TEXAS CAPITAL BANCSHARES INC/TX 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Page Reference Report of Ernst & Young LLP, Independent Registered Public Accounting Firm ( Ernst & Young LLP , Dallas, TX , Auditor Firm ID: 42 ) 50 Consolidated Balance Sheets — December 31, 2024 and December 31, 2023 52 Consolidated Statements of Income and Other Comprehensive Income — Years ended December 31, 2024, 2023 and 2022 53 Consolidated Statements of Stockholders’ Equity — Years ended December 31, 2024, 2023 and 2022 54 Consolidated Statements of Cash Flows — Years ended December 31, 2024, 2023 and 2022 55 Notes to Consolidated Financial Statements 56 49 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Texas Capital Bancshares, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Texas Capital Bancshares, Inc. (the Company) as of December 31, 2024, and 2023, the related consolidated statements of income and other comprehensive income , stockholders' equity and cash flows for each of the three years in the period ended December 31, 2024, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 11, 2025 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates. 50 Allowance for Credit Losses - Loans Description of the Matter The Company’s loans held for investment portfolio totaled $22.5 billion as of December 31, 2024, and the associated allowance for credit losses (ACL) was $325.0 million. The ACL represents management’s best estimate of expected credit losses over the contractual life of loans and for off-balance sheet commitments. The ACL is estimated using relevant available information relating to past events, current conditions, and reasonable and supportable forecasts, as well as qualitative adjustments using a Portfolio Level Qualitative Factor and/or Portfolio Segment Level Qualitative Factor (collectively the “qualitative factors”). The qualitative factors are used to bring the ACL to the level management believes is appropriate based on factors that are otherwise unaccounted for in the quantitative process. The ACL also includes reserves for loans evaluated on an individual basis, such as certain loans graded substandard or worse. Management applies judgment in the determination and usage of the qualitative factors, and in the use of a single or a blend of forecast scenarios used to calculate the reasonable and supportable forecast. Auditing management’s estimate of the ACL is complex due to the models utilized and involves a high degree of subjectivity due to the judgment required in evaluating management’s determination and usage of the qualitative factors, and in the use of a single or blend of forecast scenarios used to calculate the reasonable and supportable forecast. How We Addressed the Matter in Our Audit Our considerations and procedures performed included evaluation of the process utilized by management to challenge the model results and determine the best estimate of the ACL as of the balance sheet date. We obtained an understanding of the Company’s process for establishing the ACL, including determination and usage of the qualitative factors and determination of a single or blend of multiple forecast scenarios used to calculate the reasonable and supportable forecast. We evaluated the design and tested the operating effectiveness of the controls associated with the ACL process, including controls around 1) the reliability and accuracy of data used in the model; 2) management’s review and approval of the selected qualitative factors; 3) the single or blend of multiple forecast scenarios used to calculate the reasonable and supportable forecast; 4) the governance of the credit loss methodology including model validation; and 5) management’s review and approval of the ACL. We performed specific substantive tests of the models utilized, qualitative factors and the single or blend of forecast scenarios used to calculate the reasonable and supportable forecast. We involved EY specialists to assist in testing management models including evaluating model methodology and key modeling assumptions, as well as the appropriateness of management’s qualitative and reasonable and supportable forecast framework. We evaluated if the qualitative factors were applied based on a comprehensive framework and compared the adjustments utilized by management to both internal portfolio metrics and external macroeconomic data (as applicable) to support the adjustments and evaluate trends in such adjustments. We searched for and evaluated information that corroborates or contradicts management’s reasonable and supportable forecast as well as identification and measurement of qualitative factors. In addition, we evaluated the Company’s estimate of the overall ACL, giving consideration to the Company’s borrowers, loan portfolio, and macroeconomic trends, independently obtained and compared such information to comparable financial institutions and considered whether new or contrary information existed. /s/ Ernst & Young LLP We have served as the Company's auditor since 1999. Dallas, TX February 11, 2025 51 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS - AUDITED (in thousands except share data) December 31, 2024 December 31, 2023 Assets Cash and due from banks $ 176,501 $ 200,493 Interest bearing cash and cash equivalents 3,012,307 3,042,357 Available-for-sale debt securities 3,524,686 3,225,892 Held-to-maturity debt securities 796,168 865,477 Equity securities 75,261 51,825 Investment securities 4,396,115 4,143,194 Loans held for sale — 44,105 Loans held for investment, mortgage finance 5,215,574 3,978,328 Loans held for investment 17,234,492 16,362,230 Less: Allowance for credit losses on loans 271,709 249,973 Loans held for investment, net 22,178,357 20,090,585 Premises and equipment, net 85,443 32,366 Accrued interest receivable and other assets 881,664 801,670 Goodwill and intangibles, net 1,496 1,496 Total assets $ 30,731,883 $ 28,356,266 Liabilities and Stockholders’ Equity Liabilities: Non-interest bearing deposits $ 7,485,428 $ 7,328,276 Interest bearing deposits 17,753,171 15,043,563 Total deposits 25,238,599 22,371,839 Accrued interest payable 23,680 33,234 Other liabilities 556,322 392,904 Short-term borrowings 885,000 1,500,000 Long-term debt 660,346 859,147 Total liabilities 27,363,947 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 December 31, 2024 and 2023 300,000 300,000 Common stock, $ 0.01 par value: Authorized shares - 100,000,000 Issued shares - 51,520,315 and 51,142,979 at December 31, 2024 and 2023, respectively 515 511 Additional paid-in capital 1,056,719 1,045,576 Retained earnings 2,495,651 2,435,393 Treasury stock - 5,286,503 and 3,905,067 shares at cost at December 31, 2024 and 2023, respectively ( 301,842 ) ( 220,334 ) Accumulated other comprehensive loss, net of taxes ( 183,107 ) ( 362,004 ) Total stockholders’ equity 3,367,936 3,199,142 Total liabilities and stockholders’ equity $ 30,731,883 $ 28,356,266 See accompanying notes to consolidated financial statements. 52 TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME - AUDITED Year Ended December 31, (in thousands except per share data) 2024 2023 2022 Interest income Interest and fees on loans $ 1,377,925 $ 1,300,653 $ 983,794 Investment securities 148,219 108,294 63,179 Interest bearing cash and cash equivalents 203,406 220,976 97,271 Total interest income 1,729,550 1,629,923 1,144,244 Interest expense Deposits 736,196 587,775 190,663 Short-term borrowings 49,994 70,642 29,077 Long-term debt 42,060 57,383 48,739 Total interest expense 828,250 715,800 268,479 Net interest income 901,300 914,123 875,765 Provision for credit losses 67,000 72,000 66,000 Net interest income after provision for credit losses 834,300 842,123 809,765 Non-interest income Service charges on deposit accounts 25,546 20,874 23,266 Wealth management and trust fee income 15,315 13,955 15,036 Brokered loan fees 8,961 8,918 14,159 Investment banking and advisory fees 104,965 63,670 24,974 Trading income 21,635 22,512 10,080 Gain on disposal of subsidiary — — 248,526 Available-for-sale debt securities gains/(losses), net ( 179,581 ) 489 — Other 34,205 31,001 13,481 Total non-interest income 31,046 161,419 349,522 Non-interest expense Salaries and benefits 466,578 459,700 434,906 Occupancy expense 45,266 38,494 44,222 Marketing 22,349 25,854 32,388 Legal and professional 53,783 64,924 75,858 Communications and technology 93,085 81,262 69,253 Federal Deposit Insurance Corporation insurance assessment 23,351 36,775 14,344 Other 53,873 49,938 56,561 Total non-interest expense 758,285 756,947 727,532 Income before income taxes 107,061 246,595 431,755 Income tax expense 29,553 57,454 99,277 Net income 77,508 189,141 332,478 Preferred stock dividends 17,250 17,250 17,250 Net income available to common stockholders $ 60,258 $ 171,891 $ 315,228 Other comprehensive income/(loss) Change in unrealized gain/(loss) $ ( 31,555 ) $ 4,323 $ ( 479,814 ) Amounts reclassified into net income 253,277 67,752 9,905 Other comprehensive income/(loss) 221,722 72,075 ( 469,909 ) Income tax expense/(benefit) 42,825 15,136 ( 98,681 ) Other comprehensive income/(loss), net of tax 178,897 56,939 ( 371,228 ) Comprehensive income/(loss) $ 256,405 $ 246,080 $ ( 38,750 ) Basic earnings per common share $ 1.29 $ 3.58 $ 6.25 Diluted earnings per common share $ 1.28 $ 3.54 $ 6.18 See accompanying notes to consolidated financial statements. 53 TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY 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, 2021 300,000 $ 300,000 50,618,911 $ 506 $ 1,008,559 $ 1,948,274 ( 417 ) $ ( 8 ) $ ( 47,715 ) $ 3,209,616 Comprehensive income/(loss): Net income — — — — — 332,478 — — — 332,478 Change in other comprehensive income/(loss), net of taxes — — — — — — — — ( 371,228 ) ( 371,228 ) Total comprehensive loss ( 38,750 ) Stock-based compensation expense recognized in earnings — — — — 21,246 — — — — 21,246 Preferred stock dividends — — — — — ( 17,250 ) — — — ( 17,250 ) Issuance of stock related to stock-based awards — — 248,387 3 ( 4,212 ) — — — — ( 4,209 ) Repurchase of common stock — — — — — — ( 2,083,118 ) ( 115,302 ) — (115,302) Balance at December 31, 2022 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 — — — — — 189,141 — — — 189,141 Change in other comprehensive income/(loss), net of taxes — — — — — — — — 56,939 56,939 Total comprehensive income 246,080 Stock-based compensation expense recognized in earnings — — — — 24,200 — — — — 24,200 Preferred stock dividends — — — — — ( 17,250 ) — — — ( 17,250 ) Issuance of stock related to stock-based awards — — 275,681 2 ( 4,217 ) — — — — ( 4,215 ) Repurchase of common stock — — — — — — ( 1,821,532 ) ( 105,024 ) — ( 105,024 ) Balance at December 31, 2023 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 — — — — — 77,508 — — — 77,508 Change in other comprehensive income/(loss), net of taxes — — — — — — — — 178,897 178,897 Total comprehensive income 256,405 Stock-based compensation expense recognized in earnings — — — — 20,212 — — — — 20,212 Preferred stock dividends — — — — — ( 17,250 ) — — — ( 17,250 ) Issuance of stock related to stock-based awards — — 377,336 4 ( 9,069 ) — — — — ( 9,065 ) Repurchase of common stock — — — — — — ( 1,381,436 ) ( 81,508 ) — ( 81,508 ) Balance at December 31, 2024 300,000 $ 300,000 51,520,315 $ 515 $ 1,056,719 $ 2,495,651 ( 5,286,503 ) $ ( 301,842 ) $ ( 183,107 ) $ 3,367,936 See accompanying notes to consolidated financial statements. 54 TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, (in thousands) 2024 2023 2022 Operating activities Net income $ 77,508 $ 189,141 $ 332,478 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 67,000 72,000 66,000 Deferred tax benefit ( 16,086 ) ( 17,784 ) ( 17,395 ) Depreciation and amortization 54,228 40,473 45,284 Net (gain)/loss on sale of loans held for sale — — 990 Net (gain)/loss recognized on investment securities 173,995 ( 4,060 ) — Stock-based compensation expense 24,693 24,200 21,432 Purchases and originations of loans held for sale — ( 15,706 ) ( 37,461 ) Proceeds from sales and repayments of loans held for sale 62,516 134,948 8,132 Gain on sale of subsidiary — — ( 248,526 ) Changes in operating assets and liabilities: Accrued interest receivable and other assets ( 1,611 ) ( 78,606 ) ( 25,482 ) Accrued interest payable and other liabilities 38,878 29,134 2,518 Net cash provided by operating activities 481,121 373,740 147,970 Investing activities Purchases of available-for-sale debt securities ( 1,999,073 ) ( 849,391 ) ( 920,217 ) 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 638,906 225,034 432,175 Proceeds from maturities, redemptions and pay-downs of held-to-maturity debt securities 72,812 73,770 87,945 Sales/(purchases) of equity securities, net ( 17,850 ) ( 14,298 ) 11,651 Originations of loans held for investment, mortgage finance ( 83,658,262 ) ( 75,671,642 ) ( 102,438,943 ) Proceeds from pay-offs of loans held for investment, mortgage finance 82,421,016 75,783,347 105,824,407 Net increase in loans held for investment, excluding mortgage finance loans ( 928,967 ) ( 1,342,840 ) ( 3,001,340 ) Proceeds from sale of subsidiary — — 3,324,159 Purchase of premises and equipment, net ( 64,841 ) ( 16,381 ) ( 11,270 ) Net cash provided by/(used in) investing activities ( 2,479,100 ) ( 1,755,478 ) 3,308,567 Financing activities Net increase/(decrease) in deposits 2,866,760 ( 485,041 ) ( 5,252,485 ) Issuance of stock related to stock-based awards ( 9,065 ) ( 4,215 ) ( 4,209 ) Preferred stock dividends paid ( 17,250 ) ( 17,250 ) ( 17,250 ) Repurchase of common stock ( 81,508 ) ( 105,024 ) ( 115,302 ) Net increase/(decrease) in short-term borrowings ( 615,000 ) 298,858 ( 1,001,690 ) Redemption of long-term debt ( 200,000 ) ( 75,000 ) — Net cash provided by/(used in) financing activities 1,943,937 ( 387,672 ) ( 6,390,936 ) Net decrease in cash and cash equivalents ( 54,042 ) ( 1,769,410 ) ( 2,934,399 ) Cash and cash equivalents at beginning of period 3,242,850 5,012,260 7,946,659 Cash and cash equivalents at end of period $ 3,188,808 $ 3,242,850 $ 5,012,260 Supplemental disclosures of cash flow information Cash paid during the period for interest $ 837,804 $ 773,034 $ 252,178 Cash paid during the period for income taxes 52,815 71,941 128,435 Transfers of loans from held for investment to held for sale 18,411 126,990 — Transfers of debt securities from available-for-sale to held-to-maturity — — 1,019,365 See accompanying notes to consolidated financial statements. 55 (1) Operations and Summary of Significant Accounting Policies Organization and Nature of Business Texas Capital Bancshares, Inc. (“TCBI” or the “Company”) is a registered bank holding company and a full-service financial services firm that delivers customized solutions to businesses, entrepreneurs and individual customers. TCBI 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. The Company’s business activities are conducted primarily through its wholly-owned bank subsidiary Texas Capital Bank (the “Bank”) and its wholly-owned non-bank subsidiary, TCBI Securities Inc. (“TCBI Securities”). The Bank is a Texas state-chartered bank. TCBI Securities is a registered broker-dealer with the U.S. Securities and Exchange Commission (“SEC”) and a member of the Financial Industry Regulatory Authority (“FINRA”) and Municipal Securities Rulemaking Board (“MSRB”). The Company was incorporated as a Delaware corporation in 1996 and commenced banking operations in 1998. 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. 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. See the Allowance for Credit Losses accounting policy below for additional details of these changes. Basic and Diluted Earnings Per Common Share Basic earnings per common share is based on net income available to common stockholders divided by the weighted-average number of common shares outstanding during the period excluding non-vested stock-settled awards. Diluted earnings per common share include the dilutive effect of non-vested stock-settled awards granted using the treasury stock method. Cash and Cash Equivalents Cash equivalents include amounts due from banks, interest bearing deposits in other banks and federal funds sold. Investment Securities Investment securities include debt securities and equity securities. Debt Securities Debt securities are classified as trading, available-for-sale or held-to-maturity. Debt securities not classified as held-to-maturity or trading are classified as available-for-sale. Management classifies securities at the time of purchase and re-assesses such designation at each balance sheet date. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization and accretion are included in interest income from investment securities. Gains or losses realized upon the sale of debt securities are recorded in other non-interest income on the consolidated statements of income and other comprehensive income. The cost of securities sold is based on the specific identification method. The Company has made a policy election to exclude accrued interest from the amortized cost basis of debt securities and report accrued interest separately in accrued interest and other assets on the consolidated balance sheets. Available-for-sale and held-to-maturity debt securities are placed on non-accrual status when management no longer expects to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on non-accrual status. Accordingly, the Company does not recognize an allowance for credit loss against accrued interest receivable. Trading Account Debt securities acquired for resale in anticipation of short-term market movements are classified as trading and recorded at fair value, with realized and unrealized gains and losses recognized in income. 56 Held-to-Maturity Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, net of any allowance for credit losses. Management may transfer debt securities classified as available-for-sale to held-to-maturity when upon reassessment it is determined that the Company has both the positive intent and ability to hold these securities to maturity. The debt securities are transferred at fair value resulting in a premium or discount recorded on transfer date. Unrealized gains or losses at the date of transfer continue to be reported as a separate component of accumulated other comprehensive income/loss, net (“AOCI”). The premium or discount and the unrealized gain or loss, net of tax, in AOCI will be amortized to interest income over the remaining life of the securities using the interest method. Available-for-Sale Available-for-sale debt securities are recorded at fair value, with unrealized gains and losses, net of tax, reported as a separate component of AOCI. For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more-likely-than-not that it will be required to sell, the securities before recovery of the amortized cost basis. If either of these criteria is met, the securities’ amortized cost basis is written down to fair value as a current period expense recorded on the consolidated statements of income and other comprehensive income. If either of the above criteria is not met, management evaluates whether the decline in fair value is the result of credit losses or other factors. In making this assessment, management may consider various factors including the extent to which fair value is less than amortized cost, performance of any underlying collateral and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit losses, limited to the amount by which the fair value is less than the amortized cost basis. Any impairment not recorded through an allowance for credit losses is recognized in AOCI, net of tax, as a non-credit related impairment. Included in debt securities available-for-sale are credit risk transfer (“CRT”) securities, which represent unsecured obligations issued by government sponsored entities (“GSEs”) such as Freddie Mac and are designed to transfer mortgage credit risk from the GSE to private investors. CRT securities are structured to be subject to the performance of a reference pool of mortgage loans in which the Company shares in 50% of the first losses with the GSE. If the reference pool incurs losses, the amount the Company will recover on the notes is reduced by its share of the amount of such losses, which could potentially be up to 100% of the amount outstanding. Unrealized losses recognized in AOCI for the CRT securities are primarily related to the difference between the current market rate for similar securities and the stated interest rate and are not considered to be related to credit loss events. The CRT securities are generally interest-only for an initial period of time and may be restricted from being transferred until a future date. Equity Securities Equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in income. Equity securities without readily determinable fair values are recorded at cost less any impairment. Loans Loans Held for Sale Loans held for sale are carried at the lower of cost or fair value, unless, pursuant to the election of the fair value option in accordance with Accounting Standards Codification (“ASC”) 825, Financial Instruments , the Company elects to carry loans held for sale at fair value. As of December 31, 2024 and December 31, 2023, the Company has no loans held for sale accounted for under the fair value option. Loans Held for Investment Loans held for investment (including financing leases) are stated at the amount of unpaid principal reduced by unearned income, net of direct loan origination costs. Interest on loans is recognized using the simple interest method on the daily balances of the principal amounts outstanding. Loan origination fees, net of direct loan origination costs, and commitment fees are deferred and amortized as an adjustment to yield over the life of the loan, or over the commitment period, as applicable. A loan is considered past due when a contractually due payment has not been received by the contractual due date. The Company places a loan on non-accrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed as a reduction of current period interest income. Interest income is subsequently recognized on a cash basis as long as the remaining book balance of the asset is deemed to be collectible. If collectability is questionable, then cash payments are applied to principal. A loan is placed back on accrual status when both principal and interest are current and it is probable that all amounts due will be collected (both principal and interest) according to the terms of the loan agreement. 57 Loans held for investment includes legal ownership interests in mortgage loans that the Company purchases from unaffiliated mortgage originators, either directly or through a special purpose entity (“SPE”) structure, who are seeking additional liquidity to facilitate their ability to originate loans. In the case of an SPE structure, the unaffiliated mortgage originator is responsible for formation of the SPE and ongoing servicing of the underlying mortgage loans, and thus is the primary beneficiary of the SPE. The mortgage originator has no obligation to offer and the Company has no obligation to purchase these interests. The originator closes mortgage loans consistent with underwriting standards established by approved investors, and, at the time of the sale to the investor, the Company’s ownership interest and that of the originator are delivered to the investor selected by the originator. The Company typically purchases up to a 99% ownership interest in each mortgage with the originator owning the remaining percentage. These mortgage ownership interests are generally held for a period of less than 30 days and more typically 10-20 days. Because of conditions in agreements with originators (or SPEs) designed to reduce transaction risks, under ASC 860, Transfers and Servicing of Financial Assets (“ASC 860”), the ownership interests do not qualify as participating interests. Under ASC 860, the ownership interests are deemed to be loans to the originators (or SPEs) and payments received from investors are deemed to be payments made by or on behalf of the originators (or SPEs) to repay the loan. Because the Company has an actual, legal ownership interest in the underlying residential mortgage loan, these interests are reported as extensions of credit to the originators (or SPEs) that are secured by the mortgage loans as collateral. Due to market conditions or events of default by the investor or the originators (or SPEs), the Company could be required to purchase the remaining interests in the mortgage loans and hold them beyond the expected 10-20 days. Mortgage loans acquired under these conditions would require mark-to-market adjustments to income and could require further allocations of the allowance for credit losses or be subject to charge-off in the event the loans become impaired. Purchased loans are evaluated upon acquisition in order to determine if the loan, or pool of loans, has experienced more-than-insignificant deterioration in credit quality since origination or issuance (“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. Allowance for Credit Losses The Company’s allowance for credit losses is determined using a current expected credit loss (“CECL”) model. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Accounting Standards Update 2016-02 "Leases (Topic 842)" . The following is a discussion of the allowance for credit losses on loans held for investment and off-balance sheet credit exposures. See “ Investment Securities - Debt Securities ” above for discussion of the allowance for credit losses on available-for-sale and held-to maturity debt securities. The CECL methodology recognizes lifetime expected credit losses immediately when a financial asset is originated or purchased. The allowance for credit losses on loans is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The allowance for credit losses on off-balance sheet financial instruments is recorded in other liabilities on the consolidated balance sheets. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, credit quality, or term, as well as for changes in macroeconomic conditions, such as changes in unemployment rates, gross domestic product, property values, or other relevant factors. The allowance for credit losses is comprised of reserves measured on a collective (pool) basis when similar risk characteristics exist. Loans that do not share risk characteristics are assigned a reserve based on an individual evaluation and are not included in the collective (pool) evaluation. For purposes of determining the collective (pool) allowance for credit losses, the loan portfolio is segregated into pools first by portfolio segment and then by past due status or credit grade. Each pool is assigned a loss estimate, reflecting historical loss rates that incorporate probability of default and severity of losses over the estimated remaining life of the loans. These loss estimates are then modified to incorporate a reasonable and supportable forecast of future losses at the pool level, as well as any necessary qualitative adjustments using a Portfolio Level Qualitative Factor (“PLQF”) 58 and/or a Portfolio Segment Level Qualitative Factor (“SLQF”). A similar process is employed to calculate a reserve assigned to off-balance financial instruments, specifically unfunded loan commitments and letters of credit. Modified loss estimates are assigned based on the balance of the commitments estimated to be outstanding at the time of default. The PLQF and SLQF are utilized to address factors that are not present in historical loss rates and are otherwise unaccounted for in the quantitative process. The PLQF is used to apply a qualitative adjustment across the entire portfolio of loans, while the SLQF is designed to apply a qualitative adjustment across a single portfolio segment. Even though portions of the allowance may be allocated to specific loans, the entire allowance is available for any credit that, in management’s judgment, should be charged off. The Company generally uses a two-year forecast period, based on a single forecast scenario or a blend of multiple forecast scenarios, using variables management believes are most relevant to each portfolio segment. For periods beyond which management is able to develop reasonable and supportable forecasts, the Company reverts to the average historical loss rate, reflecting historical default probabilities and loss severities, using a reversion speed that approximates 1 to 2 years. The forecast period and scenario(s) used are reviewed on a quarterly basis and may be adjusted based on management's view of the current economic conditions and level of predictability the forecast can provide. Portfolio segments are used to pool loans with similar risk characteristics and align with the Company’s methodology for measuring expected credit losses. A summary of the primary portfolio segments is as follows: Commercial. The commercial loan portfolio is comprised of lines of credit for working capital, term loans, reserve-based loans to energy exploration and production companies, and leases to finance equipment and other business assets across a variety of industries. These loans are used for general corporate purposes including financing working capital, internal growth, and acquisitions and are generally secured by accounts receivable, inventory, oil and gas reserves, equipment and other assets of clients’ businesses. Mortgage Finance. Mortgage finance loans include legal ownership interests in mortgage loans that the Company purchases from unaffiliated mortgage originators, either directly or through a SPE structure, that are generally held for a period of less than 30 days and more typically 10-20 days before they are sold to an approved investor. Volumes fluctuate based on the level of market demand for the product and the number of days between purchase and sale of the loans, which can be affected by changes in overall market interest rates and housing demand and tend to peak at the end of each month. Mortgage finance loans are consistently underwritten based on standards established by the approved investors. Market conditions or events of default by an investor or originator could require that the Company repurchases the remaining interests in the mortgage loans and hold them beyond the expected 10-20 days. Commercial Real Estate (“CRE”). The CRE portfolio is comprised of construction/development financing and limited term financing provided to professional real estate developers, owners/managers of commercial real estate projects and properties, and residential builders/developers. Collateral properties include office buildings, warehouse/distribution buildings, shopping centers, hotels/motels, senior living, apartment buildings, residential and commercial tract developments, and raw land or lots to be developed into single-family homes. The primary source of repayment on these loans is expected to come from the sale, permanent financing or lease of the real property collateral. The performance of these loans is impacted by fluctuations in collateral values, the ability of the borrower to obtain permanent financing, and, in the case of loans to residential builder/developers, volatility in consumer demand. Consumer. This category of loans is comprised of loans made to consumers for personal expenditures, first and second lien mortgages made for the purpose of purchasing or constructing 1-4 family residential dwellings and home equity revolving lines of credit. The Company has several pass credit grades that are assigned to loans based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to watch credits which have all the characteristics of an acceptable credit risk but warrant more than the normal level of monitoring. Within the criticized/classified credit grades are special mention, substandard and doubtful. Special mention loans are those that are currently protected by the sound worth and paying capacity of the borrower, but that are potentially weak and constitute an additional credit risk. These loans have the potential to deteriorate to a substandard grade due to the existence of financial or administrative deficiencies. Substandard loans have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Some substandard loans are inadequately protected by the sound worth and paying capacity of the borrower and of the collateral pledged and may be considered impaired. Substandard loans can be accruing or can be on non-accrual depending on the circumstances of the individual loans. Loans classified as doubtful have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection in full highly questionable and improbable. The possibility of loss is extremely high. All doubtful loans are on non-accrual. The methodology used in the estimation of the allowance, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and forecasted economic conditions. Changes are reflected in the pool-basis allowance and in reserves assigned on an individual basis as the collectability of classified loans is evaluated with new 59 information. As the Company’s portfolio has matured, historical loss ratios have been closely monitored. The review of the appropriateness of the allowance is performed by executive management and presented to the Audit Committee and Risk Committee of the board of directors for their review. The committees report to the board of directors as part of the board of directors’ quarterly review of the Company’s consolidated financial statements. When management determines that foreclosure is probable, and for certain collateral-dependent loans where foreclosure is not considered probable, expected credit losses are based on the estimated fair value of the collateral adjusted for selling costs, when appropriate. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless either of the following applies: management has a reasonable expectation that a loan will be restructured or the extension or renewal options are included in the borrower contract and are not unconditionally cancellable. The Company does not measure an allowance for credit losses on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when loans are placed on non-accrual status as discussed above. Other Real Estate Owned Other real estate owned (“OREO”), which is included in other assets on the consolidated balance sheet, consists of real estate that has been foreclosed. When foreclosure occurs, the acquired asset is recorded at fair value less selling costs, generally based on appraised value, which may result in partial charge-off of the loan through a charge to the allowance for credit losses, if necessary. Subsequent write-downs required for declines in value are recorded through a valuation allowance, or taken directly to the asset, and are recorded in other non-interest expense on the consolidated statements of income and other comprehensive income. Gains or losses on sale of OREO are recorded in other non-interest income on the consolidated statements of income and other comprehensive income. Goodwill and Other Intangible Assets, Net Intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. The Company had $ 1.5 million of goodwill at both December 31, 2024 and December 31, 2023. Intangible assets with definite useful lives are amortized over their estimated life. No amortization expense related to intangible assets was recorded during the years ended December 31, 2024 or December 31, 2023, as compared to $ 338,000 during the years ended December 31, 2022. Goodwill and intangible assets are tested for impairment at least annually or whenever changes in circumstances indicate the carrying amount of the assets may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value. In 2024 and 2023, the annual test of goodwill impairment was performed, and in both periods, no impairment was indicated. Premises and Equipment, Net Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Furniture and equipment are generally depreciated over three to five years , while leasehold improvements are generally depreciated over the term of their respective lease. Gains or losses on disposals of premises and equipment are included in other non-interest income on the consolidated statements of income and other comprehensive income. Software Costs incurred in connection with development or purchase of internal use software and cloud computing arrangements, including in-substance software licenses, are capitalized. Amortization is computed on a straight-line basis over the estimated useful life of the asset, which generally ranges from one to five years . Capitalized software is included in other assets on the consolidated balance sheets. Financial Instruments with Off-Balance Sheet Risk The Company has undertaken certain guarantee obligations in the ordinary course of business which include liabilities with off-balance sheet risk. The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit that involve varying degrees of credit risk in excess of the amount recognized on the consolidated balance sheets. The Company’s exposure to credit loss in the event of non-performance by the other party to these financial instruments is 60 represented by the contractual amount of the instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the borrower. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. Commitments to extend credit generally do not include mortgage finance loan arrangements with mortgage loan originators (or SPEs), which are established as uncommitted “guidance” purchase and sale facilities under which the mortgage originator has no obligation to offer and the Company has no obligation to purchase interests in the mortgage loans subject to the arrangements. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Leases Right of use (“ROU”) assets represent the Company’s right to use an underlying asset during the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Lease agreements may contain extension options which typically provide for an extension of a lease term at the then fair market rental rates. As these extension options are not generally considered reasonably certain of exercise, they are not included in the lease term. Operating leases relate primarily to real estate used for corporate offices and bank branches and finance leases relate primarily to equipment. The Company does not separate lease and non-lease components for real estate leases. For those leases with a term greater than one year, ROU assets and lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the incremental borrowing rate on the effective date of the lease, which is based on the Company’s collateralized borrowing capabilities over a similar term as the related lease payments. ROU assets are further adjusted for lease incentives. Operating leases in which the Company is the lessee are recorded as operating lease ROU assets and operating lease liabilities, and are included in other assets and other liabilities, respectively, on the consolidated balance sheets. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term and recorded in net occupancy expense on the consolidated statements of income and other comprehensive income. Finance leases in which the Company is the lessee are recorded as finance lease ROU assets and finance lease liabilities and are included in premises and equipment, net, and other liabilities, respectively, on the consolidated balance sheets. Finance lease expense is comprised of amortization of the ROU asset, which is recognized on a straight-line basis over the lease term and recorded in net occupancy expense on the consolidated statements of income and other comprehensive income, and the implicit interest accreted on the operating lease liability, which is recognized using the effective interest method over the lease term and recorded in interest expense on the consolidated statements of income and other comprehensive income. Variable costs, such as maintenance expenses, parking and property and sales taxes, are expensed as they are incurred, and are recorded in net occupancy expense on the consolidated statements of income and other comprehensive income. Revenue Recognition ASC 606, Revenue from Contracts with Customers (“ASC 606”), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. The majority of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as loans, letters of credit, derivatives and investment securities, as these activities are subject to other GAAP discussed elsewhere within the Company’s disclosures. Descriptions of revenue-generating activities that are within the scope of ASC 606, which are presented in the income statements as components of non-interest income are as follows: • Service charges on deposit accounts - these represent general service fees for monthly account maintenance and activity- or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when the performance obligation is completed, which is generally monthly for account maintenance services or when a transaction has been 61 completed (such as a stop payment). Payments for these activities are generally received at the time the performance obligations are satisfied. • Wealth management and trust fee income - this represents monthly fees due from wealth management customers as consideration for managing the customers’ assets. Wealth management and trust services include custody of assets, investment management, escrow services, fees for trust services and similar fiduciary activities. These fees are typically paid on a quarterly basis and recognized ratably throughout the quarter as the performance obligation is satisfied each month. • Brokered loan fees - these represent fees for the administration and funding of purchased mortgage loan interests as well as facility renewal and application fees received from mortgage originators (or SPEs) related to mortgage finance loans. Revenue is recognized when the related mortgage loan interest is disposed (i.e., through sale or payoff) or upon receipt of the facility renewal or application. • Investment banking and advisory fees - this includes fees for merger, acquisition, divestiture and restructuring advisory services, fees for securities underwriting activities and loan and security syndication fees. Advisory fees are generally earned as performance obligations of the advisory service are satisfied. Underwriting fees are generally recognized upon execution of the client’s issuance of debt or equity instruments. Loan syndication fees are generally recognized upon closing of a loan syndication transaction. • Trading income - this includes fees for derivative transactions which are generally recognized when the derivative transaction occurs. Also included in trading income are realized and unrealized gains and losses recognized on the Company’s trading assets and liabilities. Realized gains and losses are generally recognized when a sale occurs and unrealized gains and losses are generally recognized monthly as the trading assets and liabilities are marked to fair value. • Other non-interest income includes items such as letter of credit fees, bank owned life insurance income, dividends on FHLB and FRB stock and other general operating income, none of which are subject to the requirements of ASC 606. Also included in other-non-interest income are interchange fees earned when commercial credit card clients process transactions through card networks. The Company’s performance obligations are generally complete when the transactions generating the fees are processed. Stock-based Compensation The Company accounts for all stock-based compensation transactions in accordance with ASC 718, Compensation — Stock Compensation (“ASC 718”), which requires that stock compensation transactions be recognized as compensation expense over the requisite service period, with forfeitures recognized as they occur, on the consolidated statements of income and other comprehensive income based on their fair values on the measurement date, which is generally the date of the grant. As compensation expense is recognized, a deferred tax asset is recorded that represents an estimate of the future tax deduction from exercise or release of restrictions. At the time awards are exercised, cancelled, expire or restrictions are released, the Company recognizes an adjustment to income tax expense for the difference between the previously estimated tax deduction and the actual tax deduction realized. Income Taxes The Company and its subsidiary file a consolidated federal income tax return. The Company utilizes the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based upon the difference between the values of the assets and liabilities as reflected in the financial statements and their related tax basis using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. As changes in tax law or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance is provided against deferred tax assets unless it is more likely than not that such deferred tax assets will be realized. Deferred tax assets, net, are included in other assets on the consolidated balance sheets. The tax effect of unrealized gains and losses on available-for-sale debt securities and derivative instruments designated as hedges is recorded to other comprehensive income and is not a component of income tax expense/(benefit). Unrecognized tax benefits for the uncertain portion of recorded tax benefits and related interest may result from the application of complex tax laws, rules, regulations and interpretations. Unrecognized tax benefits, as well as estimated penalties and interest, are assessed quarterly and may be adjusted through current income tax expense in future periods based on changing facts and circumstances, completion of examinations by taxing authorities or expiration of a statute of limitations. 62 Fair Values of Financial Instruments ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. The standard describes three levels of inputs that may be used to measure fair value as provided below. Level 1 Quoted prices in active markets for identical assets or liabilities. Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair values requires significant management judgment or estimation. Also required are disclosures of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The disclosure of fair value information about financial instruments does not and is not intended to represent the fair value of the Company. The following are descriptions of the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial instruments: Cash and Cash Equivalents, Variable Rate Loans, Variable Rate Short-term Borrowings and Variable Rate Long-term Debt The fair value of these financial instruments approximates carrying value. Investment Securities The fair value of the Company’s U.S. Treasury, U.S. government agency, residential mortgage-backed and commercial mortgage-backed securities are based on prices obtained from independent pricing services. The Company’s U.S. Treasury securities are valued based on quoted market prices for identical securities in an active market and are classified as Level 1 assets in the fair value hierarchy, while the Company’s U.S. government agency, residential mortgage-backed and commercial mortgage-backed securities are valued based on quoted market prices for the same or similar securities and are characterized as Level 2 assets in the fair value hierarchy. Management obtains documentation from the primary independent pricing service regarding the processes and controls applicable to pricing investment securities, and on a quarterly basis independently verify the prices that were received from the service provider using two additional independent pricing sources. CRT securities are valued using a discounted cash flow model, which utilizes Level 3 inputs, and are classified as Level 3 assets in the fair value hierarchy. Within the investment securities portfolio, the Company holds equity securities that consist of investments that qualify for consideration under the regulations implementing the Community Reinvestment Act and investments in exchange traded funds. Some of these equity securities are valued using quoted market prices for identical equity securities in an active market and are classified as Level 1 assets in the fair value hierarchy and others are traded in less active markets and are classified as Level 2 assets in the fair value hierarchy. Loans Held for Sale The fair value for loans held for sale is derived from quoted market prices for similar loans, in which case they are characterized as Level 2 assets in the fair value hierarchy, or is derived from third party pricing models, in which case they are characterized as Level 3 assets in the fair value hierarchy. Securities Sold Not Yet Purchased The fair value for securities sold but not yet purchased is derived from quoted prices in active markets and are classified as Level 1 liabilities in the fair value hierarchy. Derivative Assets and Liabilities The estimated fair value of derivative assets and liabilities is obtained from independent pricing services based on quoted market prices for similar derivative contracts and these financial instruments are characterized as Level 2 assets and liabilities in the fair value hierarchy. On a quarterly basis, management independently verifies the fair value using an additional independent pricing source. 63 Derivative Financial Instruments All contracts that satisfy the definition of a derivative are recorded at fair value in other assets and other liabilities on the consolidated balance sheets, and the related cash flows are recorded in the operating activities section of the consolidated statement of cash flows. The Company records the derivatives on a net basis when a right of offset exists with a single counterparty that is subject to a legally enforceable master netting agreement. Non-Hedging Derivatives The Company enters into interest rate derivative instruments with customers while at the same time entering into offsetting interest rate derivative instruments with another financial institution. These transactions allow the customer to effectively manage their exposure to a variable rate loan. Because the Company acts as an intermediary for its customers, changes in the fair value of the underlying derivative instruments substantially offset each other and do not have a material impact on the Company’s results of operations. The Company offers forward contract derivative instruments, such as to-be-announced U.S. agency residential mortgage-back securities, to its mortgage banking customers to allow the customers to mitigate exposure to market risks associated with the purchase or origination of mortgage loans. To mitigate the Company’s exposure to these forward contracts, the Company will enter into offsetting forward contracts, most typically with a financial institution. Any changes in fair value to the forward contract derivative instruments are recorded in trading income on the consolidated statements of income and other comprehensive income. The Company also offers foreign currency derivative instruments in which the Company enters into a contract with a customer to buy or sell a foreign currency at a future date for a specified price while at the same time entering into an offsetting contract with a financial institution to buy or sell the same currency at the same future date for a specified price. The transaction allows the customer to manage their exposure to foreign currency exchange rate fluctuations. Because the Company acts as an intermediary for its customers, changes in the fair value of the underlying derivative instruments substantially offset each other and do not have a material impact on the Company’s results of operations. Derivatives Designated as 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. To qualify for hedge accounting, a formal assessment is prepared to determine whether the hedging relationship, both at inception and on an ongoing basis, is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the hedge if a cash flow hedge. At inception a statistical regression analysis is prepared to determine hedge effectiveness. At each reporting period thereafter, a statistical regression or qualitative analysis is performed. If it is determined that hedge effectiveness has not been or will not continue to be highly effective, then hedge accounting ceases and any gain or loss in AOCI is recognized in earnings immediately. The cash flow hedges are recorded at fair value in other assets and other liabilities on the consolidated balance sheets with changes in fair value recorded in AOCI, net of tax. All related cash flows are reported in the operating activities section of the consolidated statement of cash flows. Amounts recorded to AOCI are reclassified into earnings in the same period in which the hedged asset or liability affects earnings and are presented in the same income statement line item as the earnings effect of the hedged asset or liability. Segment Reporting The Company adopted Accounting Standards Update 2023-07 “ Segment Reporting (Topic 280) - Improvement to Reportable Segment Disclosures” on January 1, 2024. The Company has determined that all of its banking divisions and subsidiaries meet the aggregation criteria of ASC 280, Segment Reporting , as its current operating model is structured whereby banking divisions and subsidiaries serve a similar base of primarily commercial clients utilizing a company-wide offering of similar products and services managed through similar processes and platforms that are collectively reviewed by the Company’s Chief Executive Officer, who has been identified as the chief operating decision maker (“CODM”). The CODM regularly assesses performance of the aggregated single operating and reporting segment and decides how to allocate resources based on net income calculated on the same basis as is net income reported in the Company’s consolidated statements of income and other comprehensive income. The CODM is also regularly provided with expense information at a level consistent with that disclosed in the Company’s consolidated statements of income and other comprehensive income. 64 (2) Earnings Per Share The following table presents the computation of basic and diluted earnings per share: Year ended December 31, (in thousands except share and per share data) 2024 2023 2022 Numerator: Net income $ 77,508 $ 189,141 $ 332,478 Preferred stock dividends 17,250 17,250 17,250 Net income available to common stockholders $ 60,258 $ 171,891 $ 315,228 Denominator: Basic earnings per common share—weighted average common shares 46,559,668 48,054,935 50,457,746 Effect of dilutive outstanding stock-settled awards 429,536 555,271 588,996 Dilutive earnings per common share—weighted average diluted common shares 46,989,204 48,610,206 51,046,742 Basic earnings per common share $ 1.29 $ 3.58 $ 6.25 Diluted earnings per common share $ 1.28 $ 3.54 $ 6.18 Anti-dilutive outstanding stock-settled awards — 97,368 311,226 (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 December 31, 2024 Available-for-sale debt securities: U.S. Treasury securities $ 280,137 $ — $ ( 2,852 ) $ 277,285 Residential mortgage-backed securities 3,195,145 7,200 ( 168,302 ) 3,034,043 Commercial mortgage-backed securities 206,830 — ( 5,398 ) 201,432 CRT securities 12,466 — ( 540 ) 11,926 Total available-for-sale debt securities 3,694,578 7,200 ( 177,092 ) 3,524,686 Held-to-maturity debt securities: Residential mortgage-backed securities 796,168 — ( 117,994 ) 678,174 Total held-to-maturity debt securities 796,168 — ( 117,994 ) 678,174 Equity securities 75,261 Total investment securities(2) $ 4,396,115 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 $ 13.8 million and $ 9.5 million at December 31, 2024 and December 31, 2023, respectively, related to available-for-sale debt securities and $ 1.3 million and $ 1.4 million at December 31, 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. 65 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 December 31, 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 $ 184,536 $ 182,862 $ — $ — Due after one year through five years 95,601 94,423 — — Due after five years through ten years 197,043 191,957 — — Due after ten years 3,217,398 3,055,444 796,168 678,174 Total $ 3,694,578 $ 3,524,686 $ 796,168 $ 678,174 The table below presents the weighted average yields for the Company’s available-for-sale debt securities for the year ended December 31, 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 Residential mortgage-backed securities Commercial mortgage-backed securities CRT securities Due within one year 3.14 % — % — % — % Due after one year through five years 3.12 — — — Due after five years through ten years — 3.86 4.68 4.47 Due after ten years — 4.55 4.35 — Total 3.13 % 4.55 % 4.64 % 4.47 % 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 December 31, 2024 U.S. Treasury securities $ — $ — $ 277,285 $ ( 2,852 ) $ 277,285 $ ( 2,852 ) U.S. government agency securities — — — — — — Residential mortgage-backed securities 1,338,801 ( 18,141 ) 1,323,180 ( 150,161 ) 2,661,981 ( 168,302 ) Commercial mortgage-backed securities 201,432 ( 5,398 ) — — 201,432 ( 5,398 ) CRT securities — — 11,926 ( 540 ) 11,926 ( 540 ) Total $ 1,540,233 $ ( 23,539 ) $ 1,612,391 $ ( 153,553 ) $ 3,152,624 $ ( 177,092 ) 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 December 31, 2024, the Company had 60 available-for-sale debt securities in an unrealized loss position, comprised of 6 U.S. Treasury securities, 46 residential mortgage-backed securities, 6 commercial 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 AOCI. Held-to-maturity securities consist of government guaranteed securities for which no loss is expected. At December 31, 2024 and December 31, 2023, no allowance for credit losses was established for available-for-sale or held-to-maturity debt securities. 66 At December 31, 2024 and December 31, 2023, debt securities with carrying values of approximately $ 940,000 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: Year Ended December 31, (in thousands) 2024 2023 Net gains/(losses) recognized during the period $ 6,619 $ 3,571 Less: Realized net gains/(losses) recognized on securities sold 1,032 ( 393 ) Unrealized net gains/(losses) recognized on securities still held $ 5,587 $ 3,964 (4) Loans and Allowance for Credit Losses on Loans Loans are summarized by portfolio segment as follows: (in thousands) December 31, 2024 December 31, 2023 Loans held for investment(1): Commercial $ 11,145,591 $ 10,410,766 Mortgage finance 5,215,574 3,978,328 Commercial real estate 5,616,282 5,500,774 Consumer 565,376 530,948 Gross loans held for investment 22,542,823 20,420,816 Unearned income (net of direct origination costs) ( 92,757 ) ( 80,258 ) Total loans held for investment 22,450,066 20,340,558 Allowance for credit losses on loans ( 271,709 ) ( 249,973 ) Total loans held for investment, net $ 22,178,357 $ 20,090,585 Loans held for sale: Mortgage loans, at fair value $ — $ 706 Non-mortgage loans, at lower of cost or fair value — 43,399 Total loans held for sale $ — $ 44,105 (1) Excludes accrued interest receivable of $ 107.3 million and $ 118.1 million at December 31, 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 PCD loans. 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 67 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 December 31, 2024 Commercial (1-7) Pass $ 1,612,695 $ 1,156,414 $ 1,256,539 $ 307,590 $ 76,821 $ 169,974 $ 6,027,177 $ 12,040 $ 10,619,250 (8) Special mention 22,953 28,354 134,092 21,626 30 6,369 91,423 — 304,847 (9) Substandard - accruing 623 44,901 51,536 7,855 301 3,309 37,405 — 145,930 (9+) Non-accrual — 9,220 8,057 — 360 23,708 34,219 — 75,564 Total commercial $ 1,636,271 $ 1,238,889 $ 1,450,224 $ 337,071 $ 77,512 $ 203,360 $ 6,190,224 $ 12,040 $ 11,145,591 Mortgage finance (1-7) Pass $ — $ — $ — $ — $ — $ — $ 5,215,574 $ — $ 5,215,574 (8) Special mention — — — — — — — — — (9) Substandard - accruing — — — — — — — — — (9+) Non-accrual — — — — — — — — — Total mortgage finance $ — $ — $ — $ — $ — $ — $ 5,215,574 $ — $ 5,215,574 Commercial real estate (1-7) Pass $ 599,301 $ 889,603 $ 1,843,706 $ 885,913 $ 216,077 $ 704,288 $ 273,663 $ 18,085 $ 5,430,636 (8) Special mention 25,532 4,353 70,161 15,831 299 13,731 — 872 130,779 (9) Substandard - accruing — — — — — 20,230 — — 20,230 (9+) Non-accrual 85 — 20,637 — — 13,915 — — 34,637 Total commercial real estate $ 624,918 $ 893,956 $ 1,934,504 $ 901,744 $ 216,376 $ 752,164 $ 273,663 $ 18,957 $ 5,616,282 Consumer (1-7) Pass $ 44,352 $ 28,289 $ 54,148 $ 75,924 $ 40,667 $ 99,471 $ 220,561 $ — $ 563,412 (8) Special mention — — — — — — — — — (9) Substandard - accruing — — — — — — 1,000 — 1,000 (9+) Non-accrual — — — — — 964 — — 964 Total consumer $ 44,352 $ 28,289 $ 54,148 $ 75,924 $ 40,667 $ 100,435 $ 221,561 $ — $ 565,376 Total $ 2,305,541 $ 2,161,134 $ 3,438,876 $ 1,314,739 $ 334,555 $ 1,055,959 $ 11,901,022 $ 30,997 $ 22,542,823 Gross charge-offs $ 994 $ 7,543 $ 550 $ 4,037 $ 537 $ 8,784 $ 23,566 $ 44 $ 46,055 (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 68 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 Year Ended December 31, 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 57,019 ( 1,418 ) 5,242 ( 813 ) 60,030 Charge-offs 37,761 — 8,264 30 46,055 Recoveries 5,149 — 18 15 5,182 Net charge-offs (recoveries) 32,612 — 8,246 15 40,873 Ending balance $ 198,423 $ 2,755 $ 68,825 $ 1,706 $ 271,709 Year Ended December 31, 2023 Beginning balance $ 185,303 $ 10,745 $ 54,268 $ 3,153 $ 253,469 Provision for credit losses on loans 31,529 ( 6,572 ) 23,057 ( 583 ) 47,431 Charge-offs 51,186 — 5,500 41 56,727 Recoveries 5,791 — 4 5 5,800 Net charge-offs (recoveries) 45,395 — 5,496 36 50,927 Ending balance $ 171,437 $ 4,173 $ 71,829 $ 2,534 $ 249,973 The Company recorded a $ 60.0 million provision for credit losses on loans for the year ended December 31, 2024, compared to $ 47.4 million for the same period of 2023. The $ 60.0 million provision for credit losses on loans resulted primarily from growth in loans held for investment and $ 40.9 million in net charge-offs during the year ended December 31, 2024 , compared to net charge-offs of $ 50.9 million during the same period of 2023. Criticized loans totaled $ 714.0 million at December 31, 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 December 31, 2024, the Company had $ 28.0 million in collateral-dependent commercial loans, collateralized by business assets, and $ 34.6 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 December 31, 2024 Commercial $ 7,635 $ 7,357 $ 3,483 $ 18,475 $ 75,564 $ 11,051,552 $ 11,145,591 $ 11,036 Mortgage finance — — — — — 5,215,574 5,215,574 — Commercial real estate 337 472 782 1,591 34,637 5,580,054 5,616,282 85 Consumer 6,536 — — 6,536 964 557,876 565,376 964 Total $ 14,508 $ 7,829 $ 4,265 $ 26,602 $ 111,165 $ 22,405,056 $ 22,542,823 $ 12,085 (1) As of December 31, 2024, $ 360,000 of non-accrual loans were earning interest income on a cash basis compared to $ 358,000 as of December 31, 2023. Additionally, $ 287,000 of interest income was recognized on non-accrual loans for the year ended December 31, 2024 compared to $ 37,000 for the same period in 2023. Accrued interest of $ 1.4 million and $ 3.0 million was reversed during the year ended December 31, 2024 and December 31, 2023, respectively. 69 Modifications to Borrowers Experiencing Financial Difficulty The table below details gross loans held for investment as of December 31, 2024 and December 31, 2023 made to borrowers experiencing financial difficulty that were modified during the year ended December 31, 2024 and December 31, 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 Year Ended December 31, 2024 Commercial $ 36,853 $ 9,583 $ 9,273 $ — $ 55,709 0.25 % — % 6 to 13 $ 2,060 Commercial real estate 18,488 15,831 13,915 — 48,234 0.21 % — % 3 to 4 960 Total $ 55,341 $ 25,414 $ 23,188 $ — $ 103,943 0.46 % Year Ended December 31, 2023 Commercial $ 30,873 $ 733 $ 5,458 $ 6,064 $ 43,128 0.21 % 0.70 % 4 to 36 $ 5,139 Commercial real estate — 21,364 — — 21,364 0.10 % — % 4 to 6 — Total $ 30,873 $ 22,097 $ 5,458 $ 6,064 $ 64,492 0.32 % The table below details gross loans held for investment as of December 31, 2024 and December 31, 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 Interest Rate Reduction and Term Extension Total Year Ended December 31, 2024 Commercial $ 2,729 $ — $ — $ 2,729 Total $ 2,729 $ — $ — $ 2,729 Year Ended December 31, 2023 Commercial $ — $ 240 $ 6,064 $ 6,304 Commercial $ — $ 240 $ 6,064 $ 6,304 The table below provides an age analysis of gross loans held for investment as of December 31, 2024 made to borrowers experiencing financial difficulty that were modified in the prior twelve months, and as of December 31, 2023 for loans that were modified since January 1, 2023, the date of adoption of Accounting Standards Update 2022-02: (in thousands) 30-89 Days Past Due 90+ Days Past Due Non-Accrual Current Total December 31, 2024 Commercial $ 7,350 $ — $ 18,761 $ 29,598 $ 55,709 Commercial real estate — — 32,404 15,830 48,234 Total $ 7,350 $ — $ 51,165 $ 45,428 $ 103,943 December 31, 2023 Commercial $ 7,617 $ — $ 11,601 $ 23,910 $ 43,128 Commercial real estate 4,141 — — 17,223 21,364 Total $ 11,758 $ — $ 11,601 $ 41,133 $ 64,492 70 (5) Leases The following table presents ROU assets and lease liabilities: Year Ended December 31, (in thousands) 2024 2023 ROU assets: Finance leases $ 227 $ 1,529 Operating leases 166,194 87,810 Total $ 166,421 $ 89,339 Lease liabilities Finance leases $ 234 $ 1,550 Operating leases 224,973 109,523 Total $ 225,207 $ 111,073 As of December 31, 2024, operating leases had remaining lease terms of approximately 1 year to 15 years, while finance leases had remaining terms of less than 1 year. The table below summarizes the Company’s net lease cost: Year Ended December 31, (in thousands) 2024 2023 Finance lease cost: Amortization of ROU assets $ 1,303 $ 1,335 Interest on lease liabilities 19 40 Operating lease cost 21,593 14,854 Short-term lease cost 37 37 Variable lease cost 6,069 7,168 Net lease cost $ 29,021 $ 23,434 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from finance leases $ 19 $ 40 Operating cash flows from operating leases 46,920 17,203 Financing cash flows from finance leases 1,315 1,327 ROU assets obtained in exchange for new finance leases — — ROU assets obtained in exchange for new operating leases 123,344 18,741 The table below summarizes other information related to operating and finance leases: Year Ended December 31, 2024 2023 Weighted-average remaining lease term - finance leases, in years 0.4 1.2 Weighted-average remaining lease term - operating leases, in years 13.5 12.2 Weighted-average discount rate - finance leases 2.97 % 1.85 % Weighted-average discount rate - operating leases 4.49 % 4.43 % 71 The table below summarizes the maturity of remaining lease liabilities as of December 31, 2024: (in thousands) Finance Leases Operating Leases Total 2025 $ 236 $ 20,899 $ 21,135 2026 — 22,222 22,222 2027 — 22,023 22,023 2028 — 21,314 21,314 2029 — 20,610 20,610 2030 and thereafter — 201,184 201,184 Total lease payments 236 308,252 308,488 Less: Interest ( 2 ) ( 83,279 ) ( 83,281 ) Present value of lease liabilities $ 234 $ 224,973 $ 225,207 As of December 31, 2024, the Company had $ 5.4 million of future payments for banking center leases that have not yet commenced. These leases are expected to commence during 2026, with lease terms of approximately 11 years. (6) Premises & Equipment Premises and equipment are summarized as follows: December 31, (in thousands) 2024 2023 Premises $ 74,228 $ 39,547 Furniture and equipment 47,327 63,367 Total cost 121,555 102,914 Accumulated depreciation ( 36,112 ) ( 70,548 ) Total premises and equipment, net $ 85,443 $ 32,366 Depreciation and amortization expense for the above premises and equipment was approximately $ 11.8 million, $ 10.4 million and $ 9.5 million in 2024, 2023 and 2022, respectively. (7) Deposits Deposits are summarized as follows: December 31, (in thousands) 2024 2023 Non-interest bearing deposits $ 7,485,428 $ 7,328,276 Interest bearing deposits: Transaction 2,787,913 2,264,055 Savings 12,712,510 11,000,783 Time 2,252,748 1,778,725 Total interest bearing deposits 17,753,171 15,043,563 Total deposits $ 25,238,599 $ 22,371,839 The scheduled maturities of interest bearing time deposits were as follows at December 31, 2024: (in thousands) 2025 $ 2,066,749 2026 185,749 2027 130 2028 36 2029 84 2030 and after — Total $ 2,252,748 At December 31, 2024 and 2023, interest bearing time deposits greater than $250,000 were approximately $ 495.5 million and $ 376.4 million, respectively. 72 (8) Short-Term Borrowings and Long-Term Debt The table below presents a summary of the Company’s short-term borrowings, all of which mature within one year: (dollars in thousands) Federal Funds Purchased Customer Repurchase Agreements FHLB Borrowings December 31, 2024 Amount outstanding at year-end $ — $ — $ 885,000 Interest rate at year-end — % — % 4.38 % Average balance outstanding during the year $ 16 $ — $ 933,880 Weighted-average interest rate during the year 17.82 % — % 5.35 % Maximum month-end outstanding during the year $ — $ — $ 1,675,000 December 31, 2023 Amount outstanding at year-end $ — $ — $ 1,500,000 Interest rate at year-end — % — % 5.64 % Average balance outstanding during the year $ — $ 25 $ 1,323,014 Weighted-average interest rate during the year — % 0.39 % 5.34 % Maximum month-end outstanding during the year $ — $ — $ 2,100,000 The following table summarizes the Company’s short-term borrowing capacities net of balances outstanding: (in thousands) December 31, 2024 December 31, 2023 FHLB borrowing capacity relating to loans and pledged securities $ 4,664,703 $ 2,602,092 FHLB borrowing capacity relating to unencumbered securities 4,189,993 3,737,615 Total FHLB borrowing capacity(1) $ 8,854,696 $ 6,339,707 Unused federal funds lines available from commercial banks $ 1,370,000 $ 1,188,000 Unused Federal Reserve borrowings capacity $ 5,436,652 $ 4,094,801 Unused revolving line of credit(2) $ 75,000 $ 100,000 (1) FHLB borrowings are collateralized by a blanket floating lien on certain real estate secured loans, mortgage finance loans and certain pledged securities. (2) Unsecured revolving, non-amortizing line of credit with maturity date of February 8, 2026. Proceeds may be used for general corporate purposes, including funding regulatory capital infusions into the Bank. The loan agreement contains customary financial covenants and restrictions. No borrowings were made against this line of credit during the year ended December 31, 2024 or 2023. The table below presents a summary of long-term debt: (in thousands) December 31, 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 174,717 174,457 Company-issued 4.00 % fixed rate subordinated notes due 2031 372,223 371,785 Trust preferred floating rate subordinated debentures due 2032 to 2036 113,406 113,406 Total long-term debt $ 660,346 $ 859,147 During the second quarter of 2024, the bank-issued senior unsecured credit-linked notes were redeemed in full. The following table summarizes the significant terms of the Company’s trust preferred subordinated debentures: (dollars in thousands) Texas Capital 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 SOFR + 3.61 % 3 month SOFR + 3.51 % 3 month SOFR + 1.77 % 3 month SOFR + 1.86 % 3 month SOFR + 1.97 % Maturity date November 2032 April 2033 December 2035 June 2036 December 2036 73 (9) 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 Year Ended December 31, 2024 Beginning balance $ 36,040 $ 6 $ 10,147 $ 169 $ 46,362 Provision for off-balance sheet credit losses 11,867 17 ( 4,796 ) ( 118 ) 6,970 Ending balance $ 47,907 $ 23 $ 5,351 $ 51 $ 53,332 Year Ended December 31, 2023 Beginning balance $ 16,550 $ — $ 5,222 $ 21 $ 21,793 Provision for off-balance sheet credit losses 19,490 6 4,925 148 24,569 Ending balance $ 36,040 $ 6 $ 10,147 $ 169 $ 46,362 (in thousands) December 31, 2024 December 31, 2023 Commitments to extend credit - period end balance $ 9,694,406 $ 9,749,085 Standby letters of credit - period end balance 538,047 595,079 (10) 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 year ended December 31, 2024 or during 2023. On January 17, 2024, the Company’s board of directors authorized a share repurchase program under which the Company could repurchase up to $ 150.0 million in shares of its outstanding common stock. During the year ended December 31, 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. On January 22, 2025, the Company’s board of directors authorized a new share repurchase program under which the Company may repurchase up to $200.0 million in shares of its outstanding common stock, excluding the effect of excise tax expense incurred on net stock repurchases. The share repurchase program expires on January 31, 2026, but may be suspended or discontinued at any time. Remaining repurchase authorization under the January 17, 2024 share repurchase program was terminated upon authorization of this new program. 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. 74 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%. 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 December 31, 2024 and December 31, 2023. December 31, 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 $ 3,251,979 11.38 % $ 3,264,609 12.65 % Tier 1 capital (to risk-weighted assets) 8.50 % 6.00 % 3,661,979 12.82 % 3,674,609 14.24 % Total capital (to risk-weighted assets) 10.50 % 10.00 % 4,390,656 15.37 % 4,405,575 17.07 % Tier 1 capital (to average assets)(1) 4.00 % N/A 3,661,979 11.33 % 3,674,609 12.21 % The Bank CET1 capital (to risk-weighted assets) 7.00 % 6.50 % $ 3,611,714 12.75 % $ 3,599,919 14.01 % Tier 1 capital (to risk-weighted assets) 8.50 % 8.00 % 3,611,714 12.75 % 3,599,919 14.01 % Total capital (to risk-weighted assets) 10.50 % 10.00 % 3,968,168 14.00 % 3,959,100 15.41 % Tier 1 capital (to average assets)(1) 4.00 % 5.00 % 3,611,714 11.27 % 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. (11) Stock-Based Compensation The Company has a qualified retirement plan with a salary deferral feature designed to qualify under Section 401 of the Internal Revenue Code (“the 401(k) Plan”). The 401(k) Plan permits employees to defer a portion of their compensation. Matching contributions may be made in amounts and at times determined by the Company. These contributions were approximately $ 13.8 million, $ 15.2 million and $ 13.3 million for the years ended December 31, 2024, 2023 and 2022, respectively. Employees are eligible to participate in the 401(k) Plan when they meet certain requirements concerning minimum age and period of credited service. All contributions to the 401(k) Plan are invested in accordance with participant elections among certain investment options. The Company also offers a non-qualified deferred compensation plan for executives and key members of management in order to assist in attracting and retaining these individuals. Participants in the plan may elect to defer up to 75 % of their annual salary and/or short-term incentive payout into deferral accounts that mirror the gains or losses of investments selected by the participants. The plan allows the Company to make discretionary contributions on behalf of a participant as well as matching contributions. The Company did not make any matching contributions in 2024, 2023, or 2022. All participant contributions to the plan and any related earnings are immediately vested and may be withdrawn upon the participant's separation from service, death or disability or upon a date specified by the participant. Salary deferrals are recorded as salaries and employee benefits expense on the consolidated statements of income with an offsetting payable to participants in other liabilities on the consolidated balance sheets. The Company has an Employee Stock Purchase Plan (“ESPP”). Employees are eligible for the ESPP when they meet certain requirements concerning period of credited service and minimum hours worked. Eligible employees may contribute between 1 % and 10 % of eligible compensation up to the Section 423 of the Internal Revenue Code limit of $25,000. In 2006, stockholders approved the ESPP, which allocated 400,000 shares for purchase. As of December 31, 2024, 2023 and 2022, 231,505 , 210,558 and 184,263 shares, respectively, had been purchased on behalf of employees under the ESPP. The Company has stock-based compensation plans under which equity-based compensation grants are made by the board of directors, or its designated committee. Grants are subject to vesting requirements and may be settled in shares of common stock or paid in cash. Under the plans, the Company may grant, among other things, non-qualified stock options, incentive stock options, restricted stock, restricted stock units (“RSUs”), stock appreciation rights (“SARs”), performance awards or any combination thereof to employees and non-employee directors. The Company has historically issued new shares to satisfy share unit conversions. A total of 1,400,000 shares are authorized for grant under the current plan. Total shares remaining available for grant under the current plan at December 31, 2024 were 249,423 . 75 A summary of the Company’s SAR activity and related information is as follows. Grants of SARs include time-based vesting conditions that generally vest ratably over a period of five years . December 31, 2024 December 31, 2023 December 31, 2022 SARs Weighted Average Exercise Price SARs Weighted Average Exercise Price SARs Weighted Average Exercise Price Outstanding at beginning of year — $ — — $ — 3,000 $ 44.20 Exercised — — — — ( 3,000 ) 44.20 Outstanding at year-end — $ — — $ — — $ — Vested and exercisable at year-end — $ — — $ — — $ — Weighted average remaining contractual life of vested (in years) 0.00 0.00 0.00 Weighted average remaining contractual life of outstanding (in years) 0.00 0.00 0.00 Compensation expense $ — $ — $ — Unrecognized compensation expense $ — $ — $ — Intrinsic value of exercised $ — $ — $ 64,000 A summary of the Company’s stock-settled RSU activity and related information is as follows. Grants of stock-settled RSUs include time-based vesting conditions that generally vest ratably over a period of three years . Additionally, from time to time, grants of stock-settled RSUs with both time-based and performance-based vesting conditions are made that generally vest at the end of a three year period. December 31, 2024 December 31, 2023 December 31, 2022 RSUs Weighted Average Grant Date Fair Value RSUs Weighted Average Grant Date Fair Value RSUs Weighted Average Grant Date Fair Value Outstanding at beginning of year 1,081,679 $ 66.91 1,155,652 $ 61.12 1,206,862 $ 56.06 Granted 421,642 63.98 405,434 68.63 453,323 68.15 Vested ( 528,208 ) 63.56 ( 355,046 ) 50.79 ( 308,771 ) 54.51 Forfeited ( 120,462 ) 67.14 ( 124,361 ) 66.98 ( 195,762 ) 58.42 Outstanding at year-end 854,651 $ 67.48 1,081,679 $ 66.91 1,155,652 $ 61.12 Compensation expense $ 20,212,000 $ 24,200,000 $ 21,246,000 Unrecognized compensation expense $ 24,014,000 $ 28,585,000 $ 32,148,000 Weighted average years over which unrecognized compensation expense is expected to be recognized 1.76 1.89 2.31 Fair value of shares vested during the year $ 33,572,000 $ 18,117,000 $ 16,835,000 Intrinsic value of shares vested during the year $ 32,049,000 $ 20,125,000 $ 18,640,000 The grant date fair value of stock-settled RSUs and performance awards that do not contain market conditions is equal to the market price of common stock on the grant date. The value of performance awards that include a market condition is estimated on the date of grant using a Monte Carlo simulation model with the following weighted average assumptions: December 31, 2024 December 31, 2023 December 31, 2022 Risk-free interest rate 4.41 % 4.14 % 1.56 % Expected stock price volatility 38.3 % 50.2 % 57.1 % Simulation period 2.87 years 2.89 years 2.89 years 76 A summary of the Company’s cash-settled RSU activity and related information is as follows. Grants of stock-settled RSUs include time-based vesting conditions that generally vest ratably over a period of three years . Since these units have a cash payout feature, they are accounted for under the liability method with related expense based on the stock price at period end. December 31, 2024 December 31, 2023 December 31, 2022 RSUs outstanding at beginning of year — — 13,131 Granted 226,864 — — Vested ( 55 ) — ( 12,655 ) Forfeited ( 31,998 ) — ( 476 ) RSUs outstanding at year-end 194,811 — — Compensation expense $ 4,481,000 $ — $ 186,000 Weighted average years over which unrecognized compensation expense is expected to be recognized 2.19 0.00 0.00 (12) Income Taxes Income tax expense/(benefit) consists of the following: Year ended December 31, (in thousands) 2024 2023 2022 Current: Federal $ 37,878 $ 69,350 $ 109,370 State 7,761 5,888 7,302 Total 45,639 75,238 116,672 Deferred: Federal ( 14,960 ) ( 16,540 ) ( 16,178 ) State ( 1,126 ) ( 1,244 ) ( 1,217 ) Total ( 16,086 ) ( 17,784 ) ( 17,395 ) Total expense: Federal 22,918 52,810 93,192 State 6,635 4,644 6,085 Total $ 29,553 $ 57,454 $ 99,277 The reconciliation of income tax at the U.S. federal statutory tax rate to income tax expense and effective tax rate is as follows: Year ended December 31, 2024 2023 2022 (dollars in thousands) Amount Rate Amount Rate Amount Rate U.S. statutory rate $ 22,483 21 % $ 51,785 21 % $ 90,669 21 % State taxes 2,539 2 % 2,938 1 % 6,822 2 % Tax-exempt income ( 1,471 ) ( 1 ) % ( 350 ) — % ( 1,061 ) — % Tax credits ( 1,833 ) ( 2 ) % ( 855 ) — % ( 128 ) — % Disallowed FDIC 2,257 2 % 1,863 1 % 1,491 — % Disallowed compensation 2,022 2 % 1,176 — % 2,771 1 % Uncertain tax positions recognized 2,688 3 % 155 — % 167 — % Other 868 1 % 742 — % ( 1,454 ) ( 1 ) % Total $ 29,553 28 % $ 57,454 23 % $ 99,277 23 % At December 31, 2024, 2023 and 2022, the Company had unrecognized tax benefits of $ 4.3 million, $ 1.0 million and $ 889,000 , respectively. If the income tax impacts from these tax positions are ultimately realized, such realization would not have a material impact on the income tax provision or effective tax rate. The Company is no longer subject to U.S. federal income tax examinations for years before 2021 or state and local income tax examinations for years before 2020. 77 The table below summarizes significant components of deferred tax assets and liabilities utilizing the applicable federal and state corporate income tax rates. Management believes it is more likely than not that all of the deferred tax assets will be realized. December 31, (in thousands) 2024 2023 Deferred tax assets: Allowance for credit losses $ 73,394 $ 66,913 Lease liabilities 50,852 25,080 Loan origination fees, net 14,765 13,377 Stock compensation 6,518 6,216 Non-accrual interest 2,707 1,672 Deferred compensation 5,336 4,672 Net unrealized losses in AOCI 53,404 96,229 Other 6,108 6,069 Total deferred tax assets 213,084 220,228 Deferred tax liabilities: Lease financing transactions ( 15,262 ) ( 9,741 ) Lease ROU assets ( 37,527 ) ( 21,225 ) Depreciation ( 1,513 ) ( 3,473 ) Other ( 460 ) ( 728 ) Total deferred tax liabilities ( 54,762 ) ( 35,167 ) Net deferred tax asset $ 158,322 $ 185,061 (13) 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 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. 78 Assets and liabilities measured at fair value are as follows: Fair Value Measurements Using (in thousands) Level 1 Level 2 Level 3 December 31, 2024 Available-for-sale debt securities:(1) U.S. Treasury securities $ 277,285 $ — $ — Residential mortgage-backed securities — 3,034,043 — Commercial mortgage-backed securities — 201,432 — CRT securities — — 11,926 Equity securities(1)(2) 59,235 16,026 — Loans held for investment(4) — — 35,318 Derivative assets(5) — 23,202 — Securities sold not yet purchased(6) 33,705 — — Derivative liabilities(5) — 57,906 — Non-qualified deferred compensation plan liabilities(7) 19,109 — — 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. 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 Year Ended December 31, 2024 Available-for-sale debt securities:(1) CRT securities $ 11,995 $ — $ ( 1,170 ) $ — $ 1,101 $ 11,926 Year Ended December 31, 2023 Available-for-sale debt securities:(1) CRT securities $ 11,861 $ — $ ( 1,077 ) $ — $ 1,211 $ 11,995 (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). 79 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 December 31, 2024, the discount rates utilized ranged from 5.02 % to 6.58 % and the weighted-average life ranged from 4.51 years to 6.66 years. On a combined amortized cost weighted-average basis a discount rate of 5.63 % and a weighted-average life of 5.35 years were utilized to determine the fair value of these securities at December 31, 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 $ 35.3 million fair value of loans held for investment at December 31, 2024 reported above includes impaired loans with a carrying value of $ 63.6 million that were reduced by specific allowance allocations totaling $ 28.3 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. 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 December 31, 2024 Financial assets: Cash and cash equivalents $ 3,188,808 $ 3,188,808 $ 3,188,808 $ — $ — Available-for-sale debt securities 3,524,686 3,524,686 277,285 3,235,475 11,926 Held-to-maturity debt securities 796,168 678,174 — 678,174 — Equity securities 75,261 75,261 59,235 16,026 — Loans held for investment, net 22,178,357 22,115,585 — — 22,115,585 Derivative assets 23,202 23,202 — 23,202 — Financial liabilities: Total deposits 25,238,599 25,245,009 — — 25,245,009 Short-term borrowings 885,000 885,000 — 885,000 — Long-term debt 660,346 622,713 — 622,713 — Securities sold not yet purchased 33,705 33,705 33,705 — — Derivative liabilities 57,906 57,906 — 57,906 — 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 — 80 (14) Derivative Financial Instruments The notional amounts and estimated fair values of derivative positions outstanding are presented in the following table. December 31, 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 $ 2,600,000 $ 254 $ 23,265 $ 2,850,000 $ 668 $ 57,961 Non-hedging derivatives Customer-initiated and other derivatives: Foreign currency forward contracts 485,948 5,462 5,299 4,824 52 31 Interest rate contracts: Swaps 6,273,301 45,771 45,771 5,673,822 65,247 69,863 Caps and floors written 970,451 1,066 2,529 637,971 1,654 2,228 Caps and floors purchased 970,451 2,529 1,066 637,971 2,228 1,654 Forward contracts 20,237,917 41,896 41,035 8,665,675 39,123 38,570 Gross derivatives 96,978 118,965 108,972 170,307 Netting adjustment - offsetting derivative assets/liabilities ( 44,097 ) ( 44,097 ) ( 37,346 ) ( 37,346 ) Netting adjustment - cash collateral received/posted ( 29,679 ) ( 16,962 ) ( 38,682 ) ( 62,044 ) Net derivatives included on the consolidated balance sheets $ 23,202 $ 57,906 $ 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 $ 23.2 million at December 31, 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 December 31, 2024, the Company had $ 71.3 million in cash collateral pledged to counterparties included in interest bearing cash and cash equivalents on the consolidated balance sheet and $ 31.0 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 17 risk participation agreements where it acts as a participant bank with a notional amount of $ 228.6 million at December 31, 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 $ 4.1 million at December 31, 2024 and $ 4.5 million at December 31, 2023. The fair value of these exposures was insignificant to the consolidated financial statements at both December 31, 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 25 risk participation agreements where the Company acts as the lead bank having a notional amount of $ 349.5 million at December 31, 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 year ended December 31, 2024, the Company recorded $ 28.7 million in unrealized losses to adjust its cash flow hedges to fair value, which was recorded net of tax to AOCI, and reclassified $ 66.9 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 $ 22.5 million related to active and terminated hedges will be reclassified from AOCI as a decrease to interest income. As of December 31, 2024, the maximum length of time over which forecasted transactions are hedged is 1.17 years. 81 (15) 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 Year Ended December 31, 2024 Beginning balance $ ( 45,749 ) $ ( 273,806 ) $ ( 42,449 ) $ ( 362,004 ) Change in unrealized gain/(loss) ( 28,672 ) ( 2,883 ) — ( 31,555 ) Amounts reclassified into net income 66,852 179,581 6,844 253,277 Total other comprehensive income/(loss) 38,180 176,698 6,844 221,722 Income tax expense/(benefit) 7,706 34,423 696 42,825 Total other comprehensive income/(loss), net of tax 30,474 142,275 6,148 178,897 Ending balance $ ( 15,275 ) $ ( 131,531 ) $ ( 36,301 ) $ ( 183,107 ) Year Ended December 31, 2023 Beginning balance $ ( 66,394 ) $ ( 304,309 ) $ ( 48,240 ) $ ( 418,943 ) Change in unrealized gain/(loss) ( 34,778 ) 39,101 — 4,323 Amounts reclassified into net income 60,911 ( 489 ) 7,330 67,752 Total other comprehensive income/(loss) 26,133 38,612 7,330 72,075 Income tax expense/(benefit) 5,488 8,109 1,539 15,136 Total other comprehensive income/(loss), net of tax 20,645 30,503 5,791 56,939 Ending balance $ ( 45,749 ) $ ( 273,806 ) $ ( 42,449 ) $ ( 362,004 ) (16) Related Party Transactions During 2024 and 2023, the Company had transactions with its directors, executive officers and their affiliates. These transactions were made in the ordinary course of business and include extensions of credit and deposit transactions, all made on substantially the same terms as the then prevailing market and credit terms extended to other customers. (17) Parent Company Only Summarized financial information for Texas Capital Bancshares, Inc. are as follows: Balance Sheet December 31, (in thousands) 2024 2023 Assets Cash and cash equivalents $ 205,377 $ 301,672 Investment securities 38,683 18,845 Investment in subsidiaries 3,604,699 3,306,095 Other assets 29,389 55,949 Total assets $ 3,878,148 $ 3,682,561 Liabilities and Stockholders’ Equity Liabilities: Other liabilities $ 50,050 $ 23,695 Long-term debt 485,629 485,191 Total liabilities 535,679 508,886 Stockholders’ Equity: Preferred stock 300,000 300,000 Common stock 515 511 Additional paid-in capital 1,056,719 1,045,576 Retained earnings 2,470,184 2,409,926 Treasury stock ( 301,842 ) ( 220,334 ) Accumulated other comprehensive income/(loss) ( 183,107 ) ( 362,004 ) Total stockholders’ equity 3,342,469 3,173,675 Total liabilities and stockholders’ equity $ 3,878,148 $ 3,682,561 82 Statement of Income Year ended December 31, (in thousands) 2024 2023 2022 Interest on notes receivable $ 2 $ 2,167 $ 3,250 Dividend income 685 7,671 10,529 Other income 148 ( 94 ) 9 Total income 835 9,744 13,788 Interest expense 23,925 23,714 19,721 Salaries and benefits 922 835 782 Legal and professional 2,005 1,504 1,583 Other non-interest expense 2,072 1,823 1,636 Total expense 28,924 27,876 23,722 Loss before income taxes and equity in undistributed income of subsidiary ( 28,089 ) ( 18,132 ) ( 9,934 ) Income tax benefit ( 8,102 ) ( 4,537 ) ( 2,282 ) Loss before equity in undistributed income of subsidiary ( 19,987 ) ( 13,595 ) ( 7,652 ) Equity in undistributed income of subsidiary 97,495 201,189 337,946 Net income 77,508 187,594 330,294 Preferred stock dividends 17,250 17,250 17,250 Net income available to common stockholders $ 60,258 $ 170,344 $ 313,044 Statements of Cash Flows Year ended December 31, (in thousands) 2024 2023 2022 Operating Activities Net income $ 77,508 $ 187,594 $ 330,294 Adjustments to reconcile net income to net cash provided by/(used in) operating activities: Equity in undistributed income of subsidiary ( 97,495 ) ( 201,189 ) ( 337,946 ) Depreciation and amortization 438 437 438 Net (gain)/loss recognized on equity securities ( 4,395 ) ( 508 ) — Changes in operating assets and liabilities: Accrued interest receivable and other assets 26,560 37,446 ( 2,095 ) Accrued interest payable and other liabilities 26,355 16,941 3,086 Net cash provided by/(used in) operating activities 28,971 40,721 ( 6,223 ) Investing Activities Sales/(purchases) of equity securities, net ( 15,443 ) ( 18,337 ) — Repayments of investments in/(advances to) subsidiaries ( 2,000 ) 160,000 ( 50,000 ) Net cash provided by/(used in) investing activities ( 17,443 ) 141,663 ( 50,000 ) Financing Activities Issuance of stock related to stock-based awards ( 9,065 ) ( 4,215 ) ( 4,209 ) Preferred stock dividends paid ( 17,250 ) ( 17,250 ) ( 17,250 ) Repurchase of common stock ( 81,508 ) ( 105,024 ) ( 115,302 ) Net cash used in financing activities ( 107,823 ) ( 126,489 ) ( 136,761 ) Net increase/(decrease) in cash and cash equivalents ( 96,295 ) 55,895 ( 192,984 ) Cash and cash equivalents at beginning of year 301,672 245,777 438,761 Cash and cash equivalents at end of year $ 205,377 $ 301,672 $ 245,777 (18) New Accounting Standards Accounting Standards Update 2023-09 “Income Taxes (Topic 740) - Improvements to Income Tax Disclosures” (“ASU 2023-09”) enhances the transparency and decision usefulness of income tax disclosures. ASU 2023-09 will require disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. Entities will also be required to disclose income/(loss) from continuing operations before income tax expense/(benefit) disaggregated between domestic and foreign, as well as income tax expense/(benefit) from continuing operations disaggregated by federal, state and foreign. ASU 2023-09 is effective January 1, 2025 and is not expected to have a significant impact on the Company’s financial statement disclosures. 83 Accounting Standards Update 2024-01 “Compensation - Stock Compensation (Topic 718) - Scope Application of Profits Interest and Similar Awards” (“ASU 2024-01”) clarifies how an entity determines whether a profits interest or similar award is within the scope of Topic 718 or is not a share-based payment arrangement and therefore within the scope of other guidance. ASU 2024-01 provides an illustrative example with multiple fact patterns and also amends certain language in the “Scope” and “Scope Exceptions” sections of Topic 718 to improve its clarity and operability without changing the guidance. Entities can apply the amendments either retrospectively to all prior periods presented in the financial statements or prospectively to profits interest and similar awards granted or modified on or after the date of adoption. If prospective application is elected, an entity must disclose the nature of and reason for the change in accounting principle. ASU 2024-01 is effective January 1, 2025, including interim periods, and is not expected to have a significant impact on the Company’s financial statements. Accounting Standards Update 2024-02 “Codification Improvements” (“ASU 2024-02”) amends the Codification to remove references to various concepts statements and impacts a variety of topics in the Codification. The amendments apply to all reporting entities within the scope of the affected accounting guidance, but in most instances the references removed are extraneous and not required to understand or apply the guidance. Generally, the amendments in ASU 2024-02 are not intended to result in significant accounting changes for most entities. ASU 2024-02 is effective January 1, 2025 and is not expected to have a significant impact on the Company’s financial statements. Accounting Standards Update 2024-03 “Income Statement Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses” (“ASU 2024-03”) improves financial reporting by requiring that public business entities disclose additional information about specific expense categories (certain costs and expenses) in the notes to the financial statements. ASU 2024-03 is effective January 1, 2026 and is not expected to have a significant impact on the Company’s financial statements. Accounting Standards Update 2024-04 “Debt - Debt with Conversion and Other Options (Subtopic 470-20)” (“ASU 2024-04”) clarifies wither the settlement of convertible debt, including debt containing cash conversion features at terms that are different from the terms included in the existing debt instrument, should be accounted for as an induced conversion or a debt extinguishment. ASU 2024-04 is effective for public business entities January 1, 2025 and is not expected to have a significant impact on the Company’s financial statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None.