratio Capital Amount Ratio The Company CET1 capital (to risk-weighted assets) 7.00 % N/A $ 3,183,035 11.19 % $ 3,264,609 12.65 % Tier 1 capital (to risk-weighted assets) 8.50 % 6.00 % 3,593,035 12.63 % 3,674,609 14.24 % Total capital (to risk-weighted assets) 10.50 % 10.00 % 4,315,608 15.17 % 4,405,575 17.07 % Tier 1 capital (to average assets)(1) 4.00 % N/A 3,593,035 11.44 % 3,674,609 12.21 % The Bank CET1 capital (to risk-weighted assets) 7.00 % 6.50 % $ 3,570,548 12.65 % $ 3,599,919 14.01 % Tier 1 capital (to risk-weighted assets) 8.50 % 8.00 % 3,570,548 12.65 % 3,599,919 14.01 % Total capital (to risk-weighted assets) 10.50 % 10.00 % 3,921,007 13.89 % 3,959,100 15.41 % Tier 1 capital (to average assets)(1) 4.00 % 5.00 % 3,570,548 11.44 % 3,599,919 12.00 % (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. (8) Stock-Based Compensation The Company has long-term incentive plans under which stock-based compensation awards are granted to employees and directors by the Company’s 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, restricted stock units (“RSUs”), restricted stock and performance units, or any combination thereof. The table below summarizes the Company’s stock-based compensation expense: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2024 2023 2024 2023 Stock-settled awards: RSUs $ 4,957 $ 4,441 $ 18,229 $ 17,948 Cash-settled units 1,496 — 2,979 — Total $ 6,453 $ 4,441 $ 21,208 $ 17,948 (in thousands except period data) September 30, 2024 Unrecognized compensation expense related to unvested stock-settled awards $ 32,278 Weighted average period over which stock-settled awards expense is expected to be recognized, in years 1.9 Unrecognized compensation expense related to cash-settled units $ 11,039 Weighted average period over which cash-settled units expense is expected to be recognized, in years 2.4 (9) Fair Value Disclosures The Company determines the fair market values of its assets and liabilities measured at fair value on a recurring and nonrecurring basis using the fair value hierarchy as prescribed in Accounting Standards Codification 820, Fair Value Measurements and Disclosures. See Note 1 - Operations and Summary of Significant Accounting Policies in our 2023 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 statements. 17 Table of Contents Assets and liabilities measured at fair value are as follows: Fair Value Measurements Using (in thousands) Level 1 Level 2 Level 3 September 30, 2024 Available-for-sale debt securities:(1) U.S. Treasury securities $ 275,804 $ — $ — Residential mortgage-backed securities — 3,230,856 — CRT securities — — 12,002 Equity securities(1)(2) 58,140 16,286 — Loans held for investment(4) — — 20,709 Derivative assets(5) — 43,030 — Securities sold not yet purchased(6) 33,244 — — Derivative liabilities(5) — 31,675 — Non-qualified deferred compensation plan liabilities(7) 18,727 — — December 31, 2023 Available-for-sale debt securities:(1) U.S. Treasury securities $ 636,473 $ — $ — U.S. government agency securities — 106,592 — Residential mortgage-backed securities — 2,470,832 — CRT securities — — 11,995 Equity securities(1)(2) 40,661 11,164 — Mortgage loans held for sale(3) — 706 — Loans held for investment(4) — — 38,341 Derivative assets(5) — 32,944 — Securities sold not yet purchased(6) 10,602 — — Derivative liabilities(5) — 70,917 — Non-qualified deferred compensation plan liabilities(7) 20,387 — — (1) Available-for-sale debt securities and equity securities are measured at fair value on a recurring basis, generally monthly. (2) Equity securities consist of investments that qualify for consideration under the regulations implementing the Community Reinvestment Act and investments in exchange traded funds. (3) Loans held for sale 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) Securities sold not yet purchased are measured at fair value on a recurring basis, generally monthly. (7) 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. 18 Table of Contents Level 3 Valuations The following table presents a reconciliation of the level 3 fair value category measured at fair value on a recurring basis: Net 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, 2024 Available-for-sale debt securities:(1) CRT securities $ 12,328 $ — $ ( 346 ) $ — $ 20 $ 12,002 Three Months Ended September 30, 2023 Available-for-sale debt securities:(1) CRT securities $ 11,756 $ — $ ( 341 ) $ — $ 676 $ 12,091 Nine Months Ended September 30, 2024 Available-for-sale debt securities:(1) CRT securities $ 11,995 $ — $ ( 846 ) $ — $ 853 $ 12,002 Nine Months Ended September 30, 2023 Available-for-sale debt securities:(1) CRT securities $ 11,861 $ — $ ( 828 ) $ — $ 1,058 $ 12,091 (1) Unrealized gains/(losses) on available-for-sale debt securities are recorded in AOCI . Realized gains/(losses) are recorded in other non-interest income on the consolidated statements of income and other comprehensive income/(loss). CRT securities The fair value of CRT securities is based on a discounted cash flow model, which utilizes Level 3 inputs, the most significant of which were a discount rate and weighted-average life. At September 30, 2024, the discount rates utilized ranged from 4.52 % to 6.09 % and the weighted-average life ranged from 4.63 years to 6.91 years. On a combined amortized cost weighted-average basis a discount rate of 5.12 % and a weighted-average life of 5.50 years were utilized to determine the fair value of these securities at September 30, 2024. At December 31, 2023, the combined weighted-average discount rate and weighted-average life utilized were 6.57 % and 6.06 years, respectively. 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 $ 20.7 million fair value of loans held for investment at September 30, 2024 reported above includes impaired loans with a carrying value of $ 47.1 million that were reduced by specific allowance allocations totaling $ 26.4 million based on collateral valuations utilizing Level 3 inputs. The $ 38.3 million fair value of loans held for investment at December 31, 2023 reported above includes impaired loans with a carrying value of $ 58.3 million that were reduced by specific allowance allocations totaling $ 20.0 million based on collateral valuations utilizing Level 3 inputs. 19 Table of Contents Fair Value of Financial Instruments A summary of the carrying amounts and estimated fair values of financial instruments is as follows: Carrying Amount Estimated Fair Value (in thousands) Total Level 1 Level 2 Level 3 September 30, 2024 Financial assets: Cash and cash equivalents $ 4,191,585 $ 4,191,585 $ 4,191,585 $ — $ — Available-for-sale debt securities 3,518,662 3,518,662 275,804 3,230,856 12,002 Held-to-maturity debt securities 812,432 727,743 — 727,743 — Equity securities 74,426 74,426 58,140 16,286 — Loans held for sale 9,022 9,022 — 9,022 — Loans held for investment, net 22,021,028 21,978,258 — — 21,978,258 Derivative assets 43,030 43,030 — 43,030 — Financial liabilities: Total deposits 25,865,255 25,873,387 — — 25,873,387 Short-term borrowings 1,035,000 1,035,000 — 1,035,000 — Long-term debt 660,172 624,776 — 624,776 — Securities sold not yet purchased 33,244 33,244 33,244 — — Derivative liabilities 31,675 31,675 — 31,675 — December 31, 2023 Financial assets: Cash and cash equivalents $ 3,242,850 $ 3,242,850 $ 3,242,850 $ — $ — Available-for-sale debt securities 3,225,892 3,225,892 636,473 2,577,424 11,995 Held-to-maturity debt securities 865,477 763,844 — 763,844 — Equity securities 51,825 51,825 40,661 11,164 — Loans held for sale 44,105 44,105 15,000 29,105 — Loans held for investment, net 20,090,585 20,050,974 — — 20,050,974 Derivative assets 32,944 32,944 — 32,944 — Financial liabilities: Total deposits 22,371,839 22,379,452 — — 22,379,452 Short-term borrowings 1,500,000 1,500,000 — 1,500,000 — Long-term debt 859,147 801,309 — 801,309 — Securities sold not yet purchased 10,602 10,602 10,602 — — Derivative liabilities 70,917 70,917 — 70,917 — 20 Table of Contents (10) Derivative Financial Instruments The notional amounts and estimated fair values of derivative positions outstanding are presented in the following table. September 30, 2024 December 31, 2023 Estimated Fair Value Estimated Fair Value (in thousands) Notional Amount Asset Derivative Liability Derivative Notional Amount Asset Derivative Liability Derivative Derivatives designated as hedges Cash flow hedges: Interest rate contracts: Swaps hedging loans $ 2,850,000 $ 964 $ 25,745 $ 2,850,000 $ 668 $ 57,961 Non-hedging derivatives Customer-initiated and other derivatives: Foreign currency forward contracts 382,981 3,946 3,743 4,824 52 31 Interest rate contracts: Swaps 5,938,223 51,466 51,466 5,673,822 65,247 69,863 Caps and floors written 778,995 2,074 1,320 637,971 1,654 2,228 Caps and floors purchased 778,995 1,320 2,034 637,971 2,228 1,654 Forward contracts 22,299,994 38,529 37,167 8,665,675 39,123 38,570 Gross derivatives 98,299 121,475 108,972 170,307 Netting adjustment - offsetting derivative assets/liabilities ( 38,072 ) ( 38,072 ) ( 37,346 ) ( 37,346 ) Netting adjustment - cash collateral received/posted ( 17,197 ) ( 51,728 ) ( 38,682 ) ( 62,044 ) Net derivatives included on the consolidated balance sheets $ 43,030 $ 31,675 $ 32,944 $ 70,917 The Company’s 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. The Company’s credit exposure associated with these instruments, net of any collateral pledged, was approximately $ 43.0 million at September 30, 2024 and approximately $ 32.9 million at December 31, 2023. Collateral levels are monitored and adjusted on a regular basis for changes in the value of derivative instruments. At September 30, 2024, the Company had $ 101.5 million in cash collateral pledged to counterparties included in interest bearing cash and cash equivalents on the consolidated balance sheet and $ 17.7 million in cash collateral received from counterparties included in interest bearing deposits on the consolidated balance sheet. The comparative amounts at December 31, 2023, were $ 119.0 million in cash collateral pledged to counterparties and $ 42.3 million cash collateral received from counterparties. The Company also enters into credit risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which the Company is either a participant or a lead bank. The risk participation agreements entered into by the Company 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. The Company is party to 16 risk participation agreements where it acts as a participant bank with a notional amount of $ 219.0 million at September 30, 2024, compared to 14 risk participation agreements with a notional amount of $ 230.7 million at December 31, 2023. The maximum estimated exposure to these agreements, assuming 100% default by all obligors, was approximately $ 2.3 million at September 30, 2024 and $ 4.5 million at December 31, 2023. The fair value of these exposures was insignificant to the consolidated financial statements at both September 30, 2024 and December 31, 2023. Risk participation agreements entered into by the Company as the lead bank provide credit protection should the borrower fail to perform on its interest rate derivative contract. The Company is party to 19 risk participation agreements where the Company acts as the lead bank having a notional amount of $ 253.0 million at September 30, 2024, compared to 15 agreements having a notional amount of $ 204.8 million at December 31, 2023. Derivatives Designated as Cash Flow Hedges The Company enters into interest rate derivative contracts that are designated as qualifying cash flow hedges to hedge the exposure to variability in expected future cash flows attributable to changes in a contractually specified interest rate. During the nine months ended September 30, 2024, the Company recorded $ 17.8 million in unrealized losses to adjust its cash flow hedges to fair value, which was recorded net of tax to AOCI, and reclassified $ 54.4 million from AOCI as a decrease to interest income on loans. Based on current market conditions, the Company estimates that during the next 12 months, an additional $ 26.0 million related to active and terminated hedges will be reclassified from AOCI as a decrease to interest income. As of September 30, 2024, the maximum length of time over which forecasted transactions are hedged is 1.42 years. 21 Table of Contents (11) Accumulated Other Comprehensive Income The following table provides the change in AOCI by component: (in thousands) Cash Flow Hedges Available-for-Sale Securities Held-to-Maturity Securities Total Three Months Ended September 30, 2024 Beginning balance $ ( 45,215 ) $ ( 283,559 ) $ ( 38,958 ) $ ( 367,732 ) Change in unrealized gain/(loss) 18,849 91,000 — 109,849 Amounts reclassified into net income 18,251 179,581 1,767 199,599 Total other comprehensive income/(loss) 37,100 270,581 1,767 309,448 Income tax expense/(benefit) 8,377 61,097 399 69,873 Total other comprehensive income/(loss), net of tax 28,723 209,484 1,368 239,575 Ending balance $ ( 16,492 ) $ ( 74,075 ) $ ( 37,590 ) $ ( 128,157 ) Three Months Ended September 30, 2023 Beginning balance $ ( 81,785 ) $ ( 313,196 ) $ ( 45,327 ) $ ( 440,308 ) Change in unrealized gain/(loss) ( 20,572 ) ( 81,758 ) — ( 102,330 ) Amounts reclassified into net income 17,378 — 1,907 19,285 Total other comprehensive income/(loss) ( 3,194 ) ( 81,758 ) 1,907 ( 83,045 ) Income tax expense/(benefit) ( 671 ) ( 17,170 ) 400 ( 17,441 ) Total other comprehensive income/(loss), net of tax ( 2,523 ) ( 64,588 ) 1,507 ( 65,604 ) Ending balance $ ( 84,308 ) $ ( 377,784 ) $ ( 43,820 ) $ ( 505,912 ) Nine Months Ended September 30, 2024 Beginning balance $ ( 45,749 ) $ ( 273,806 ) $ ( 42,449 ) $ ( 362,004 ) Change in unrealized gain/(loss) ( 17,762 ) 71,329 — 53,567 Amounts reclassified into net income 54,371 179,581 5,180 239,132 Total other comprehensive income/(loss) 36,609 250,910 5,180 292,699 Income tax expense/(benefit) 7,352 51,179 321 58,852 Total other comprehensive income/(loss), net of tax 29,257 199,731 4,859 233,847 Ending balance $ ( 16,492 ) $ ( 74,075 ) $ ( 37,590 ) $ ( 128,157 ) Nine Months Ended September 30, 2023 Beginning balance $ ( 66,394 ) $ ( 304,309 ) $ ( 48,240 ) $ ( 418,943 ) Change in unrealized gain/(loss) ( 66,101 ) ( 92,518 ) — ( 158,619 ) Amounts reclassified into net income 43,426 ( 489 ) 5,594 48,531 Total other comprehensive income/(loss) ( 22,675 ) ( 93,007 ) 5,594 ( 110,088 ) Income tax expense/(benefit) ( 4,761 ) ( 19,532 ) 1,174 ( 23,119 ) Total other comprehensive income/(loss), net of tax ( 17,914 ) ( 73,475 ) 4,420 ( 86,969 ) Ending balance $ ( 84,308 ) $ ( 377,784 ) $ ( 43,820 ) $ ( 505,912 ) 22 Table of Contents