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 ) 54 Consolidated Balance Sheets — December 31, 2021 and December 31, 2020 56 Consolidated Statements of Income and Other Comprehensive Income — Years ended December 31, 2021, 2020 and 2019 57 Consolidated Statements of Stockholders’ Equity — Years ended December 31, 2021, 2020 and 2019 58 Consolidated Statements of Cash Flows — Years ended December 31, 2021, 2020 and 2019 59 Notes to Consolidated Financial Statements 60 53 Table of Contents 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, 2021 and 2020, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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, 2021, 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 9, 2022 expressed an unqualified opinion thereon. Adoption of New Accounting Standard As discussed in Note 1 to the consolidated financial statements, the Company changed its method for accounting for credit losses in 2020. 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. 54 Table of Contents Allowance for Credit Losses - Loans Description of the Matter The Company’s loans held for investment portfolio totaled $22.8 billion as of December 31, 2021, and the associated allowance for credit losses (ACL) was $229.1 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 the reliability and accuracy of data used in the model, management’s review and approval of the selected qualitative factors, the single or blend of multiple forecast scenarios used to calculate the reasonable and supportable forecast, the governance of the credit loss methodology, and 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. We have served as the Company's auditor since 1999. Dallas, TX February 9, 2022 55 Table of Contents TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS December 31, (in thousands except share data) 2021 2020 Assets Cash and due from banks $ 180,663 $ 173,573 Interest-bearing deposits in other banks 7,765,996 9,032,807 Investment securities 3,583,808 3,196,970 Loans held for sale ($ 8.1 million and $ 239.1 million at December 2021 and 2020, respectively, at fair value) 8,123 283,165 Loans held for investment, mortgage finance 7,475,497 9,079,409 Loans held for investment (net of unearned income) 15,331,457 15,351,451 Less: Allowance for credit losses on loans 211,866 254,615 Loans held for investment, net 22,595,088 24,176,245 Mortgage servicing rights, net — 105,424 Premises and equipment, net 20,901 24,546 Accrued interest receivable and other assets 559,897 715,699 Goodwill and intangible assets, net 17,262 17,667 Total assets $ 34,731,738 $ 37,726,096 Liabilities and Stockholders’ Equity Liabilities: Deposits: Non-interest-bearing $ 13,390,370 $ 12,740,947 Interest-bearing 14,718,995 18,255,642 Total deposits 28,109,365 30,996,589 Accrued interest payable 7,699 11,150 Other liabilities 273,488 339,486 Federal funds purchased and repurchase agreements 2,832 111,751 Other borrowings 2,200,000 3,000,000 Long-term debt 928,738 395,896 Total liabilities 31,522,122 34,854,872 Stockholders’ equity: Preferred stock, $ 0.01 par value, $ 1,000 liquidation value: Authorized shares— 10,000,000 Issued shares— 300,000 and 6,000,000 shares issued at December 31, 2021 and 2020, respectively 300,000 150,000 Common stock, $ 0.01 par value: Authorized shares— 100,000,000 Issued shares— 50,618,911 and 50,470,867 at December 31, 2021 and 2020, respectively 506 504 Additional paid-in capital 1,008,559 991,898 Retained earnings 1,948,274 1,713,056 Treasury stock (shares at cost: 417 at December 31, 2021 and 2020) ( 8 ) ( 8 ) Accumulated other comprehensive income/(loss), net of taxes ( 47,715 ) 15,774 Total stockholders’ equity 3,209,616 2,871,224 Total liabilities and stockholders’ equity $ 34,731,738 $ 37,726,096 See accompanying notes to consolidated financial statements. 56 Table of Contents TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME Year ended December 31, (in thousands except per share data) 2021 2020 2019 Interest income Interest and fees on loans $ 820,532 $ 993,670 $ 1,273,547 Investment securities 42,820 17,475 8,654 Federal funds sold 1 693 1,529 Interest-bearing deposits in other banks 13,232 27,569 71,093 Total interest income 876,585 1,039,407 1,354,823 Interest expense Deposits 65,507 146,117 293,537 Federal funds purchased 131 1,083 11,872 Other borrowings 4,482 20,923 58,393 Long-term debt 37,628 19,963 21,790 Total interest expense 107,748 188,086 385,592 Net interest income 768,837 851,321 969,231 Provision for credit losses ( 30,000 ) 258,000 75,000 Net interest income after provision for credit losses 798,837 593,321 894,231 Non-interest income Service charges on deposit accounts 18,674 11,620 11,320 Wealth management and trust fee income 13,173 9,998 8,810 Brokered loan fees 27,954 46,423 29,738 Servicing income 15,513 27,029 13,439 Investment banking and trading income 24,441 22,687 14,876 Net gain/(loss) on sale of loans held for sale 1,317 58,026 ( 20,259 ) Other 37,158 27,198 44,444 Total non-interest income 138,230 202,981 102,368 Non-interest expense Salaries and employee benefits 350,930 340,529 328,483 Net occupancy expense 33,232 34,955 32,989 Marketing 10,006 23,581 53,355 Legal and professional 41,152 52,132 52,460 Communications and technology 75,185 103,054 44,826 Federal Deposit Insurance Corporation (“FDIC”) insurance assessment 21,027 25,955 20,093 Servicing-related expenses 27,765 64,585 22,012 Merger-related expenses — 17,756 1,370 Other 39,715 41,809 44,701 Total non-interest expense 599,012 704,356 600,289 Income before income taxes 338,055 91,946 396,310 Income tax expense 84,116 25,657 84,295 Net income 253,939 66,289 312,015 Preferred stock dividends 18,721 9,750 9,750 Net income available to common stockholders $ 235,218 $ 56,539 $ 302,265 Other comprehensive income Change in unrealized gain/(loss) on available-for-sale debt securities, before tax $ ( 80,366 ) $ 8,639 $ 10,674 Income tax expense/(benefit) ( 16,877 ) 1,815 2,242 Other comprehensive income/(loss), net of tax ( 63,489 ) 6,824 8,432 Comprehensive income $ 190,450 $ 73,113 $ 320,447 Basic earnings per common share $ 4.65 $ 1.12 $ 6.01 Diluted earnings per common share $ 4.60 $ 1.12 $ 5.99 See accompanying notes to consolidated financial statements. 57 Table of Contents 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, 2018 6,000,000 $ 150,000 50,201,127 $ 502 $ 967,890 $ 1,361,406 ( 417 ) $ ( 8 ) $ 518 $ 2,480,308 Comprehensive income: Net income — — — — — 312,015 — — — 312,015 Change in unrealized gain/(loss) on available-for-sale debt securities, net of taxes — — — — — — — — 8,432 8,432 Total comprehensive income 320,447 Stock-based compensation expense recognized in earnings — — — — 11,775 — — — — 11,775 Preferred stock dividend — — — — — ( 9,750 ) — — — ( 9,750 ) Issuance of stock related to stock-based awards — — 128,263 1 ( 1,460 ) — — — — ( 1,459 ) Issuance of common stock related to warrants — — 8,768 — — — — — — — Balance at December 31, 2019 6,000,000 $ 150,000 50,338,158 $ 503 $ 978,205 $ 1,663,671 ( 417 ) $ ( 8 ) $ 8,950 $ 2,801,321 Impact of adoption of new accounting standards(1) — — — — — ( 7,154 ) — — — ( 7,154 ) Comprehensive income: Net income — — — — — 66,289 — — — 66,289 Change in unrealized gain/(loss) on available-for-sale debt securities, net of taxes — — — — — — — — 6,824 6,824 Total comprehensive income 73,113 Stock-based compensation expense recognized in earnings — — — — 15,681 — — — — 15,681 Preferred stock dividend — — — — — ( 9,750 ) — — — ( 9,750 ) Issuance of stock related to stock-based awards — — 132,709 1 ( 1,988 ) — — — — ( 1,987 ) Balance at December 31, 2020 6,000,000 $ 150,000 50,470,867 $ 504 $ 991,898 $ 1,713,056 ( 417 ) $ ( 8 ) $ 15,774 $ 2,871,224 Comprehensive income: Net income — — — — — 253,939 — — — 253,939 Change in unrealized gain/(loss) on available-for-sale debt securities, net of taxes — — — — — — — — ( 63,489 ) ( 63,489 ) Total comprehensive income 190,450 Stock-based compensation expense recognized in earnings — — — — 30,061 — — — — 30,061 Issuance of preferred stock 300,000 300,000 — — ( 10,277 ) — — — — 289,723 Preferred stock dividend — — — — — ( 18,721 ) — — — ( 18,721 ) Issuance of stock related to stock-based awards — — 148,044 2 ( 3,123 ) — — — — ( 3,121 ) Redemption of preferred stock ( 6,000,000 ) ( 150,000 ) — — — — — — — ( 150,000 ) 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 (1) Represents the impact of adopting ASU 2016-13. See Note 1 - Operations and Summary of Significant Accounting Policies to the consolidated financial statements for more information. See accompanying notes to consolidated financial statements. 58 Table of Contents TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, (in thousands) 2021 2020 2019 Operating activities Net income $ 253,939 $ 66,289 $ 312,015 Adjustments to reconcile net income to net cash provided by/(used in) operating activities: Provision/(benefit) for credit losses ( 30,000 ) 258,000 75,000 Deferred tax expense/(benefit) ( 20,253 ) ( 7,964 ) 10,796 Depreciation and amortization 93,406 74,925 37,267 Net (gain)/loss on sale of loans held for sale ( 1,317 ) ( 58,026 ) 20,259 Increase/(decrease) in valuation allowance on mortgage servicing rights ( 16,448 ) 20,164 5,803 Stock-based compensation expense 31,326 17,441 17,604 Purchases and originations of loans held for sale ( 1,413,899 ) ( 11,366,986 ) ( 10,183,057 ) Proceeds from sales and repayments of loans held for sale 1,676,601 13,619,623 9,508,927 Changes in operating assets and liabilities: Accrued interest receivable and other assets 154,114 10,654 ( 143,538 ) Accrued interest payable and other liabilities ( 70,154 ) 5,749 98,735 Net cash provided by/(used in) operating activities 657,315 2,639,869 ( 240,189 ) Investing activities Purchases of investment securities ( 1,059,897 ) ( 3,001,746 ) ( 113,233 ) Principal payments received on investment securities 569,931 52,609 6,185 Originations of mortgage finance loans ( 167,084,439 ) ( 216,234,122 ) ( 138,759,289 ) Proceeds from pay-offs of mortgage finance loans 168,688,351 215,324,562 136,466,964 Proceeds from sale of mortgage servicing rights 115,891 — — Net decrease in loans held for investment, excluding mortgage finance loans 7,076 926,176 139,868 Purchase of premises and equipment, net ( 4,127 ) ( 2,796 ) ( 16,651 ) Net cash provided by/(used in) investing activities 1,232,786 ( 2,935,317 ) ( 2,276,156 ) Financing activities Net increase/(decrease) in deposits ( 2,887,224 ) 4,517,996 5,872,480 Costs from issuance of stock related to stock-based awards and warrants ( 3,121 ) ( 1,986 ) ( 1,459 ) Net proceeds from issuance of preferred stock 289,723 — — Redemption of preferred stock ( 150,000 ) — — Preferred dividends paid ( 18,721 ) ( 9,750 ) ( 9,750 ) Net proceeds from issuance of long-term debt 639,440 — — Redemption of long-term debt ( 111,000 ) — — Net increase/(decrease) in other borrowings ( 800,000 ) 600,000 ( 1,500,000 ) Net decrease in federal funds purchased and repurchase agreements ( 108,919 ) ( 30,015 ) ( 499,408 ) Net cash provided by/(used in) financing activities ( 3,149,822 ) 5,076,245 3,861,863 Net increase/(decrease) in cash and cash equivalents ( 1,259,721 ) 4,780,797 1,345,518 Cash and cash equivalents at beginning of period 9,206,380 4,425,583 3,080,065 Cash and cash equivalents at end of period $ 7,946,659 $ 9,206,380 $ 4,425,583 Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 111,199 $ 189,696 $ 393,507 Cash paid during the period for income taxes 101,101 26,152 89,967 See accompanying notes to consolidated financial statements. 59 Table of Contents (1) Operations and Summary of Significant Accounting Policies Organization and Nature of Business Texas Capital Bancshares, Inc. (“we,” “us,” “TCBI” or the “Company”), a Delaware corporation, was incorporated in November 1996 and commenced banking operations in December 1998. The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiary, Texas Capital Bank (the “Bank”). We serve the needs of commercial businesses and professionals and entrepreneurs located in Texas as well as operate several lines of business serving a regional or national clientele of commercial borrowers. We are primarily a secured lender, with the majority of our loans held for investment, excluding mortgage finance loans and other national lines of business, being made to businesses headquartered or with operations in Texas. Our national lines of business provide specialized lending products to businesses throughout the United States. In May 2021 the Bank applied to the Texas Department of Banking to convert from a national association to a Texas state-chartered bank. The application was approved during the third quarter and the conversion was effective at open of business on September 15, 2021. Effective as of the date of conversion, the Texas Department of Banking is the Bank’s primary regulator, the Federal Deposit Insurance Corporation (“FDIC”) is the Bank’s primary federal regulator, and the Board of Governors of the Federal Reserve System (“Federal Reserve”). Basis of Presentation Our accounting and reporting policies conform to accounting principles generally accepted in the United States (“GAAP”) and to generally accepted practices within the banking industry. Certain prior period balances have been reclassified to conform to the current period presentation. In December 2021, the Company received approval from the U.S. Securities and Exchange Commission (“SEC”) and Financial Industry Regulatory Authority (“FINRA”) for broker-dealer registration and FINRA membership of TCBI Securities, a wholly owned non-bank subsidiary of the Bank. As a result, we are establishing a policy regarding the accounting for loan syndication fees and reclassifying prior period financial statements to conform to this policy. Refer to the Revenue Recognition section of this footnote for this accounting policy. Such reclassifications are immaterial, individually and in the aggregate, to both current and all previously issued financial statements taken as a whole and have no effect on previously reported consolidated net income. December 31, 2020 December 31, 2019 ( in thousands) As Reported Adjustment As Revised As Reported Adjustment As Revised Interest and fees on loans $ 1,011,175 $ ( 17,505 ) $ 993,670 $ 1,284,036 $ ( 10,489 ) $ 1,273,547 Total interest income 1,056,912 ( 17,505 ) 1,039,407 1,365,312 ( 10,489 ) 1,354,823 Net interest income 868,826 ( 17,505 ) 851,321 979,720 ( 10,489 ) 969,231 Net interest income after provision for credit losses 610,826 ( 17,505 ) 593,321 904,720 ( 10,489 ) 894,231 Swap fees 5,182 ( 5,182 ) — 4,387 ( 4,387 ) — Investment banking and trading income — 22,687 22,687 — 14,876 14,876 Total non-interest income 185,476 17,505 202,981 91,879 10,489 102,368 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. 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. Accumulated Other Comprehensive Income/(Loss) Unrealized gains or losses on our available-for-sale debt securities, net of applicable income tax expense or benefit, are included in accumulated other comprehensive income/(loss), net (“AOCI”) in the accompanying consolidated statements of stockholders’ equity. Changes to AOCI are reported on the consolidated statements of income and other comprehensive income. 60 Table of Contents GAAP does not permit the adjustment of tax amounts in AOCI for changes in tax rates; as a result the effects become “stranded” in AOCI. Stranded tax effects caused by the 2018 revaluation of deferred taxes resulting from the corporate tax rates established by the Tax Cuts and Jobs Act (the “Tax Act”) are reclassified from AOCI to retained earnings in accordance with our early adoption of ASU 2018-02 “ Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” 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. 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. Held-to-Maturity Debt securities are classified as held-to-maturity when we have the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. 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, we first assess whether we intend to sell, or it is more-likely-than-not that we will be required to sell, the securities before recovery of the amortized cost basis. If either of these criteria is met, the securities’ amortized cost basis is written down to fair value as a current period expense. If either of the above criteria is not met, we evaluate whether the decline in fair value is the result of credit losses or other factors. In making this assessment, we may consider various factors including the extent to which fair value is less than amortized cost, performance of any underlying collateral and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess 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. 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. Realized gains and losses and declines in value judged to be other-than-temporary are included 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. We have made a policy election to exclude accrued interest from the amortized cost basis of available-for-sale debt securities and report accrued interest separately in accrued interest and other assets on the consolidated balance sheets. Available-for-sale debt securities are placed on non-accrual status when we no longer expect to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on non-accrual status. Accordingly, we do not recognize an allowance for credit loss against accrued interest receivable. Included in debt securities available-for-sale are credit risk transfer (“CRT”) securities. CRT securities represent unsecured obligations issued by government sponsored entities (“GSEs”) such as Freddie Mac and are designed to transfer mortgage credit risk from the GSE to private investors. CRT securities are structured to be subject to the performance of a reference pool of mortgage loans in which we share in 50% of the first losses with the GSE. If the reference pool incurs losses, the amount we will recover on the notes is reduced by our share of the amount of such losses, which could potentially be up to 100% of the amount outstanding. Unrealized losses recognized in 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. 61 Table of Contents 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, if any. Loans Loans Held for Sale We transitioned our mortgage correspondent aggregation (“MCA”) program to a third party in 2021. Prior to transition, we committed to purchase residential mortgage loans from independent correspondent lenders and delivered those loans into the secondary market via whole loan sales to independent third parties or in securitization transactions to third parties such as Ginnie Mae or to GSEs. In some cases, we retained the mortgage servicing rights. Once purchased, these loans were classified as held for sale and carried at fair value pursuant to our election of the fair value option in accordance with Accounting Standards Codification (“ASC”) 825, Financial Instruments . At the commitment date, we entered into a corresponding forward sale commitment with a third party, typically Ginnie Mae or a GSE, to deliver the loans within a specified timeframe. The estimated gain/(loss) for the entire transaction (from initial purchase commitment to final delivery of loans) was recorded as an asset or liability. The fair value of loans held for sale is derived from observable current market prices, when available, and includes the fair value of the mortgage servicing rights. Adjustments to reflect unrealized gains and losses resulting from changes in fair value and realized gains and losses upon ultimate sale of the loans are classified as gain/(loss) on sale of loans held for sale on the consolidated statements of income and other comprehensive income. Residential mortgage loans held for sale are subject to both credit and interest rate risk. Credit risk is managed through underwriting policies and procedures, including collateral requirements, which are generally accepted by the secondary loan markets. Exposure to interest rate fluctuations is partially managed through forward sales contracts, which set the price for loans that will be delivered in the next 60 to 90 days. Pursuant to Ginnie Mae servicing guidelines, we have the unilateral right, but not the obligation, to repurchase certain delinquent loans securitized in Ginnie Mae pools, if they meet defined delinquent loan criteria. Once the delinquency criteria have been met, and regardless of whether the repurchase option has been exercised, we account for these loans as if they had been repurchased and recognize the loans and a corresponding liability as loans held for sale and other liabilities, respectively, on the consolidated balance sheets. If the loans are actually repurchased, the liability is extinguished and the loans continue to be reported as held for sale. As a Ginnie Mae approved lender, we may recover losses incurred on repurchased loans through a claims process with the government agency. From time to time we hold for sale the guaranteed portion of Small Business Administration 7(a) loans, which are carried at lower of cost or market. 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 costs). Interest on loans is recognized using the simple interest method on the daily balances of the principal amounts outstanding. Loan origination fees, net of direct loan origination costs, and commitment fees are deferred and amortized as an adjustment to yield over the life of the loan, or over the commitment period, as applicable. Restructured loans are loans on which, due to the borrower’s financial difficulties, we have granted a concession that we would not otherwise consider for borrowers of similar credit quality. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two. Modifications of terms that could potentially qualify as a restructuring include reduction of contractual interest rate, extension of the maturity date at a contractual interest rate lower than the current rate for new debt with similar risk, an adjustment to payment terms, a reduction of the face amount of debt or forgiveness of either principal or accrued interest. A loan continues to qualify as restructured until a consistent payment history or change in the borrower’s financial condition has been evidenced, generally for no less than twelve months. If the restructuring agreement specifies an interest rate at the time of the restructuring that is greater than or equal to the rate that we are willing to accept for a new extension of credit with comparable risk, then the loan is no longer considered a restructuring if it is in compliance with the modified terms in calendar years after the year of the restructure. A loan is considered past due when a contractually due payment has not been received by the contractual due date. We place a loan on non-accrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed as a reduction of current period interest income. Interest income is subsequently recognized on a cash basis as long as the remaining book balance of the asset is deemed to be collectible. If collectability is questionable, then cash payments are applied to principal. A loan is placed back on accrual status when both 62 Table of Contents principal and interest are current and it is probable that we will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement. Loans held for investment includes legal ownership interests in mortgage loans that we purchase through our mortgage finance division. The ownership interests are purchased from unaffiliated mortgage originators who are seeking additional liquidity to facilitate their ability to originate loans. The mortgage originator has no obligation to offer and we have no obligation to purchase these interests. The originator closes mortgage loans consistent with underwriting standards established by approved investors, and, at the time of the sale to the investor, our ownership interest and that of the originator are delivered by us to the investor selected by the originator and approved by us. We typically purchase up to a 99% ownership interest in each mortgage with the originator owning the remaining percentage. These mortgage ownership interests are generally held by us for a period of less than 30 days and more typically 10-20 days. Because of conditions in agreements with originators designed to reduce transaction risks, under ASC 860, Transfers and Servicing of Financial Assets (“ASC 860”), the ownership interests do not qualify as participating interests. Under ASC 860, the ownership interests are deemed to be loans to the originators and payments we receive from investors are deemed to be payments made by or on behalf of the originator to repay the loan. Because we have an actual, legal ownership interest in the underlying residential mortgage loan, these interests are reported as extensions of credit to the originators that are secured by the mortgage loans as collateral. Due to market conditions or events of default by the investor or the originator, we could be required to purchase the remaining interests in the mortgage loans and hold them beyond the expected 10-20 days. Mortgage loans acquired under these conditions would require mark-to-market adjustments to income and could require further allocations of the allowance for credit losses or be subject to charge-off in the event the loans become impaired. Allowance for Credit Losses On January 1, 2020, we adopted ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"), which uses the current expected credit loss ("CECL") model to determine the allowance for credit losses. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with ASU 2016-02 "Leases (Topic 842)" . We adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost, off-balance sheet credit exposures and net investments in leases. Results for reporting periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. Prior to January 1, 2020, the allowance for loan losses was based on incurred credit losses in accordance with accounting policies disclosed in Note 1 - Operations and Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year-ended December 31, 2019. The following is our discussion of the allowance for credit losses on loans held for investment. See “ Investment Securities - Available-for-Sale ” above for discussion of the allowance for credit losses on available-for-sale debt securities. The CECL methodology recognizes lifetime expected credit losses immediately when a financial asset is originated or purchased. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, credit quality, or term, as well as for changes in macroeconomic conditions, such as changes in unemployment rates, crude oil prices, property values or other relevant factors. The allowance for credit losses is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Reserves on loans that do not share risk characteristics are evaluated on an individual basis. In order to determine the allowance for credit losses, all loans are assigned a credit grade. Loans graded substandard or worse and greater than $500,000 are specifically reviewed for loss potential and when deemed appropriate are assigned a reserve based on an individual evaluation. For purposes of determining the pool-basis reserve, the remainder of the portfolio, representing all loans not assigned an individual reserve, is segregated first by portfolio segment, then by product type, to recognize differing risk profiles within portfolio segments, and finally by credit grade. Each credit grade within each product type is assigned a historical loss rate. These historical loss rates are then modified to incorporate our reasonable and 63 Table of Contents supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments using a Portfolio Level Qualitative Factor (“PLQF”) and/or a Portfolio Segment Level Qualitative Factor (“SLQF”). These modified historical loss rates are multiplied by the outstanding principal balance of each loan to calculate a required reserve. A similar process is employed to calculate a reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and letters of credit, and any needed reserve is recorded in other liabilities on the consolidated balance sheets. The PLQF and SLQF are utilized to address factors that are not present in historical loss rates and are otherwise unaccounted for in the quantitative process. The PLQF is used to apply a qualitative adjustment across the entire portfolio of loans, while the SLQF is designed to apply a qualitative adjustment across a single portfolio segment. Even though portions of the allowance may be allocated to specific loans, the entire allowance is available for any credit that, in management’s judgment, should be charged off. We generally use a two-year forecast period, based on a single forecast scenario or a blend of multiple forecast scenarios, using variables we believe are most relevant to each portfolio segment. For periods beyond which we are able to develop reasonable and supportable forecasts, we immediately revert to the average historical loss rate. The forecast period and scenario(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 our methodology for measuring expected credit losses. A summary of our primary portfolio segments is as follows: Commercial . Our commercial loan portfolio is comprised of lines of credit for working capital, term loans and leases to finance equipment and other business assets across a variety of industries. These loans are used for general corporate purposes including financing working capital, internal growth, acquisitions and business insurance premiums and are generally secured by accounts receivable, inventory, equipment and other assets of our clients’ businesses. Our commercial loan portfolio also includes consumer loans because our small portfolio of consumer loans is largely comprised of accommodation loans to individuals associated with our commercial clients. Energy . Our energy loan portfolio is primarily comprised of loans to exploration and production companies that are generally collateralized with proven reserves based on appropriate valuation standards that take into account the risk of oil and gas price volatility. The majority of this portfolio is first lien, senior secured, reserve-based lending, which we believe is the lowest-risk form of energy lending. Energy loans are impacted by commodity price volatility, as well as changes in consumer and business demand. Mortgage finance . Mortgage finance loans relate to our mortgage warehouse lending operations in which we purchase mortgage loan ownership interests from unaffiliated mortgage originators that are generally held by us for a period of less than 30 days and more typically 10-20 days before they are sold to an approved investor. Volumes fluctuate based on the level of market demand for the product and the number of days between purchase and sale of the loans, which can be affected by changes in overall market interest rates and housing demand and tend to peak at the end of each month. Mortgage finance loans are consistently underwritten based on standards established by the approved investors. Market conditions or events of default by an investor or originator could require that we repurchase the remaining interests in the mortgage loans and hold them beyond the expected 10-20 days. Real estate . Our real estate portfolio is comprised of the following types of loans: Commercial real estate (“CRE”) . Our CRE portfolio is comprised of both construction/development financing and limited term financing provided to professional real estate developers and owners/managers of commercial real estate projects and properties who have a demonstrated record of past success with similar properties. Collateral properties include office buildings, warehouse/distribution buildings, shopping centers, hotels/motels, senior living, apartment buildings and residential and commercial tract development. The primary source of repayment on these loans is expected to come from the sale, permanent financing or lease of the real property collateral. CRE loans are impacted by fluctuations in collateral values, as well as the ability of the borrower to obtain permanent financing. Residential homebuilder finance (“RBF”) . The RBF portfolio is comprised of loans made to residential builders and developers. Loans to residential builders are typically in the form of uncommitted guidance lines and are for the purpose of developing lots into single-family homes, while loans to developers are typically in the form of borrowing base lines extended for the purpose of acquiring and developing raw land into lots that can be further sold to home builders. RBF loans, if not structured and monitored correctly, can be impacted by volatility in consumer demand, as well as fluctuation in housing prices. Secured by 1-4 family . This category of loans includes both first and second lien loans made for the purpose of purchasing or constructing 1-4 family residential dwellings, as well as home equity revolving lines of credit and loans to purchase lots for future construction of 1-4 family residential dwellings. 64 Table of Contents Other . The “other” category is primarily comprised of real estate loans originated through a Small Business Administration (SBA) program where repayment is partially guaranteed by the SBA, as well as other loans secured by real estate where the primary source of repayment is not expected to come from the sale or lease of the real property collateral. We have several pass credit grades that are assigned to loans based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to watch credits which have all the characteristics of an acceptable credit risk but warrant more than the normal level of monitoring. Within our criticized/classified credit grades are special mention, substandard and doubtful. Special mention loans are those that are currently protected by the sound worth and paying capacity of the borrower, but that are potentially weak and constitute an additional credit risk. These loans have the potential to deteriorate to a substandard grade due to the existence of financial or administrative deficiencies. Substandard loans have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Some substandard loans are inadequately protected by the sound worth and paying capacity of the borrower and of the collateral pledged and may be considered impaired. Substandard loans can be accruing or can be on non-accrual depending on the circumstances of the individual loans. Loans classified as doubtful have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection in full highly questionable and improbable. The possibility of loss is extremely high. All doubtful loans are on non-accrual. The methodology used in the estimation of the allowance, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and forecasted economic conditions. Changes are reflected in the pool-basis allowance and in reserves assigned on an individual basis as the collectability of classified loans is evaluated with new information. As our portfolio has matured, historical loss ratios have been closely monitored. The review of the appropriateness of the allowance is performed by executive management and presented to the audit and risk committees of our board of directors for their review. The committees report to the board as part of the board's review on a quarterly basis of our consolidated financial statements. When management determines that foreclosure is probable, and for certain collateral-dependent loans where foreclosure is not considered probable, expected credit losses are based on the estimated fair value of the collateral adjusted for selling costs, when appropriate. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless either of the following applies: management has a reasonable expectation that a loan will be restructured or the extension or renewal options are included in the borrower contract and are not unconditionally cancellable by us. We do not measure an allowance for credit losses on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when loans are placed on non-accrual status as discussed above. 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. Mortgage Servicing Rights, Net Mortgage servicing rights (“MSRs”) are created by selling mortgage loans with servicing rights retained. We identify classes of servicing rights based upon the nature of the underlying assumptions used to value the asset along with the risks associated with the underlying asset. Based upon these criteria we have one class of MSRs, residential. MSRs are recognized based on the estimated fair value of the mortgage loans and the related servicing rights at the date of sale using values derived from a valuation model. MSRs are reported on the consolidated balance sheets at amortized cost, less a valuation allowance if the fair value of identified strata within the MSR portfolio are determined to have a fair value that is less than amortized cost. MSRs are amortized proportionally over the estimated life of the projected net servicing revenue and are periodically evaluated for impairment. From time to time we may sell MSRs. Gain/(loss) from the sale of MSRs is calculated as the difference between the amortized cost of the sold MSRs, adjusted for any valuation allowance, compared to the sales price. Loan servicing fee income represents income earned for servicing mortgage loans owned by investors and includes mortgage servicing fees and other ancillary servicing income. Servicing fees are recorded as income when earned and are reported in non- 65 Table of Contents interest income on the consolidated statements of income and other comprehensive income. MSR valuation allowance expense, gain/(loss) on the sale of MSRs and servicing related expenses are recorded in servicing-related expenses on the consolidated statements of income and other comprehensive income. The estimated fair value of the MSR assets is obtained from an independent third party and reviewed by management on a quarterly basis. MSRs typically do not trade in an active, open market with readily observable prices; as such, the fair value of MSRs is determined using a discounted cash flow model to calculate the present value of the estimated future net servicing income. The assumptions utilized in the discounted cash flow model are based on market data for comparable assets, where available. Each quarter, management and the independent third party review the key assumptions used in the discounted cash flow model and make adjustments as necessary to estimate the fair value of the MSRs. 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. Our intangible assets relate primarily to loan customer relationships purchased as part of business acquisitions. Intangible assets with definite useful lives are amortized over their estimated life. 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. 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 is 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. We consider the following arrangements to be guarantees: commitments to extend credit, standby letters of credit and indemnification agreements included within third party contractual arrangements. The Bank 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 Bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Bank 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 Bank evaluates each customer’s creditworthiness on a case-by-case basis. Commitments to extend credit do not include our mortgage finance arrangements with mortgage loan originators through our mortgage warehouse lending division, which are established as uncommitted “guidance” purchase and sale facilities under which the mortgage originator has no obligation to offer and we have no obligation to purchase interests in the mortgage loans subject to the arrangements. Standby letters of credit are conditional commitments issued by the Bank 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. In conjunction with the sale and securitization of loans held for sale and their related servicing rights, we may be exposed to liability resulting from recourse, repurchase and make-whole agreements. If it is determined subsequent to our sale of a loan or its related servicing rights that a breach of the representations or warranties made in the applicable sale agreement has occurred, 66 Table of Contents which may include guarantees that prepayments will not occur within a specified and customary time frame, we may have an obligation to either (a) repurchase the loan for the unpaid principal balance, accrued interest and related advances, (b) indemnify the purchaser against any loss it suffers or (c) make the purchaser whole for the economic benefits of the loan and its related servicing rights. Our repurchase, indemnification and make-whole obligations vary based upon the terms of the applicable agreements, the nature of the asserted breach and the status of the mortgage loan at the time a claim is made. We establish reserves for estimated losses of this nature inherent in the origination of mortgage loans by estimating the losses inherent in the population of all loans sold based on trends in claims and actual loss severities experienced. The reserve will include accruals for probable contingent losses in addition to those identified in the pipeline of claims received. Leases Right of use (“ROU”) assets represent our right to use an underlying asset during the lease term and lease liabilities represent our 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. Our operating leases relate primarily to real estate used for corporate offices and bank branches and our finance leases relate primarily to equipment. We do not separate lease and non-lease components for our 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 our incremental borrowing rate at the date the lease is executed and signed, which is based on our collateralized borrowing capabilities over a similar term as the related lease payments. ROU assets are further adjusted for lease incentives. Operating leases in which we are the lessee are recorded as operating lease ROU assets and operating lease liabilities, and are included in other assets and other liabilities, respectively, on our 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 is recorded in net occupancy expense on the consolidated statements of income and other comprehensive income. Finance leases in which we are 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 our 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. 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 our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, derivatives and investment securities, as well as revenue related to our mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within our disclosures. Descriptions of our revenue-generating activities that are within the scope of ASC 606, which are presented in our 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 our performance obligation is completed, which is generally monthly for account maintenance services or when a transaction has been 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 to us on a quarterly basis and recognized ratably throughout the quarter as our performance obligation is satisfied each month. 67 Table of Contents • 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 originator customers in our mortgage warehouse lending business. Also included are fees received from independent correspondent mortgage lenders as consideration for our purchase of individual residential mortgage loans through our MCA business. Revenue related to the mortgage warehouse lending business is recognized when the related loan interest is disposed (i.e., through sale or payoff) or upon receipt of the facility renewal or application. Revenue related to our MCA business is recognized at the time a loan is purchased. • Investment banking and trading income - these include fees for merger, acquisition, divestiture and restructuring advisory services, fees for securities underwriting activities, loan syndication fees, and swap 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. • 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 our commercial credit card clients process transactions through card networks. Our performance obligations are generally complete when the transactions generating the fees are processed. Stock-based Compensation We account 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 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. Income Taxes The Company and its subsidiary file a consolidated federal income tax return. We utilize 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 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. 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 68 Table of Contents 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, and Variable Rate Debt The fair value of these financial instruments approximates carrying value. Investment Securities Within the investment securities portfolio, we hold equity securities that consist of investments that qualify for consideration under the regulations implementing the Community Reinvestment Act and investments related to our non-qualified deferred compensation plan. 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. The fair value of our U.S. government agency and residential mortgage-backed securities are based on prices obtained from independent pricing services that are based on quoted market prices for the same or similar securities, and are characterized as Level 2 assets in the fair value hierarchy. We obtain documentation from our primary pricing service regarding their processes and controls applicable to pricing investment securities, and on a quarterly basis independently verify the prices that we receive from the service provider using two additional independent pricing sources. We also hold tax-exempt asset-backed securities and CRT securities that are valued using a discounted cash flow model, which utilizes Level 3 inputs, and are classified as Level 3 assets in the fair value hierarchy. Loans Held for Sale 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. Derivative Assets and Liabilities The estimated fair value of interest rate swaps and caps is obtained from independent pricing services based on quoted market prices for similar derivative contracts and these financial instruments are characterized as Level 2 assets and liabilities in the fair value hierarchy. On a quarterly basis, we independently verify the fair value using an additional independent pricing source. Foreign currency forward contracts are valued based upon quoted market prices obtained from independent pricing services for similar derivative contracts. As such, these financial instruments are characterized as Level 2 assets and liabilities in the fair value hierarchy. The derivative instruments related to the loans held for sale portfolio include loan purchase commitments and forward sale commitments. Loan purchase commitments are valued based upon the fair value of the underlying mortgage loans to be purchased, which is based on observable market data for similar loans. Forward sale commitments are valued based upon quoted market prices from brokers. As such, these loan purchase commitments and forward sales commitments are characterized as Level 2 assets or liabilities in the fair value hierarchy. The derivative instruments related to our residential MSRs include interest rate swap futures and forward sale commitments. The interest rate swap futures are valued based on quoted market prices obtained from brokers for similar derivative contracts, while the forward sale commitments are valued based on the fair value of the underlying mortgage loans to be purchased, which is based on observable market data for similar loans. As such, these derivative instruments are characterized as Level 2 assets and liabilities in the fair value hierarchy. 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. We record 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. We enter into interest rate derivative contracts that are not designated as hedging instruments. These derivative positions relate to transactions in which we enter into an interest rate swap, cap and/or floor with a customer while at the same time entering into an offsetting interest rate swap, cap and/or floor with another financial institution. In connection with each swap transaction, we agree to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, we agree to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows our customer to effectively convert a variable rate loan to a fixed rate. Because we act as an intermediary for our customer, changes in the fair value of the underlying derivative contracts substantially offset each other and do not have a material impact on our results of operations. We also enter into foreign currency forward contracts that are not designated as hedging instruments. These derivative instruments relate to transactions in which we enter 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 69 Table of Contents same currency at the same future date for a specified price. These transactions allow our customers to manage their exposure to foreign currency exchange rate fluctuations. Because we act as an intermediary for our customer, changes in the fair value of the underlying derivative instruments substantially offset each other and do not have a material impact on our results of operations. Prior to the transition of our MCA program to a third party in 2021, we entered into loan purchase commitment contracts with mortgage originators to purchase residential mortgage loans at a future date, as well as forward sales commitment contracts to sell residential mortgage loans or to deliver mortgage-backed securities at a future date. The objective of these transactions was to mitigate our exposure to interest rate risk associated with the purchase of mortgage loans held for sale. Any changes in fair value were recorded in gain/(loss) on sale of loans held for sale on the consolidated statements of income and other comprehensive income. Prior to the sale of our portfolio of MSRs to a third party in 2021, we entered into interest rate derivative contracts, primarily interest rate swap futures and forward sale commitments of mortgage-backed securities, in order to mitigate exposure to potential impairment losses from adverse changes in the fair value of our residential MSR portfolio. These derivative instruments were considered highly liquid and could be settled daily, which allowed us to dynamically manage our exposure. The derivative instruments were used to economically hedge the fair value of the residential MSR portfolio impacted by changes in anticipated prepayments resulting from mortgage interest rate movements and were classified as other assets and other liabilities on the consolidated balance sheets. Any unrealized or realized gains/(losses) related to derivatives economically hedging the residential MSR portfolio were recognized in servicing-related expenses along with changes to the MSR valuation allowance. Segment Reporting We have determined that all of our lending divisions and subsidiaries meet the aggregation criteria of ASC 280, Segment Reporting , as our current operating model is structured whereby divisions and subsidiaries serve a similar base of primarily commercial clients utilizing a bank-wide offering of similar products and services managed through similar processes and platforms that are collectively reviewed by the chief operating decision maker. (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) 2021 2020 2019 Numerator: Net income $ 253,939 $ 66,289 $ 312,015 Preferred stock dividends 18,721 9,750 9,750 Net income available to common stockholders $ 235,218 $ 56,539 $ 302,265 Denominator: Denominator for basic earnings per share—weighted average shares 50,580,660 50,430,326 50,286,300 Effect of employee stock-based awards(1) 560,314 152,653 132,904 Denominator for dilutive earnings per share—adjusted weighted average shares and assumed conversions 51,140,974 50,582,979 50,419,204 Basic earnings per common share $ 4.65 $ 1.12 $ 6.01 Diluted earnings per common share $ 4.60 $ 1.12 $ 5.99 (1) SARs and RSUs outstanding of 93,945 , 453,024 and 86,308 in 2021, 2020 and 2019, respectively, have not been included in diluted earnings per share because to do so would have been antidilutive for the periods presented. 70 Table of Contents (3) Investment Securities Available-for-Sale Debt Securities The following is a summary of available-for-sale debt securities: (in thousands) Amortized Cost(1) Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value December 31, 2021 U.S. government agency securities $ 125,000 $ — $ ( 4,056 ) $ 120,944 Residential mortgage-backed securities 3,288,261 156 ( 63,039 ) 3,225,378 Tax-exempt asset-backed securities 170,626 9,407 — 180,033 CRT securities 14,713 — ( 2,867 ) 11,846 Total $ 3,598,600 $ 9,563 $ ( 69,962 ) $ 3,538,201 December 31, 2020 U.S. government agency securities $ 125,000 $ 1 $ ( 1,412 ) $ 123,589 Residential mortgage-backed securities 2,818,518 11,566 ( 1,128 ) 2,828,956 Tax-exempt asset-backed securities 184,940 14,236 — 199,176 CRT securities 14,713 — ( 3,296 ) 11,417 Total $ 3,143,171 $ 25,803 $ ( 5,836 ) $ 3,163,138 (1) Excludes accrued interest receivable of $ 6.6 million and $ 6.0 million at December 31, 2021 and 2020, respectively, that is recorded in accrued interest receivable and other assets on the consolidated balance sheets. 71 Table of Contents The amortized cost and estimated fair value, excluding accrued interest receivable, and weighted average yield of available-for-sale debt securities are presented below by contractual maturity: (dollars in thousands) Less Than One Year After One Through Five Years After Five Through Ten Years After Ten Years Total December 31, 2021 U.S. government agency securities:(1) Amortized cost $ — $ — $ 125,000 $ — $ 125,000 Estimated fair value — — 120,944 — 120,944 Weighted average yield(3) — % — % 1.13 % — % 1.13 % Residential mortgage-backed securities:(1) Amortized cost $ 48 $ 153 $ 17,324 $ 3,270,736 $ 3,288,261 Estimated fair value 53 166 16,547 3,208,612 3,225,378 Weighted average yield(3) 4.35 % 4.69 % 1.08 % 1.12 % 1.12 % Tax-exempt asset-backed securities:(1) Amortized Cost $ — $ — $ — $ 170,626 $ 170,626 Estimated fair value — — — 180,033 180,033 Weighted average yield(2)(3) — % — % — % 4.96 % 4.96 % CRT securities:(1) Amortized Cost $ — $ — $ 14,713 $ — $ 14,713 Estimated fair value — — 11,846 — 11,846 Weighted average yield(3) — % — % 0.12 % — % 0.12 % Total available-for-sale debt securities: Amortized cost $ 3,598,600 Estimated fair value $ 3,538,201 December 31, 2020 U.S. government agency securities:(1) Amortized cost $ — $ — $ 125,000 $ — $ 125,000 Estimated fair value — — 123,589 — 123,589 Weighted average yield(3) — % — % 1.13 % — % 1.13 % Residential mortgage-backed securities:(1) Amortized cost $ — $ 545 $ 17,500 $ 2,800,473 $ 2,818,518 Estimated fair value — 605 17,490 2,810,861 2,828,956 Weighted average yield(3) — % 4.58 % 1.08 % 1.25 % 1.25 % Tax-exempt asset-backed securities:(1) Amortized Cost $ — $ — $ — $ 184,940 $ 184,940 Estimated fair value — — — 199,176 199,176 Weighted average yield(2)(3) — % — % — % 4.92 % 4.92 % CRT securities:(1) Amortized Cost $ — $ — $ — $ 14,713 $ 14,713 Estimated fair value — — — 11,417 11,417 Weighted average yield(3) — % — % — % 0.15 % 0.15 % Total available-for-sale debt securities: Amortized cost $ 3,143,171 Estimated fair value $ 3,163,138 (1) Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties. (2) Yields have been adjusted to a tax equivalent basis assuming a 21 % federal tax rate. (3) Yields are calculated based on amortized cost. 72 Table of Contents The following table discloses our available-for-sale debt securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months: Less Than 12 Months 12 Months or Longer Total (in thousands) Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss December 31, 2021 U.S. government agency securities $ 24,085 $ ( 915 ) $ 96,859 $ ( 3,141 ) $ 120,944 $ ( 4,056 ) Residential mortgage-backed securities 2,871,052 ( 50,721 ) 303,491 ( 12,318 ) 3,174,543 ( 63,039 ) CRT securities — — 11,846 ( 2,867 ) 11,846 ( 2,867 ) Total $ 2,895,137 $ ( 51,636 ) $ 412,196 $ ( 18,326 ) $ 3,307,333 $ ( 69,962 ) December 31, 2020 U.S. government agency securities $ 98,588 $ ( 1,412 ) $ — $ — $ 98,588 $ ( 1,412 ) Residential mortgage-backed securities 354,387 ( 1,128 ) — — 354,387 ( 1,128 ) CRT securities — — 11,417 ( 3,296 ) 11,417 ( 3,296 ) Total $ 452,975 $ ( 2,540 ) $ 11,417 $ ( 3,296 ) $ 464,392 $ ( 5,836 ) At December 31, 2021, we had 119 securities in an unrealized loss position, comprised of five U.S. government agency securities, 112 residential mortgage-backed securities and two CRT securities . Based upon our December 31, 2021 review of securities with unrealized losses we have determined that all losses resulted from factors not deemed credit-related. We have evaluated the near-term prospects of each securities portfolio in relation to the severity of the unrealized losses and adverse conditions related to the securities among other factors. Based on that evaluation management has determined that we have the ability and intent to hold the securities until recovery of fair value and have recorded the unrealized losses in AOCI. Available-for-sale debt securities with carrying values of approximately $ 22.0 million and $ 2.0 million were pledged to secure certain customer repurchase agreements and deposits, respectively, at December 31, 2021. The comparative amounts at December 31, 2020 were $ 31.7 million and $ 1.9 million, respectively. Equity Securities Equity securities consist of investments that qualify for consideration under the regulations implementing the Community Reinvestment Act and investments related to our non-qualified deferred compensation plan. At December 31, 2021 and December 31, 2020, we had $ 45.6 million and $ 33.8 million, respectively, in equity securities recorded at fair value. The following is a summary of unrealized and realized gains/(losses) recognized on equity securities included in other non-interest income on the consolidated statements of income and other comprehensive income: Year Ended December 31, (in thousands) 2021 2020 Net gains/(losses) recognized during the period $ 2,277 $ 2,998 Less: Realized net gains/(losses) recognized during the period on equity securities sold 1,065 1,418 Unrealized net gains/(losses) recognized during the period on equity securities still held $ 1,212 $ 1,580 (4) Loans Held for Investment and Allowance for Credit Losses on Loans Loans held for investment are summarized by portfolio segment as follows: December 31, (in thousands) 2021 2020 Commercial $ 9,897,561 $ 8,861,580 Energy 721,373 766,217 Mortgage finance(1) 7,475,497 9,079,409 Real estate 4,777,530 5,794,624 Gross loans held for investment(2) 22,871,961 24,501,830 Unearned income (net of direct origination costs) ( 65,007 ) ( 70,970 ) Allowance for credit losses on loans ( 211,866 ) ( 254,615 ) Total loans held for investment, net(2) $ 22,595,088 $ 24,176,245 (1) Balances at December 31, 2021 and December 31, 2020 are stated net of $ 1.0 billion and $ 1.2 billion of participations sold, respectively. (2) Excludes accrued interest receivable of $ 50.3 million and $ 56.5 million at December 31, 2021 and December 31, 2020, respectively, that is recorded in accrued interest receivable and other assets on the consolidated balance sheets. 73 Table of Contents The following tables summarize our gross loans held for investment by year of origination and internally assigned credit grades: (in thousands) 2021 2020 2019 2018 2017 2016 and prior Revolving lines of credit Revolving lines of credit converted to term loans Total December 31, 2021 Commercial (1-7) Pass $ 1,133,013 $ 3,157,150 $ 546,520 $ 319,246 $ 200,478 $ 289,795 $ 3,960,706 $ 41,377 $ 9,648,285 (8) Special mention 2,650 5,277 23,129 8,697 39 5,322 5,120 7,883 58,117 (9) Substandard - accruing — 7,705 102,619 25,010 6,202 6,962 14,742 2,007 165,247 (9+) Non-accrual 736 1,191 49 12,955 1,166 6,196 3,619 — 25,912 Total commercial $ 1,136,399 $ 3,171,323 $ 672,317 $ 365,908 $ 207,885 $ 308,275 $ 3,984,187 $ 51,267 $ 9,897,561 Energy (1-7) Pass $ 71,750 $ — $ — $ 3 $ — $ 7,188 $ 577,988 $ — $ 656,929 (8) Special mention — — — — — — 27,421 — 27,421 (9) Substandard - accruing — — — — — 8,643 — — 8,643 (9+) Non-accrual — — — — — — 28,380 — 28,380 Total energy $ 71,750 $ — $ — $ 3 $ — $ 15,831 $ 633,789 $ — $ 721,373 Mortgage finance (1-7) Pass $ 289,042 $ 590,616 $ 656,445 $ 754,507 $ 332,001 $ 4,852,886 $ — $ — $ 7,475,497 (8) Special mention — — — — — — — — — (9) Substandard - accruing — — — — — — — — — (9+) Non-accrual — — — — — — — — — Total mortgage finance $ 289,042 $ 590,616 $ 656,445 $ 754,507 $ 332,001 $ 4,852,886 $ — $ — $ 7,475,497 Real estate CRE (1-7) Pass $ 497,462 $ 576,344 $ 600,005 $ 294,005 $ 155,252 $ 451,042 $ 73,988 $ 25,970 $ 2,674,068 (8) Special mention — — 291 8,827 20,089 26,344 — — 55,551 (9) Substandard - accruing 17,850 — — 40,900 37,393 38,188 — 2,308 136,639 (9+) Non-accrual — — — — — 198 — — 198 RBF (1-7) Pass 155,595 44,362 9,693 8,565 — 12,732 460,888 — 691,835 (8) Special mention — — — — — — — — — (9) Substandard - accruing — — — — — — — — — (9+) Non-accrual — — — — — — — — — Other (1-7) Pass 166,202 148,811 119,017 106,343 61,723 139,723 47,653 29,595 819,067 (8) Special mention — 7,365 — — 845 4,982 — — 13,192 (9) Substandard - accruing — 6,424 — — 16,922 20,184 — — 43,530 (9+) Non-accrual — — — — 2,641 1,450 — 13,741 17,832 Secured by 1-4 family (1-7) Pass 96,899 60,659 40,586 22,976 31,826 65,910 4,535 — 323,391 (8) Special mention — 553 — — — 291 — — 844 (9) Substandard - accruing — — — — — 1,203 — — 1,203 (9+) Non-accrual — — — — — 180 — — 180 Total real estate $ 934,008 $ 844,518 $ 769,592 $ 481,616 $ 326,691 $ 762,427 $ 587,064 $ 71,614 $ 4,777,530 Total loans held for investment $ 2,431,199 $ 4,606,457 $ 2,098,354 $ 1,602,034 $ 866,577 $ 5,939,419 $ 5,205,040 $ 122,881 $ 22,871,961 74 Table of Contents (in thousands) 2020 2019 2018 2017 2016 2015 and prior Revolving lines of credit Revolving lines of credit converted to term loans Total December 31, 2020 Commercial (1-7) Pass $ 1,259,949 $ 2,816,425 $ 543,438 $ 374,455 $ 192,060 $ 213,212 $ 3,020,353 $ 40,253 $ 8,460,145 (8) Special mention 2,664 115,015 38,751 26,423 1,983 290 19,971 22,797 227,894 (9) Substandard - accruing 15,773 15,854 18,068 32,241 15,297 19,639 22,932 1,641 141,445 (9+) Non-accrual 1,820 8,360 377 1,292 802 15,157 3,836 452 32,096 Total commercial $ 1,280,206 $ 2,955,654 $ 600,634 $ 434,411 $ 210,142 $ 248,298 $ 3,067,092 $ 65,143 $ 8,861,580 Energy (1-7) Pass $ — $ 12,020 $ 7,598 $ 26,931 $ — $ 23,750 $ 553,970 $ — $ 624,269 (8) Special mention — — — — — 13,358 76,866 — 90,224 (9) Substandard - accruing — — — — — — — — — (9+) Non-accrual — — — 5,705 1,972 8,009 36,038 — 51,724 Total energy $ — $ 12,020 $ 7,598 $ 32,636 $ 1,972 $ 45,117 $ 666,874 $ — $ 766,217 Mortgage finance (1-7) Pass $ 755,309 $ 1,063,641 $ 821,122 $ 483,436 $ 106,013 $ 5,849,888 $ — $ — $ 9,079,409 (8) Special mention — — — — — — — — — (9) Substandard - accruing — — — — — — — — — (9+) Non-accrual — — — — — — — — — Total mortgage finance $ 755,309 $ 1,063,641 $ 821,122 $ 483,436 $ 106,013 $ 5,849,888 $ — $ — $ 9,079,409 Real estate CRE (1-7) Pass $ 352,688 $ 892,831 $ 923,762 $ 444,587 $ 208,426 $ 451,283 $ 62,336 $ 61,133 $ 3,397,046 (8) Special mention 3,475 11,170 6,485 88,633 11,153 17,623 — 1,247 139,786 (9) Substandard - accruing — 327 47,708 11,601 32,645 30,766 — 15,940 138,987 (9+) Non-accrual — — — — 5,749 4,852 — — 10,601 RBF (1-7) Pass 162,397 60,077 65,271 3,727 5,888 8,483 551,703 — 857,546 (8) Special mention — 353 — — — — — — 353 (9) Substandard - accruing — — — — — — — — — (9+) Non-accrual — — — — — — — — — Other (1-7) Pass 190,995 150,787 119,696 120,817 82,465 113,105 16,630 39,129 833,624 (8) Special mention — 6,700 2,240 — 1,843 7,195 — 1,018 18,996 (9) Substandard - accruing — — 2,567 14,452 3,301 14,453 — — 34,773 (9+) Non-accrual — — — 927 5,524 6,403 — 14,496 27,350 Secured by 1-4 family (1-7) Pass 58,515 63,031 46,623 54,096 72,527 31,880 4,697 — 331,369 (8) Special mention 646 — — 635 — 1,768 — — 3,049 (9) Substandard - accruing — — — 817 — 109 — — 926 (9+) Non-accrual — — — — — 218 — — 218 Total real estate $ 768,716 $ 1,185,276 $ 1,214,352 $ 740,292 $ 429,521 $ 688,138 $ 635,366 $ 132,963 $ 5,794,624 Total loans held for investment $ 2,804,231 $ 5,216,591 $ 2,643,706 $ 1,690,775 $ 747,648 $ 6,831,441 $ 4,369,332 $ 198,106 $ 24,501,830 75 Table of Contents The following table details activity in the allowance for credit losses on loans. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. (in thousands) Commercial Energy Mortgage Finance Real Estate Total Year ended December 31, 2021 Beginning balance $ 73,061 $ 84,064 $ 4,699 $ 92,791 $ 254,615 Provision for credit losses on loans 36,733 ( 27,045 ) 1,384 ( 40,903 ) ( 29,831 ) Charge-offs 11,987 6,418 — 1,192 19,597 Recoveries 4,395 1,967 — 317 6,679 Net charge-offs (recoveries) 7,592 4,451 — 875 12,918 Ending balance $ 102,202 $ 52,568 $ 6,083 $ 51,013 $ 211,866 Year ended December 31, 2020 Beginning balance $ 102,254 $ 60,253 $ 2,265 $ 30,275 $ 195,047 Impact of CECL adoptions ( 15,740 ) 24,154 2,031 ( 1,860 ) 8,585 Provision for credit losses on loans 58,630 126,180 403 64,556 249,769 Charge-offs 73,360 133,522 — 180 207,062 Recoveries 1,277 6,999 — — 8,276 Net charge-offs (recoveries) 72,083 126,523 — 180 198,786 Ending balance $ 73,061 $ 84,064 $ 4,699 $ 92,791 $ 254,615 We recorded a negative $ 30.0 million provision for credit losses for the year ended December 31, 2021, compared to a $ 258.0 million provision for the same period of 2020. The decreased provision resulted primarily from decreases in charge-offs and criticized loans during 2021, as well as improvement in the economic outlook as the economy recovered from the impacts of the COVID-19 pandemic during 2021. We recorded $ 12.9 million in net charge-offs during the year ended December 31, 2021, compared to $ 198.8 million during the same period of 2020. Criticized loans totaled $ 582.9 million at December 31, 2021 and $ 918.4 million at December 31, 2020. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. There were no loans that met these criteria at December 31, 2021. The table below provides an age analysis of our loans held for investment: (in thousands) 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due(1) Total Past Due Non-accrual(2) Current Total Non-accrual With No Allowance December 31, 2021 Commercial $ 6,722 $ 15,883 $ 3,368 $ 25,973 $ 25,912 $ 9,845,676 $ 9,897,561 $ 4,303 Energy — — — — 28,380 692,993 721,373 8,857 Mortgage finance loans — — — — — 7,475,497 7,475,497 — Real estate CRE — — — — 198 2,866,258 2,866,456 — RBF — — — — — 691,835 691,835 — Other — — — — 17,832 875,789 893,621 4,805 Secured by 1-4 family 1,477 140 99 1,716 180 323,722 325,618 — Total loans held for investment $ 8,199 $ 16,023 $ 3,467 $ 27,689 $ 72,502 $ 22,771,770 $ 22,871,961 $ 17,965 (1) Loans past due 90 days and still accruing includes premium finance loans of $ 3.3 million. These loans are generally secured by obligations of insurance carriers to refund premiums on canceled insurance policies. The receipt of the refund of premiums from the insurance carriers can take 180 days or longer from the cancellation date. (2) As of December 31, 2021 and December 31, 2020, none of our non-accrual loans were earning interest income on a cash basis. Additionally, no interest income was recognized on non-accrual loans for the years ended December 31, 2021 and 2020. Accrued interest of $ 1.2 million and $ 1.3 million was reversed during the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021 and December 31, 2020, we did not have any loans considered restructured that were not on non-accrual. Of the non-accrual loans at December 31, 2021 and 2020, $ 19.4 million and $ 45.4 million, respectively, met the criteria for restructured. These loans had no unfunded commitments at their respective balance sheet dates. 76 Table of Contents We did not have any loans that were restructured during the year ended December 31, 2021. The following table details the recorded investment at December 31, 2020 of loans that were restructured during the year ended December 31, 2020 by type of modification: Extended Maturity Adjusted Payment Schedule Total (dollars in thousands) Number of Contracts Balance at Period End Number of Contracts Balance at Period End Number of Contracts Balance at Period End Year Ended December 31, 2020 Commercial 2 $ 7,390 2 $ 14,496 $ 4 $ 21,886 Energy 1 5,705 3 12,935 4 18,640 Total 3 $ 13,095 5 $ 27,431 $ 8 $ 40,526 The restructuring of these loans did not have a significant impact on our allowance for credit losses at December 31, 2021 or 2020. As of December 31, 2021 and 2020, we did not have any loans that were restructured within the last 12 months that subsequently defaulted. (5) Certain Transfers of Financial Assets On April 20, 2021, we entered into an agreement to sell our portfolio of MSRs and to transition the MCA program to a third-party. The sale was completed on June 1, 2021 and the transfer of the servicing on the underlying mortgage loans was completed on August 1, 2021. Transition activities began immediately following the execution of the agreement and were complete prior to December 31, 2021. We sold the remaining MSR balance of $ 1.2 million, which represented MSRs from loans sold after the cut-off date for the initial sale mentioned above. The sale of this MSR portfolio and the transfer of servicing on the underlying mortgage loans were completed on October 1, 2021, at which time all remaining MSR hedge positions were closed. The table below presents a reconciliation of the changes in loans held for sale: Year Ended December 31, (in thousands) 2021 2020 Outstanding balance(1): Beginning balance $ 281,137 $ 2,568,362 Loans purchased and originated 1,413,899 11,366,986 Payments and loans sold ( 1,686,567 ) ( 13,654,211 ) Ending balance 8,469 281,137 Fair value adjustment: Beginning balance 2,028 8,772 Increase/(decrease) to fair value ( 2,374 ) ( 6,744 ) Ending balance ( 346 ) 2,028 Loans held for sale at fair value $ 8,123 $ 283,165 (1) Includes $ 44.1 million of loans held for sale that are carried at lower of cost or market as of December 31, 2020 and $ 5.8 million as of December 31, 2019. No loans held for sale were on non-accrual as of December 31, 2021. At December 31, 2020 we had $ 7.0 million in non-accrual loans held for sale, comprised of one loan previously reported in loans held for investment that was transferred to loans held for sale as of December 31, 2020 and subsequently sold at carrying value. At December 31, 2021 and December 31, 2020, we had $ 4.0 million and $ 16.7 million, respectively, in loans held for sale that were 90 days or more past due. The $ 4.0 million in loans held for sale that were 90 days or more past due at December 31, 2021 was comprised of loans guaranteed by U.S. government agencies that were purchased out of Ginnie Mae securities and recorded as loans held for sale, at fair value, on the balance sheet. Interest on these past due loans accrues at the debenture rate guaranteed by the U.S. government. At December 31, 2020, $ 3.3 million of the $ 16.7 million in loans held for sale that were 90 days or more past due were loans guaranteed by U.S. government agencies that were purchased out of Ginnie Mae securities and recorded as loans held for sale, at fair value, on the balance sheet and $ 13.4 million were loans, pursuant to Ginnie Mae servicing guidelines, that we have the unilateral right, but not the obligation, to repurchase if defined delinquent criteria are met, and therefore must record as held for sale on our balance sheet regardless of whether the repurchase option has been exercised. 77 Table of Contents Prior to the transition of the MCA program to a third party, we retained the right to service loans after they are sold, creating MSRs which were recorded as assets on our consolidated balance sheets. A summary of MSR activity is as follows: Year Ended December 31, (in thousands) 2021 2020 MSRs: Balance, beginning of year $ 131,391 $ 70,707 Capitalized servicing rights 15,990 99,678 Amortization ( 18,663 ) ( 38,994 ) Direct write-down ( 279 ) — Sales ( 128,439 ) — Balance, end of period $ — $ 131,391 Valuation allowance: Balance, beginning of year $ 25,967 $ 5,803 Increase (decrease) in valuation allowance ( 25,967 ) 20,164 Balance, end of period $ — $ 25,967 MSRs, net $ — $ 105,424 MSRs, fair value $ — $ 105,424 In connection with the servicing of these loans, we held deposits in the name of investors representing escrow funds for taxes and insurance, as well as collections in transit to the investors. These escrow funds were segregated and held in separate non-interest-bearing deposit accounts at the Bank. These deposits, included in total non-interest-bearing deposits on the consolidated balance sheets, were $ 152.6 million at December 31, 2020. At December 31, 2020, our servicing portfolio of MSRs was comprised of residential mortgage loans with an outstanding principal balance of $ 13.8 billion. At December 31, 2021, our entire portfolio of MSRs had been sold. The following tables summarize the assumptions used by management to determine the fair value of MSRs and a sensitivity analysis of changes in the fair value of our MSR portfolio resulting from certain key assumptions. Based on the 2021 sales of our MSR portfolio in its entirety, only December 31, 2020 data is provided in the tables below. December 31, 2020 Average discount rates 9.09 % Expected prepayment speeds 16.37 % Weighted-average life, in years 4.9 December 31, (in thousands) 2020 50 bp adverse change in prepayment speed $ ( 12,203 ) 100 bp adverse change in prepayment speed ( 16,062 ) These sensitivities are hypothetical and actual results may differ materially due to a number of factors. The effect on fair value of a 10% variation in assumptions generally cannot be determined with confidence because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may be correlated with changes in other factors, which could impact the sensitivity analysis as presented. In conjunction with the sale and securitization of loans held for sale, we may be exposed to liability resulting from repurchase, indemnification and make-whole agreements. Our estimated exposure related to those agreements totaled $ 400,000 and $ 621,000 at December 31, 2021 and December 31, 2020, respectively, and is recorded in other liabilities on the consolidated balance sheets. $ 92,000 in make-whole obligation payments were made during the year ended December 31, 2021 compared to $ 8.4 million in 2020. 78 Table of Contents (6) Leases The following table presents ROU assets and leases liabilities: December 31, (in thousands) 2021 2020 ROU assets: Finance leases $ 259 $ — Operating leases 55,330 66,968 Total $ 55,589 $ 66,968 Leases liabilities Finance leases $ 259 $ — Operating leases 69,184 82,529 Total $ 69,443 $ 82,529 As of December 31, 2021, additional finance leases related to computer equipment that had not yet commenced totaled $ 2.6 million. These leases will commence in the first quarter of 2022. As of December 31, 2021, operating leases had remaining lease terms of generally 1 to 11 years, while finance leases had remaining terms of generally 3 years. The table below summarizes our net lease cost: Year Ended December 31, (in thousands) 2021 2020 Finance lease cost: Amortization of ROU assets $ 32 $ — Interest on lease liabilities 1 — Operating lease cost 15,608 15,544 Short-term lease cost 19 19 Variable lease cost 4,747 4,476 Sublease income ( 107 ) ( 107 ) Net lease cost $ 20,299 $ 19,932 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from finance leases $ 1 $ — Operating cash flows from operating leases 17,666 16,568 Financing cash flows from finance leases 32 — ROU assets obtained in exchange for new finance leases 291 — ROU assets obtained in exchange for new operating leases 2,109 833 The table below summarizes other information related to our operating and finance leases: December 31, 2021 2020 Weighted-average remaining lease term - finance leases, in years 2.7 — Weighted-average remaining lease term - operating leases, in years 5.9 6.5 Weighted-average discount rate - finance leases 0.77 % — % Weighted-average discount rate - operating leases 2.30 % 2.74 % 79 Table of Contents The table below summarizes the maturity of remaining combined operating and finance lease liabilities as of December 31, 2021: (in thousands) Finance Leases Operating Leases Total 2022 $ 98 $ 17,168 $ 17,266 2023 98 17,205 17,303 2024 66 12,063 12,129 2025 — 5,610 5,610 2026 — 5,473 5,473 2027 and thereafter — 17,442 17,442 Total lease payments 262 74,961 75,223 Less: Interest ( 3 ) ( 5,777 ) ( 5,780 ) Present value of lease liabilities $ 259 $ 69,184 $ 69,443 (7) Goodwill and Other Intangible Assets Goodwill and other intangible assets are summarized as follows: (in thousands) Goodwill and Intangible Assets Accumulated Amortization Goodwill and Intangible Assets, Net December 31, 2021 Goodwill $ 15,468 $ ( 374 ) $ 15,094 Intangible assets—customer relationships and trademarks 9,006 ( 6,838 ) 2,168 Total goodwill and intangible assets $ 24,474 $ ( 7,212 ) $ 17,262 December 31, 2020 Goodwill $ 15,468 $ ( 374 ) $ 15,094 Intangible assets—customer relationships and trademarks 9,006 ( 6,433 ) 2,573 Total goodwill and intangible assets $ 24,474 $ ( 6,807 ) $ 17,667 Amortization expense related to intangible assets totaled $ 405,000 in 2021, $ 432,000 in 2020 and $ 471,000 in 2019. The estimated aggregate future amortization expense for intangible assets remaining as of December 31, 2021 is as follows: (in thousands) 2022 $ 405 2023 382 2024 268 2025 268 2026 268 Thereafter 577 Total $ 2,168 (8) Premises and Equipment Premises and equipment are summarized as follows: December 31, (in thousands) 2021 2020 Premises $ 32,609 $ 32,231 Furniture and equipment 43,852 41,627 Total cost 76,461 73,858 Accumulated depreciation ( 55,560 ) ( 49,312 ) Total premises and equipment, net $ 20,901 $ 24,546 Depreciation and amortization expense for the above premises and equipment was approximately $ 8.1 million, $ 9.5 million and $ 9.2 million in 2021, 2020 and 2019, respectively. 80 Table of Contents (9) Deposits Deposits are summarized as follows: December 31, (in thousands) 2021 2020 Non-interest-bearing demand deposits $ 13,390,370 $ 12,740,947 Interest-bearing deposits: Transaction 2,837,521 4,396,243 Savings 10,682,768 11,619,880 Time 1,198,706 2,239,519 Total interest-bearing deposits 14,718,995 18,255,642 Total deposits $ 28,109,365 $ 30,996,589 The scheduled maturities of interest-bearing time deposits were as follows at December 31, 2021: (in thousands) 2022 $ 1,059,975 2023 132,036 2024 3,031 2025 3,467 2026 192 2027 and after 5 Total $ 1,198,706 At December 31, 2021 and 2020, interest-bearing time deposits of greater than $250,000 were approximately $ 186.0 million and $ 375.7 million, respectively. (10) Short-Term and Other Borrowings The following table summarizes our short-term and other borrowings: (dollars in thousands) Federal Funds Purchased Customer Repurchase Agreements FHLB Borrowings December 31, 2021 Amount outstanding at year-end $ — $ 2,832 $ 2,200,000 Interest rate at year-end — % 0.25 % 0.13 % Average balance outstanding during the year $ 88,916 $ 4,199 $ 2,306,165 Weighted-average interest rate during the year 0.15 % 0.28 % 0.19 % Maximum month-end outstanding during the year $ 302,301 $ 5,487 $ 2,600,000 December 31, 2020 Amount outstanding at year-end $ 107,600 $ 4,151 $ 3,000,000 Interest rate at year-end 0.15 % 0.35 % 0.46 % Average balance outstanding during the year $ 207,121 $ 5,563 $ 2,902,732 Weighted-average interest rate during the year 0.52 % 0.47 % 0.72 % Maximum month-end outstanding during the year $ 300,430 $ 8,314 $ 4,900,000 81 Table of Contents The following table summarizes our other borrowing capacities net of balances outstanding. As of December 31, 2021, all are scheduled to mature within one year. December 31, (in thousands) 2021 2020 FHLB borrowing capacity relating to loans $ 5,190,703 $ 7,653,317 FHLB borrowing capacity relating to securities 3,352,111 2,946,539 Total FHLB borrowing capacity(1) $ 8,542,814 $ 10,599,856 Unused federal funds lines available from commercial banks $ 892,000 $ 1,030,000 Unused Federal Reserve borrowings capacity $ 2,414,702 $ 2,179,000 Unused revolving line of credit(2) $ 75,000 $ 130,000 (1) FHLB borrowings are collateralized by a blanket floating lien on certain real estate secured loans, mortgage finance assets and also certain pledged securities. (2) Unsecured revolving, non-amortizing line of credit with maturity date of February 8, 2023. 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 2021, 2020. Periodically, based on market conditions and other factors, and subject to compliance with applicable laws and regulations and the terms of our existing indebtedness, we or the Bank may repay, repurchase, exchange or redeem outstanding indebtedness, or otherwise enter into transactions regarding our debt or capital structure. For example we and the Bank periodically evaluate and may engage in liability management transactions, including repurchases or redemptions of outstanding subordinated notes, which may be funded by the issuance of, or exchanges of, newly issued unsecured borrowings, as we seek to actively manage our debt maturity profile and interest cost. (11) Long-Term Debt From November 2002 to September 2006 various Texas Capital Statutory Trusts were created and subsequently issued floating rate trust preferred securities in various private offerings totaling $ 113.4 million. For the year ended December 31, 2021, the combined weighted-average interest rate on the trust preferred subordinated debentures was 2.13 %, compared to 2.82 % for 2020. As of December 31, 2021, the details of the trust preferred subordinated debentures are summarized below: (dollars in thousands) Texas Capital Bancshares Statutory Trust I Texas Capital Statutory Trust II Texas Capital Statutory Trust III Texas Capital Statutory Trust IV Texas Capital Statutory Trust V Date issued November 19, 2002 April 10, 2003 October 6, 2005 April 28, 2006 September 29, 2006 Trust preferred securities issued $ 10,310 $ 10,310 $ 25,774 $ 25,774 $ 41,238 Floating or fixed rate securities Floating Floating Floating Floating Floating Interest rate on subordinated debentures 3 month LIBOR + 3.35 % 3 month LIBOR + 3.25 % 3 month LIBOR + 1.51 % 3 month LIBOR + 1.60 % 3 month LIBOR + 1.71 % Maturity date November 2032 April 2033 December 2035 June 2036 December 2036 On September 21, 2012, the Company issued $ 111.0 million of subordinated notes. The notes mature in September 2042 and bear interest at a rate of 6.50 % per annum, payable quarterly. The indenture governing the notes contains customary covenants and restrictions. These notes were redeemed on June 21, 2021. On January 31, 2014, the Bank issued $ 175.0 million of subordinated notes in an offering to institutional investors exempt from registration under Section 3(a)(2) of the Securities Act of 1933 and 12 C.F.R. Part 16. The notes mature in January 2026 and bear interest at a rate of 5.25 % per annum, payable semi-annually. The notes are unsecured and are subordinate to the Bank’s obligations to its depositors, its obligations under banker’s acceptances and letters of credit, certain obligations to Federal Reserve Banks and the FDIC and the Bank’s obligations to its other creditors, except any obligations which expressly rank on a parity with or junior to the notes. The notes qualify as Tier 2 capital for regulatory capital purposes, subject to applicable limitations. At the beginning of each of the last five years of the life of the notes, the amount that is eligible to be included in Tier 2 capital is reduced by 20% of the original amount of the notes (net of redemptions). In 2021, the amount of the notes that qualify as Tier 2 capital has been reduced by 20%. On March 9, 2021, the Bank issued and sold $ 275.0 million of senior unsecured credit-linked notes. The notes mature on September 30, 2024, and accrue interest at a rate equal to the higher of LIBOR plus 4.50 % or 4.25 %, payable quarterly on each of March 31, June 30, September 30 and December 31. For the year ended December 31, 2021, the weighted-average interest rate on the notes was 5.56 %. The notes effectively transfer the risk of first losses on a $ 2.2 billion reference pool of the Bank’s mortgage warehouse loans to the purchasers of the notes in an amount up to $ 275.0 million. In the event of a failure to pay by the relevant mortgage originator, insolvency of the relevant mortgage originator, or restructuring of such loans that results in a loss on a loan included in the reference pool, the principal balance of the notes will be reduced to the extent of such loss and 82 Table of Contents recognized as a debt extinguishment gain within non-interest income on our consolidated statements of income and other comprehensive income. The purchasers of the notes have the option to acquire the underlying mortgage loan collateralizing the reference warehouse line of credit in lieu of a principal reduction on the notes. Losses on our warehouse lines of credit have not generally been significant. The notes are recorded in long-term debt on our consolidated balance sheets and accounted for at amortized cost. On May 6, 2021, the Company issued and sold $ 375.0 million of subordinated notes. The notes mature in May 2031 and bear interest at a fixed rate of 4.00 % per annum, payable semi-annually. Net proceeds from the transaction were $ 370.7 million providing additional capital to be used for general corporate purposes. A portion of the proceeds were also used to redeem the Company’s 6.50 % fixed rate subordinated notes, as is described above. The indenture governing the notes contains customary covenants and restrictions. (12) Financial Instruments with Off-Balance Sheet Risk The table below presents our financial instruments with off-balance sheet risk, as well as the activity in the allowance for off-balance sheet credit losses related to those financial instruments: Year Ended December 31, (in thousands) 2021 2020 Beginning balance of allowance for off-balance sheet credit losses $ 17,434 $ 8,640 Impact of CECL adoption — 563 Provision for off-balance sheet credit losses ( 169 ) 8,231 Ending balance of allowance for off-balance sheet credit losses $ 17,265 $ 17,434 December 31, (in thousands) 2021 2020 Commitments to extend credit - period end balance $ 9,445,763 $ 8,530,453 Standby letters of credit - period end balance 357,672 268,894 (13) Regulatory Restrictions The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The Basel III regulatory capital framework (the “Basel III Capital Rules”) adopted by U.S. federal regulatory authorities, among other things, (i) establishes the capital measure called “Common Equity Tier 1” (“CET1”), (ii) specifies that Tier 1 capital consist of CET1 and “Additional Tier 1 Capital” instruments meeting stated requirements, (iii) requires that most deductions/adjustments to regulatory capital measures be made to CET1 and not to other components of capital and (iv) defines the scope of the deductions/adjustments to the capital measures. Additionally, the Basel III Capital Rules require that we maintain a 2.5 % capital conservation buffer with respect to each of CET1, Tier 1 and total capital to risk-weighted assets, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers. In February 2019, the federal bank regulatory agencies issued a final rule (the “2019 CECL Rule”) that revised certain capital regulations to account for changes to credit loss accounting under GAAP. The 2019 CECL Rule included a transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of adopting the new accounting standard related to the measurement of current expected credit losses on their regulatory capital ratios (three-year transition option). In March 2020, the federal bank regulatory agencies issued an interim final rule that maintains the three-year transition option of the 2019 CECL Rule and also provides banking organizations that were required under GAAP to implement CECL before the end of 2020 the option to delay for two years an estimate of the effect of CECL on regulatory capital, relative to the incurred loss methodology's effect on regulatory capital, followed by a three-year transition period (five-year transition option). We adopted CECL on January 1, 2020 and have elected to utilize the five-year transition option. 83 Table of Contents Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of CET1, Tier 1 and total capital to risk-weighted assets, and of Tier 1 capital to average assets, each as defined in the regulations. Management believes, as of December 31, 2021, that the Company and the Bank meet all capital adequacy requirements to which they are subject. Financial institutions are categorized as well capitalized based on total risk-based, Tier 1 risk-based, CET1 and Tier 1 leverage ratios. As shown in the table below, the Company’s and Bank’s capital ratios exceeded the regulatory definition of well capitalized as of December 31, 2021 and 2020. The regulatory authorities can apply changes in classification of assets and such changes may retroactively subject the Company and the Bank to changes in capital ratios. Any such change could reduce one or more capital ratios below well-capitalized status. In addition, a change may result in imposition of additional assessments by the FDIC or could result in regulatory actions that could have a material effect on our condition and results of operations. Because the Bank had less than $ 15.0 billion in total consolidated assets as of December 31, 2009, we are allowed to continue to classify our trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1 capital. The table below summarizes our actual and required capital ratios under the Basel III Capital Rules. The ratios presented below include the effects of our election to utilize the five-year CECL transition described above. Actual Minimum Capital Required(2) Capital Required to be Well Capitalized (dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio December 31, 2021 CET1 Company $ 2,949,785 11.06 % $ 1,866,444 7.00 % N/A N/A Bank 3,013,170 11.30 % 1,866,303 7.00 % 1,732,996 6.50 % Total capital (to risk-weighted assets) Company 4,085,540 15.32 % 2,799,666 10.50 % 2,666,348 10.00 % Bank 3,578,014 13.42 % 2,799,455 10.50 % 2,666,148 10.00 % Tier 1 capital (to risk-weighted assets) Company 3,359,785 12.60 % 2,266,396 8.50 % 1,599,809 6.00 % Bank 3,173,170 11.90 % 2,266,225 8.50 % 2,132,918 8.00 % Tier 1 capital (to average assets)(1) Company 3,359,785 9.01 % 1,490,902 4.00 % N/A N/A Bank 3,173,170 8.51 % 1,490,677 4.00 % 1,863,346 5.00 % December 31, 2020 CET1 Company $ 2,708,150 9.35 % $ 2,026,806 7.00 % N/A N/A Bank 2,744,211 9.48 % 2,025,417 7.00 % 1,880,745 6.50 % Total capital (to risk-weighted assets) Company 3,498,737 12.08 % 3,040,209 10.50 % 2,895,437 10.00 % Bank 3,375,983 11.67 % 3,038,126 10.50 % 2,893,453 10.00 % Tier 1 capital (to risk-weighted assets) Company 2,968,150 10.25 % 2,461,121 8.50 % 1,737,262 6.00 % Bank 2,904,211 10.04 % 2,459,435 8.50 % 2,314,763 8.00 % Tier 1 capital (to average assets)(1) Company 2,968,150 7.52 % 1,578,651 4.00 % N/A N/A Bank 2,904,211 7.36 % 1,578,207 4.00 % 1,972,758 5.00 % (1) The Tier 1 capital ratio (to average assets) is not impacted by the Basel III Capital Rules; however, the Federal Reserve Board and the FDIC may require the Company and the Bank, respectively, to maintain a Tier 1 capital ratio (to average assets) above the required minimum. (2) Percentages represent the minimum capital ratios plus, as applicable, the fully phased-in 2.5% CET1 capital buffer under the Basel III Capital Rules. Our mortgage finance loan volumes can increase significantly at month-end, causing a meaningful difference between ending and average balance for any period. As CET1, Tier 1 and total capital ratios are calculated using quarter-end risk-weighted assets and our mortgage finance loans are 100% risk-weighted (excluding MCA loans held for sale, which receive lower risk weights), the period-end fluctuation in these balances can significantly impact our reported ratios. Due to the actual risk profile and liquidity of this asset class, we do not believe that the period-end balance is representative of risk characteristics that would justify higher allocations, and while we manage capital allocated to mortgage finance loans based on changing trends in average balances, we do monitor our capital allocation to confirm that all capital levels remain above well-capitalized levels. To better align the actual risk profile of this asset class to its required capital allocation, the Bank issued and sold senior unsecured credit- 84 Table of Contents linked notes in the first quarter of 2021 that effectively transfer the risk of first losses on a $ 2.2 billion reference pool of the Bank's mortgage warehouse loans to the purchasers of the notes in an amount up to $ 275.0 million. The issuance of these notes decreases the required risk-weight on the $ 2.2 billion reference pool, which significantly improves our reported ratios. Dividends that may be paid by banks are routinely restricted by various regulatory authorities, including federal banking law requirements concerning the payment of dividends. The Basel III Capital Rules further limit the amount of dividends that may be paid by us or our Bank. No dividends were declared or paid on our common stock during 2021, 2020 or 2019. We are required to maintain reserve balances in cash and on deposit with the Federal Reserve based on a percentage of transactional deposits; however, the Federal Reserve reduced the reserve requirement ratio to zero effective March 26, 2020, therefore the total requirement was zero at both December 31, 2021 and 2020. (14) Stock-Based Compensation and Employee Benefits We have 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 our employees to defer a portion of their compensation. Matching contributions may be made in amounts and at times determined by the Company. We contributed approximately $ 10.2 million, $ 10.3 million, and $ 9.5 million for the years ended December 31, 2021, 2020 and 2019, 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. We also offer a non-qualified deferred compensation plan for our executives and key members of management in order to assist us 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 us to make discretionary contributions on behalf of a participant as well as matching contributions. We made matching contributions of $ 274,000 in 2021 and $ 1.0 million in each of 2020 and 2019. 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. We have 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 a between 1 % and 10 % of eligible compensation up to the Section 423 of the Internal Revenue Code limit of $25,000. Employee contributions to the ESPP were temporarily suspended throughout 2020. On January 1, 2021, the suspension was removed and employee contributions commenced. In 2006, stockholders approved the ESPP, which allocated 400,000 shares for purchase. As of December 31, 2021, 2020 and 2019, 164,033 , 155,933 and 155,933 shares, respectively, had been purchased on behalf of employees under the ESPP. We have 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, we 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. A total of 2,550,000 shares are authorized for grant under the current plan. Total shares remaining available for grant under the current plan at December 31, 2021 were 764,496 . 85 Table of Contents A summary of our 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, 2021 December 31, 2020 December 31, 2019 SARs Weighted Average Exercise Price SARs Weighted Average Exercise Price SARs Weighted Average Exercise Price Outstanding at beginning of year 12,400 $ 43.48 21,200 $ 33.95 41,350 $ 29.13 Exercised ( 9,400 ) 43.24 ( 8,800 ) 20.52 ( 20,150 ) 24.07 Outstanding at year-end 3,000 $ 44.20 12,400 $ 43.48 21,200 $ 33.95 Vested and exercisable at year-end 3,000 $ 44.20 12,400 $ 43.48 21,200 $ 33.95 Weighted average remaining contractual life of vested (in years) 1.66 2.26 2.14 Weighted average remaining contractual life of outstanding (in years) 1.66 2.26 2.14 Compensation expense $ — $ — $ 6,000 Unrecognized compensation expense $ — $ — $ — Fair value of shares vested during the year $ — $ — $ 37,000 Intrinsic value of exercised $ 302,000 $ 294,000 $ 724,000 A summary of our RSU activity and related information is as follows. Grants of RSUs include time-based vesting conditions that generally vest ratably over a period of three to five years . Additionally, from time to time, grants of RSUs with both time-based and performance-based vesting conditions are made that generally vest at the end of a three or four year period. December 31, 2021 December 31, 2020 December 31, 2019 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 955,594 $ 48.76 558,312 $ 64.95 349,533 $ 69.11 Granted 677,472 66.31 631,092 39.37 386,913 59.28 Vested ( 187,530 ) 58.82 ( 171,494 ) 65.17 ( 140,666 ) 59.97 Forfeited ( 238,674 ) 53.76 ( 62,316 ) 56.92 ( 37,468 ) 62.73 Outstanding at year-end 1,206,862 $ 56.06 955,594 $ 48.76 558,312 $ 64.95 Compensation expense $ 30,060,000 $ 15,655,000 $ 11,733,000 Unrecognized compensation expense $ 32,525,000 $ 29,146,000 $ 25,305,000 Weighted average years over which unrecognized compensation expense is expected to be recognized 2.79 2.83 3.09 From time to time the Company has made grants of restricted common stock to various non-employee directors as to which restrictions lapse ratably over a period of three years . Compensation expense for these grants was $ 1,000 , $ 26,000 and $ 36,000 for the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021, there were no remaining restrictions on any grants of restricted common stock. Total compensation cost for grants of stock-settled units was $ 30.1 million, $ 15.7 million and $ 11.8 million for the years ended December 31, 2021, 2020 and 2019, respectively. Cash-settled RSUs totaling 13,131 were outstanding at December 31, 2021, all of which are time-based and vest ratably over a period of four years . No grants of cash-settled RSUs were made in 2021, 2020 or 2019. 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. Compensation cost for the cash-settled units was $ 1.3 million, $ 1.8 million and $ 5.8 million for the years ended December 31, 2021, 2020 and 2019, respectively. 86 Table of Contents (15) Income Taxes Income tax expense/(benefit) consists of the following: Year ended December 31, (in thousands) 2021 2020 2019 Current: Federal $ 97,608 $ 32,701 $ 69,427 State 6,761 920 4,072 Total 104,369 33,621 73,499 Deferred: Federal ( 19,020 ) ( 7,964 ) 10,796 State ( 1,233 ) — — Total ( 20,253 ) ( 7,964 ) 10,796 Total expense: Federal 78,588 24,737 80,223 State 5,528 920 4,072 Total $ 84,116 $ 25,657 $ 84,295 The reconciliation of income tax at the U.S. federal statutory tax rate to our income tax expense and effective tax rate is as follows: Year ended December 31, 2021 2020 2019 (dollars in thousands) Amount Rate Amount Rate Amount Rate U.S. statutory rate $ 70,992 21 % $ 19,309 21 % $ 85,504 21 % State taxes 4,108 1 % 726 1 % 3,217 1 % Tax-exempt income ( 1,855 ) ( 1 ) % ( 3,356 ) ( 4 ) % ( 5,127 ) ( 1 ) % Tax credits ( 179 ) — % ( 1,216 ) ( 1 ) % ( 2,052 ) ( 1 ) % Disallowed FDIC 2,936 1 % 3,920 4 % 2,468 1 % Disallowed compensation 6,377 2 % 3,098 3 % 628 — % Other 1,737 1 % 3,176 4 % ( 343 ) — % Total $ 84,116 25 % $ 25,657 28 % $ 84,295 21 % Our 2020 effective tax rate was significantly impacted by the lower level of income before income taxes experienced in 2020. At December 31, 2021, 2020 and 2019, we had unrecognized tax benefits of $ 722,000 , $ 1.1 million and $ 1.3 million, respectively. We are no longer subject to U.S. federal income tax examinations for years before 2018 or state and local income tax examinations for years before 2017. 87 Table of Contents The table below summarizes significant components of our deferred tax assets and liabilities utilizing the federal corporate income tax rate of 21%. Management believes it is more likely than not that all of the deferred tax assets will be realized. In connection with our adoption of CECL, a $ 2.0 million increase to the deferred tax asset associated with our allowance for credit losses was recorded on January 1, 2020. December 31, (in thousands) 2021 2020 Deferred tax assets: Allowance for credit losses $ 51,738 $ 59,279 Operating lease liabilities 15,615 17,983 Loan origination fees 11,204 11,181 Stock compensation 4,649 3,913 Non-accrual interest 1,874 1,245 Non-qualified deferred compensation 6,705 5,795 Unrealized loss on securities 12,684 — Other 1,671 3,136 Total deferred tax assets 106,140 102,532 Deferred tax liabilities: Loan origination costs ( 3,110 ) ( 2,997 ) Leases ( 8,414 ) ( 8,603 ) Operating lease ROU assets ( 14,266 ) ( 16,617 ) MSRs — ( 22,566 ) Depreciation ( 10,567 ) ( 14,968 ) Unrealized gain on securities — ( 4,193 ) Other ( 3,446 ) ( 3,381 ) Total deferred tax liabilities ( 39,803 ) ( 73,325 ) Net deferred tax asset $ 66,337 $ 29,207 (16) Fair Value Disclosures We determine the fair market values of our assets and liabilities measured at fair value on a recurring and nonrecurring basis using the fair value hierarchy as prescribed in ASC 820. See Note 1 - Operations and Summary of Significant Accounting Policies 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. 88 Table of Contents Assets and liabilities measured at fair value are as follows: Fair Value Measurements Using (in thousands) Level 1 Level 2 Level 3 December 31, 2021 Available-for-sale debt securities:(1) U.S. government agency securities $ — $ 120,944 $ — Residential mortgage-backed securities — 3,225,378 — Tax-exempt asset-backed securities — — 180,033 CRT securities — — 11,846 Equity securities(1)(2) 33,589 12,018 — Loans held for sale(3) — 465 7,658 Derivative assets(5) — 37,788 — Derivative liabilities(5) — 37,788 — Non-qualified deferred compensation plan liabilities(6) 29,695 — — December 31, 2020 Available-for-sale debt securities:(1) U.S. government agency securities $ — $ 123,589 $ — Residential mortgage-backed securities — 2,828,956 — Tax-exempt asset-backed securities — — 199,176 CRT securities — — 11,417 Equity securities(1)(2) 26,593 7,239 — Loans held for sale(3) — 232,147 6,933 Loans held for investment(4) — — 21,209 Derivative assets(5) — 102,720 — Derivative liabilities(5) — 99,255 — Non-qualified deferred compensation plan liabilities(6) 26,593 — — (1) Securities are measured at fair value on a recurring basis, generally monthly, except for tax-exempt asset-backed securities and CRT securities which are measured quarterly. (2) Equity securities consist of investments that qualify for consideration under the regulations implementing the Community Reinvestment Act funds and investments related to our non-qualified deferred compensation plan. (3) Loans held for sale purchased through our MCA program are measured at fair value on a recurring basis, generally monthly. (4) Includes certain collateral-dependent loans held for investment for which a specific allocation of the allowance for credit losses is based upon the fair value of the loan’s underlying collateral. These loans held for investment are measured on a nonrecurring basis, generally annually or more often as warranted by market and economic conditions. (5) Derivative assets and liabilities are measured at fair value on a recurring basis, generally quarterly. (6) Non-qualified deferred compensation plan liabilities represent the fair value of the obligation to the employee, which generally corresponds to the fair value of the invested assets, and are measured at fair value on a recurring basis, generally monthly. 89 Table of Contents Level 3 Valuations The following table presents a reconciliation of the level 3 fair value category measured at fair value on a recurring basis: Net Realized/Unrealized Gains (Losses) (in thousands) Balance at Beginning of Period Purchases / Additions Sales / Reductions Realized Unrealized Balance at End of Period Year ended December 31, 2021 Available-for-sale debt securities:(1) Tax-exempt asset-backed securities $ 199,176 $ — $ ( 14,314 ) $ — $ ( 4,829 ) $ 180,033 CRT securities 11,417 — — — 429 11,846 Loans held for sale(2) 6,933 2,125 ( 1,428 ) 5 23 7,658 Year ended December 31, 2020 Available-for-sale debt securities:(1) Tax-exempt asset-backed securities $ 197,027 $ 8,470 $ ( 6,755 ) $ — $ 434 $ 199,176 CRT securities 11,964 — — — ( 547 ) 11,417 Loans held for sale(2) 7,043 1,472 ( 2,077 ) 248 247 6,933 (1) Unrealized gains/(losses) on available-for-sale debt securities are recorded in AOCI and relate to assets that remain outstanding at period end. Realized gains/(losses) are recorded in other non-interest income. (2) Realized and unrealized gains/(losses) on loans held for sale are recorded in gain/(loss) on sale of loans held for sale. Tax-exempt asset-backed securities The fair value of tax-exempt asset-backed securities is based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs, the most significant of which were a discount rate and weighted-average life. At December 31, 2021, the discount rates utilized ranged from 2.55 % to 2.66 % and the weighted-average life ranged from 4.59 years to 4.63 years. On a combined amortized cost weighted-average basis a discount rate of 2.60 % and a weighted-average life of 4.61 years were utilized to determine the fair value of these securities at December 31, 2021. At December 31, 2020, the combined weighted-average discount rate and weighted-average life utilized were 2.49 % and 5.53 years, respectively. CRT securities The fair value of CRT securities is based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs, the most significant of which were a discount rate and weighted-average life. At December 31, 2021, the discount rates utilized ranged from 3.33 % to 8.25 % and the weighted-average life ranged from 4.75 years to 9.55 years. On a combined amortized cost weighted-average basis a discount rate of 4.97 % and a weighted-average life of 6.35 years were utilized to determine the fair value of these securities at December 31, 2021. At December 31, 2020, the combined weighted-average discount rate and weighted-average life utilized were 4.36 % and 7.49 years, respectively. Loans held for sale The fair value of loans held for sale using Level 3 inputs include loans that cannot be sold through normal sale channels and thus require significant management judgment or estimation when determining the fair value. The fair value of such loans is generally based upon quoted prices of comparable loans with a liquidity discount applied. At December 31, 2021, the fair value of these loans was calculated using a weighted-average discounted price of 97.8 %, compared to 97.2 % at December 31, 2020. Loans held for investment Certain collateral-dependent loans held for investment are reported at fair value when, based upon an individual evaluation, the specific allocation of the allowance for credit losses that is deducted from the loan's amortized cost is based upon the fair value of the loan's underlying collateral. There were no collateral-dependent loans held for investment reported at fair value at December 31, 2021. The $ 21.2 million fair value of loans held for investment at December 31, 2020 reported above includes impaired loans with a carrying value of $ 25.3 million that were reduced by specific allowance allocations totaling $ 4.1 million based on collateral valuations utilizing Level 3 inputs. 90 Table of Contents Fair Value of Financial Instruments A summary of the carrying amounts and estimated fair values of financial instruments is as follows: December 31, 2021 December 31, 2020 (in thousands) Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Financial assets: Level 1 inputs: Cash and cash equivalents $ 7,946,659 $ 7,946,659 $ 9,206,380 $ 9,206,380 Investment securities 33,589 33,589 26,593 26,593 Level 2 inputs: Investment securities 3,358,340 3,358,340 2,959,784 2,959,784 Loans held for sale 465 465 232,147 232,147 Derivative assets 37,788 37,788 102,720 102,720 Level 3 inputs: Investment securities 191,879 191,879 210,593 210,593 Loans held for sale 7,658 7,658 6,933 6,933 Loans held for investment, net 22,595,088 22,631,252 24,176,245 24,233,185 Financial liabilities: Level 2 inputs: Federal funds purchased and repurchase agreements 2,832 2,832 111,751 111,751 Other borrowings 2,200,000 2,200,000 3,000,000 3,000,000 Long-term debt 928,738 952,404 395,896 405,110 Derivative liabilities 37,788 37,788 99,255 99,255 Level 3 inputs: Deposits 28,109,365 28,109,762 30,996,589 30,997,980 (17) Derivative Financial Instruments The notional amounts and estimated fair values of derivative positions outstanding are presented in the following table. All derivative positions related to residential MSRs and loans held for sale were closed during the third quarter of 2021 as a result of the sale of our MSR portfolio and transition of the MCA program to a third-party. December 31, 2021 December 31, 2020 Estimated Fair Value Estimated Fair Value (in thousands) Notional Amount Asset Derivative Liability Derivative Notional Amount Asset Derivative Liability Derivative Non-hedging derivatives: Financial institution counterparties: Commercial loan/lease interest rate swaps $ 1,768,045 $ 3,228 $ 37,694 $ 1,922,956 $ 71 $ 96,246 Commercial loan/lease interest rate caps 191,291 94 — 565,634 34 — Foreign currency forward contracts — — — 6,667 214 78 Customer counterparties: Commercial loan/lease interest rate swaps 1,768,045 37,694 3,228 1,922,956 96,246 71 Commercial loan/lease interest rate caps 191,291 — 94 565,634 — 34 Foreign currency forward contracts — — — 6,667 78 214 Economic hedging derivatives to hedge: Residential MSRs: Interest rate swap futures — — — 320,000 474 — Forward sale commitments — — — 155,000 551 — Loans held for sale: Loan purchase commitments — — — 332,145 5,123 8 Forward sale commitments — — — 485,326 — 2,675 Gross derivatives 41,016 41,016 102,791 99,326 Offsetting derivative assets/liabilities ( 3,228 ) ( 3,228 ) ( 71 ) ( 71 ) Net derivatives included on the consolidated balance sheets $ 37,788 $ 37,788 $ 102,720 $ 99,255 91 Table of Contents The weighted-average received and paid interest rates for interest rate swaps outstanding were as follows: December 31, 2021 Weighted-Average Interest Rate December 31, 2020 Weighted-Average Interest Rate Received Paid Received Paid Non-hedging interest rate swaps - financial institution counterparties 1.15 % 2.65 % 1.38 % 3.14 % Non-hedging interest rate swaps - customer counterparties 2.65 % 1.15 % 3.14 % 1.38 % The weighted-average strike rate for outstanding interest rate caps was 2.54 % at December 31, 2021 and 3.41 % at December 31, 2020. Our credit exposure on derivative instruments is limited to the net favorable value and interest payments by each counterparty. In some cases collateral may be required from the counterparties involved if the net value of the derivative instruments exceeds a nominal amount. Our credit exposure associated with these instruments, net of any collateral pledged, was approximately $ 37.8 million at December 31, 2021 and approximately $ 102.7 million at December 31, 2020. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap and cap values, as well as for changes in the value of forward sale commitments. At December 31, 2021, we had $ 40.3 million in cash collateral pledged for these derivatives that is included in interest-bearing deposits in other banks. At December 31, 2020, we had $ 108.3 million in cash collateral pledged for these derivatives, of which $ 104.4 million was included in interest-bearing deposits and $ 3.9 million was included in accrued interest receivable and other assets. We also enter into credit risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are either a participant or a lead bank. The risk participation agreements entered into by us as a participant bank provide credit protection to the financial institution counterparty should the borrower fail to perform on its interest rate derivative contract with that financial institution. We are party to seven risk participation agreements where we are a participant bank with a notional amount of $ 79.2 million at December 31, 2021, compared to nine risk participation agreements having a notional amount of $ 119.5 million at December 31, 2020. The maximum estimated exposure to these agreements, assuming 100% default by all obligors, was approximately $ 2.3 million at December 31, 2021 and $ 6.0 million at December 31, 2020. The fair value of these exposures was insignificant to the consolidated financial statements at both December 31, 2021 and December 31, 2020. Risk participation agreements entered into by us as the lead bank provide credit protection to us should the borrower fail to perform on its interest rate derivative contract with us. We are party to 15 risk participation agreements where we are the lead bank having a notional amount of $ 156.1 million at December 31, 2021, compared to 16 agreements having a notional amount of $ 165.9 million at December 31, 2020. (18) Related Party Transactions During 2021 and 2020, we have had transactions with our directors, executive officers and their affiliates and our employees. These transactions were made in the ordinary course of business and include extensions of credit and deposit transactions, all made on the same terms as the then prevailing market and credit terms extended to other customers. The Bank had approximately $ 10.2 million in deposits from related parties, including directors, stockholders and their affiliates at December 31, 2021 and $ 11.6 million at December 31, 2020. 92 Table of Contents (19) Parent Company Only Summarized financial information for Texas Capital Bancshares, Inc. are as follows: Balance Sheet December 31, (in thousands) 2021 2020 Assets Cash and cash equivalents $ 438,761 $ 57,472 Loans held for investment — 7,500 Investment in subsidiaries 3,155,954 2,930,843 Other assets 91,301 89,551 Total assets $ 3,686,016 $ 3,085,366 Liabilities and Stockholders’ Equity Other liabilities $ 3,668 $ 1,320 Long-term debt 484,316 222,222 Total liabilities 487,984 223,542 Preferred stock 300,000 150,000 Common stock 506 504 Additional paid-in capital 1,018,711 1,002,050 Retained earnings 1,926,538 1,693,504 Treasury stock ( 8 ) ( 8 ) Accumulated other comprehensive income/(loss) ( 47,715 ) 15,774 Total stockholders’ equity 3,198,032 2,861,824 Total liabilities and stockholders’ equity $ 3,686,016 $ 3,085,366 Statement of Income Year ended December 31, (in thousands) 2021 2020 2019 Interest on loans $ 3,404 $ 3,402 $ 3,401 Dividend income 10,472 10,496 10,551 Other income 5 3 17 Total income 13,881 13,901 13,969 Interest expense 15,946 10,515 12,342 Salaries and employee benefits 720 725 607 Legal and professional 1,803 3,238 3,093 Other non-interest expense 4,375 4,553 1,889 Total expense 22,844 19,031 17,931 Loss before income taxes and equity in undistributed income of subsidiary ( 8,963 ) ( 5,130 ) ( 3,962 ) Income tax benefit ( 2,179 ) ( 1,135 ) ( 861 ) Loss before equity in undistributed income of subsidiary ( 6,784 ) ( 3,995 ) ( 3,101 ) Equity in undistributed income of subsidiary 258,539 68,100 312,932 Net income 251,755 64,105 309,831 Preferred stock dividends 18,721 9,750 9,750 Net income available to common stockholders $ 233,034 $ 54,355 $ 300,081 93 Table of Contents Statements of Cash Flows Year ended December 31, (in thousands) 2021 2020 2019 Operating Activities Net income $ 251,755 $ 64,105 $ 309,831 Adjustments to reconcile net income to net cash provided by/(used in) operating activities: Equity in undistributed income of subsidiary ( 258,539 ) ( 68,100 ) ( 312,932 ) Amortization 2,469 101 101 Increase in other assets ( 1,750 ) ( 912 ) ( 1,187 ) Increase (decrease) in other liabilities 2,348 ( 448 ) 297 Net cash used in operating activities ( 3,717 ) ( 5,254 ) ( 3,890 ) Investing Activities Net (increase)/decrease in loans held for investment 7,500 3,000 ( 3,000 ) Net cash provided by/(used in) investing activities 7,500 3,000 ( 3,000 ) Financing Activities Costs from issuance of stock related to stock-based awards and warrants ( 3,121 ) ( 1,986 ) ( 1,459 ) Net proceeds from issuance of preferred stock 289,723 — — Redemption of preferred stock ( 150,000 ) — — Preferred dividends paid ( 18,721 ) ( 9,750 ) ( 9,750 ) Redemption of long-term debt ( 111,000 ) — — Issuance of long-term debt 370,625 — — Net cash provided by/(used in) financing activities 377,506 ( 11,736 ) ( 11,209 ) Net increase/(decrease) in cash and cash equivalents 381,289 ( 13,990 ) ( 18,099 ) Cash and cash equivalents at beginning of year 57,472 71,462 89,561 Cash and cash equivalents at end of year $ 438,761 $ 57,472 $ 71,462 (20) Material Transactions Affecting Stockholders’ Equity On March 3, 2021, we completed an issuance of 5.75 % fixed rate non-cumulative perpetual preferred stock, Series B, with a liquidation preference of $ 1,000 per share (equivalent to $ 25 per depositary share) (the “Series B Preferred Stock”) and an issuance and sale of 12,000,000 depositary shares, each representing a 1/40th interest in a share of the Series B Preferred Stock. Dividends on the Series B Preferred Stock are not cumulative and will be paid when declared by our board of directors to the extent that we have legally available funds to pay dividends. If declared, dividends will accrue and be payable quarterly, in arrears, on the liquidation preference amount, on a non-cumulative basis, at a rate of 5.75 % per annum. Holders of preferred stock will not have voting rights, except with respect to certain changes in the terms of the preferred stock, certain dividend non-payments and as otherwise required by applicable law. Net proceeds from the sale totaled $ 289.7 million, providing additional capital to be used for general corporate purposes. A portion of the proceeds were also used to redeem, in whole, our 6.50 % non-cumulative perpetual preferred stock Series A, par value $ 0.01 per share, in accordance with its terms. The redemption of the Series A preferred stock occurred on June 15, 2021. 94 Table of Contents (21) Quarterly Financial Data (unaudited) The tables below summarize our quarterly financial information: 2021 Selected Quarterly Financial Data (in thousands except per share data) Fourth Third Second First Interest income $ 219,892 $ 216,589 $ 216,953 $ 223,151 Interest expense 25,860 26,053 27,496 28,339 Net interest income 194,032 190,536 189,457 194,812 Provision for credit losses ( 10,000 ) 5,000 ( 19,000 ) ( 6,000 ) Net interest income after provision for credit losses 204,032 185,536 208,457 200,812 Non-interest income 31,459 24,779 37,639 44,353 Non-interest expense 146,649 152,987 149,060 150,316 Income before income taxes 88,842 57,328 97,036 94,849 Income tax expense 23,712 13,938 23,555 22,911 Net income 65,130 43,390 73,481 71,938 Preferred stock dividends 4,313 4,312 6,317 3,779 Net income available to common stockholders $ 60,817 $ 39,078 $ 67,164 $ 68,159 Basic earnings per share: $ 1.20 $ 0.76 $ 1.31 $ 1.33 Diluted earnings per share: $ 1.19 $ 0.76 $ 1.31 $ 1.33 2020 Selected Quarterly Financial Data (in thousands except per share data) Fourth Third Second First Interest income $ 245,348 $ 241,554 $ 248,648 $ 303,857 Interest expense 32,153 36,162 42,082 77,689 Net interest income 213,195 205,392 206,566 226,168 Provision for credit losses 32,000 30,000 100,000 96,000 Net interest income after provision for credit losses 181,195 175,392 106,566 130,168 Non-interest income 52,678 62,525 73,847 13,931 Non-interest expense 150,863 165,741 222,335 165,417 Income/(loss) before income taxes 83,010 72,176 ( 41,922 ) ( 21,318 ) Income tax expense/(benefit) 22,834 15,060 ( 7,606 ) ( 4,631 ) Net income/(loss) 60,176 57,116 ( 34,316 ) ( 16,687 ) Preferred stock dividends 2,437 2,438 2,437 2,438 Net income/(loss) available to common stockholders $ 57,739 $ 54,678 $ ( 36,753 ) $ ( 19,125 ) Basic earnings/(loss) per share: $ 1.14 $ 1.08 $ ( 0.73 ) $ ( 0.38 ) Diluted earnings/(loss) per share: $ 1.14 $ 1.08 $ ( 0.73 ) $ ( 0.38 ) (22) New Accounting Standards ASU 2020-04, “ Reference Rate Reform (Topic 848)” (“ASU 2020-04”) provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered “minor” so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. We anticipate this ASU will simplify any modifications we execute between the selected start date and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than extinguishment of the old contract resulting in writing off unamortized fees/costs. The adoption of this ASU did not significantly impact our consolidated financial statements. 95 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None.