TEXAS CAPITAL BANCSHARES INC/TX 10-Q

ITEM 1. FINANCIAL STATEMENTS TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS - UNAUDITED (in thousands except share data) March 31, 2022 December 31, 2021 (Unaudited) Assets Cash and due from banks $ 234,853 $ 180,663 Interest-bearing cash and cash equivalents 5,136,680 7,765,996 Available-for-sale debt securities 2,591,218 3,538,201 Held-to-maturity debt securities 1,009,972 — Equity securities 40,825 45,607 Investment securities 3,642,015 3,583,808 Loans held for sale 8,085 8,123 Loans held for investment, mortgage finance 5,827,965 7,475,497 Loans held for investment 15,849,434 15,331,457 Less: Allowance for credit losses on loans 211,151 211,866 Loans held for investment, net 21,466,248 22,595,088 Premises and equipment, net 24,181 20,901 Accrued interest receivable and other assets 556,154 559,897 Goodwill and intangible assets, net 17,161 17,262 Total assets $ 31,085,377 $ 34,731,738 Liabilities and Stockholders’ Equity Liabilities: Non-interest bearing $ 13,434,723 $ 13,390,370 Interest bearing 11,943,215 14,718,995 Total deposits 25,377,938 28,109,365 Accrued interest payable 8,560 7,699 Other liabilities 252,394 273,488 Short-term borrowings 1,427,033 2,202,832 Long-term debt 929,414 928,738 Total liabilities 27,995,339 31,522,122 Stockholders’ equity: Preferred stock, $ 0.01 par value, $ 1,000 liquidation value: Authorized shares - 10,000,000 Issued shares - 300,000 at March 31, 2022 and December 31, 2021 300,000 300,000 Common stock, $ 0.01 par value: Authorized shares - 100,000,000 Issued shares - 50,710,858 and 50,618,911 at March 31, 2022 and December 31, 2021, respectively 507 506 Additional paid-in capital 1,011,353 1,008,559 Retained earnings 1,983,611 1,948,274 Treasury stock - 417 shares at cost at March 31, 2022 and December 31, 2021 ( 8 ) ( 8 ) Accumulated other comprehensive income/(loss), net of taxes ( 205,425 ) ( 47,715 ) Total stockholders’ equity 3,090,038 3,209,616 Total liabilities and stockholders’ equity $ 31,085,377 $ 34,731,738 See accompanying notes to consolidated financial statements. 3 TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME/(LOSS) - UNAUDITED Three months ended March 31, (in thousands except per share data) 2022 2021 Interest income Interest and fees on loans $ 187,657 $ 210,331 Investment securities 17,302 9,887 Interest-bearing cash and cash equivalents 3,571 2,933 Total interest income 208,530 223,151 Interest expense Deposits 13,630 20,004 Short-term borrowings 758 2,592 Long-term debt 10,595 5,743 Total interest expense 24,983 28,339 Net interest income 183,547 194,812 Provision for credit losses ( 2,000 ) ( 6,000 ) Net interest income after provision for credit losses 185,547 200,812 Non-interest income Service charges on deposit accounts 6,022 4,716 Wealth management and trust fee income 3,912 2,855 Brokered loan fees 3,970 9,311 Servicing income 237 9,009 Investment banking and trading income 4,179 5,787 Net gain/(loss) on sale of loans held for sale — 5,572 Other 1,962 7,103 Total non-interest income 20,282 44,353 Non-interest expense Salaries and benefits 100,098 87,522 Occupancy expense 8,885 8,274 Marketing 4,977 1,697 Legal and professional 10,302 8,277 Communications and technology 14,700 15,969 Federal Deposit Insurance Corporation (“FDIC”) insurance assessment 3,981 6,613 Servicing-related expenses — 12,989 Other 10,149 8,975 Total non-interest expense 153,092 150,316 Income before income taxes 52,737 94,849 Income tax expense 13,087 22,911 Net income 39,650 71,938 Preferred stock dividends 4,313 3,779 Net income available to common stockholders $ 35,337 $ 68,159 Other comprehensive income/(loss): Change in unrealized gain/(loss) on available-for-sale debt securities, before tax $ ( 199,633 ) $ ( 91,407 ) Income tax benefit ( 41,923 ) ( 19,196 ) Other comprehensive loss, net of tax ( 157,710 ) ( 72,211 ) Comprehensive loss $ ( 118,060 ) $ ( 273 ) Basic earnings per common share $ 0.70 $ 1.35 Diluted earnings per common share $ 0.69 $ 1.33 See accompanying notes to consolidated financial statements. 4 TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED Preferred Stock Common Stock Additional Treasury Stock Accumulated Other Paid-in Retained Comprehensive (in thousands except share data) Shares Amount Shares Amount Capital Earnings Shares Amount Income/(Loss) Total Balance at December 31, 2020 (audited) 6,000,000 $ 150,000 50,470,867 $ 504 $ 991,898 $ 1,713,056 ( 417 ) $ ( 8 ) $ 15,774 $ 2,871,224 Comprehensive income/(loss): Net income — — — — — 71,938 — — — 71,938 Change in unrealized gain/(loss) on available-for-sale debt securities, net of taxes — — — — — — — — ( 72,211 ) ( 72,211 ) Total comprehensive loss ( 273 ) Stock-based compensation expense recognized in earnings — — — — 5,461 — — — — 5,461 Issuance of preferred stock 300,000 300,000 — — ( 10,277 ) — — — — 289,723 Preferred stock dividend — — — — — ( 3,779 ) — — — ( 3,779 ) Issuance of stock related to stock-based awards — — 87,317 1 ( 2,875 ) — — — — ( 2,874 ) Balance at March 31, 2021 6,300,000 $ 450,000 50,558,184 $ 505 $ 984,207 $ 1,781,215 ( 417 ) $ ( 8 ) $ ( 56,437 ) $ 3,159,482 Balance at December 31, 2021 (audited) 300,000 $ 300,000 50,618,911 $ 506 $ 1,008,559 $ 1,948,274 ( 417 ) $ ( 8 ) $ ( 47,715 ) $ 3,209,616 Comprehensive income/(loss): Net income — — — — — 39,650 — — — 39,650 Change in unrealized gain/(loss) on available-for-sale debt securities, net of taxes — — — — — — — — ( 157,710 ) ( 157,710 ) Total comprehensive loss ( 118,060 ) Stock-based compensation expense recognized in earnings — — — — 5,407 — — — — 5,407 Preferred stock dividend — — — — — ( 4,313 ) — — — ( 4,313 ) Issuance of stock related to stock-based awards — — 91,947 1 ( 2,613 ) — — — — ( 2,612 ) Balance at March 31, 2022 300,000 $ 300,000 50,710,858 $ 507 $ 1,011,353 $ 1,983,611 ( 417 ) $ ( 8 ) $ ( 205,425 ) $ 3,090,038 See accompanying notes to consolidated financial statements. 5 TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED Three months ended March 31, (in thousands) 2022 2021 Operating activities Net income $ 39,650 $ 71,938 Adjustments to reconcile net income to net cash provided by operating activities: Provision/(benefit) for credit losses ( 2,000 ) ( 6,000 ) Depreciation and amortization expense 10,604 26,067 Net (gain)/loss on sale of loans held for sale — ( 5,572 ) Decrease in valuation allowance on mortgage servicing rights — ( 16,448 ) Stock-based compensation expense 5,588 6,368 Purchases and originations of loans held for sale — ( 1,133,239 ) Proceeds from sales and repayments of loans held for sale 571 1,233,725 Changes in operating assets and liabilities: Accrued interest receivable and other assets 43,200 48,927 Accrued interest payable and other liabilities ( 24,691 ) ( 27,335 ) Net cash provided by operating activities 72,922 198,431 Investing activities Purchases of available-for-sale debt securities ( 376,415 ) ( 460,793 ) Proceeds from maturities, redemptions and pay-downs of available-for-sale debt securities 104,338 118,316 Proceeds from maturities, redemptions and pay-downs of held-to-maturity debt securities 9,882 — Sales/(purchases) of equity securities, net 940 ( 588 ) Originations of loans held for investment, mortgage finance ( 26,902,960 ) ( 48,097,222 ) Proceeds from pay-offs of loans held for investment, mortgage finance 28,550,492 48,167,550 Net (increase)/decrease in loans held for investment, excluding mortgage finance ( 517,465 ) ( 54,141 ) Purchases of premises and equipment, net ( 2,709 ) ( 924 ) Net cash provided by/(used in) investing activities 866,103 ( 327,802 ) Financing activities Net increase/(decrease) in deposits ( 2,731,427 ) 2,395,381 Issuance of stock related to stock-based awards ( 2,612 ) ( 2,874 ) Net proceeds from issuance of preferred stock — 289,723 Preferred stock dividends paid ( 4,313 ) ( 3,779 ) Net decrease in short-term borrowings ( 775,799 ) ( 596,164 ) Net proceeds from issuance of long-term debt — 268,815 Net cash provided by/(used in) financing activities ( 3,514,151 ) 2,351,102 Net increase/(decrease) in cash and cash equivalents ( 2,575,126 ) 2,221,731 Cash and cash equivalents at beginning of period 7,946,659 9,206,380 Cash and cash equivalents at end of period $ 5,371,533 $ 11,428,111 Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 24,122 $ 33,860 Cash paid during the period for income taxes 302 440 Transfers of debt securities from available-for-sale to held-to-maturity 1,019,365 — See accompanying notes to consolidated financial statements. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (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. Basis of Presentation Our accounting and reporting policies conform to accounting principles generally accepted in the United States (“GAAP”) and to generally accepted practices within the banking industry. Certain prior period balances have been reclassified to conform to the current period presentation. The consolidated interim financial statements are unaudited and certain information and disclosures in the notes to consolidated unaudited financial statements that are presented in accordance with GAAP have been condensed or omitted. In the opinion of management, the interim financial statements include all normal and recurring adjustments and the disclosures made are adequate to make the interim financial information not misleading. The consolidated financial statements have been prepared in accordance with GAAP for interim financial information and the instructions to Form 10-Q adopted by the U.S. Securities and Exchange Commission (“SEC”). Accordingly, the financial statements do not include all of the information and notes to the consolidated unaudited financial statements required by GAAP for complete annual financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2021, included in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for credit losses, the fair value of financial instruments and the status of contingencies are particularly susceptible to significant change. (2) Earnings Per Share The following table presents the computation of basic and diluted earnings per share: Three months ended March 31, (in thousands except share and per share data) 2022 2021 Numerator: Net income $ 39,650 $ 71,938 Preferred stock dividends 4,313 3,779 Net income available to common stockholders $ 35,337 $ 68,159 Denominator: Denominator for basic earnings per common share—weighted average common shares 50,667,090 50,513,277 Effect of dilutive outstanding stock-settled awards 656,937 556,234 Denominator for dilutive earnings per common share—weighted average diluted common shares 51,324,027 51,069,511 Basic earnings per common share $ 0.70 $ 1.35 Diluted earnings per common share $ 0.69 $ 1.33 Anti-dilutive outstanding stock-settled awards 229,488 80,263 7 (3) Investment Securities The following is a summary of our investment securities: (in thousands) Amortized Cost(1) Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value March 31, 2022 Available-for-sale debt securities: U.S. Treasury securities $ 376,569 $ — $ ( 8,715 ) $ 367,854 U.S. government agency securities 125,000 — ( 11,484 ) 113,516 Residential mortgage-backed securities 2,099,900 46 ( 167,844 ) 1,932,102 Tax-exempt asset-backed securities 166,889 926 ( 1,970 ) 165,845 Credit risk transfer (“CRT”) securities 14,713 — ( 2,812 ) 11,901 Total available-for-sale debt securities 2,783,071 972 ( 192,825 ) 2,591,218 Held-to-maturity debt securities: Residential mortgage-backed securities 1,009,972 — ( 36,381 ) 973,591 Total held-to-maturity debt securities 1,009,972 — ( 36,381 ) 973,591 Equity securities 40,825 Total investment securities(2) $ 3,642,015 December 31, 2021 Available-for-sale debt securities: 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 available-for-sale debt securities 3,598,600 9,563 ( 69,962 ) 3,538,201 Equity securities 45,607 Total investment securities(2) $ 3,583,808 (1) Excludes accrued interest receivable of $ 5.5 million and $ 6.6 million at March 31, 2022 and December 31, 2021, respectively, related to available-for-sale debt securities, and $ 1.6 million at March 31, 2022 related to held-to-maturity debt securities that is recorded in accrued interest receivable and other assets on the consolidated balance sheets. (2) Includes available-for-sale debt securities and equity securities at estimated fair value and held-to-maturity debt securities at amortized cost. Debt Securities In the first quarter of 2022, we transferred $ 1.0 billion of available-for-sale debt securities to held-to-maturity at fair value. The transfer was the result of deliberate actions taken to execute on our asset-liability management strategies in response to rising interest rates. Management determined that it has both the positive intent and ability to hold these securities to maturity. On the date of transfer, the difference between the carrying value and fair value of these securities, which was recorded, net of tax, as a loss in accumulated other comprehensive income/(loss) (“AOCI”), resulted in the securities transferring at a discount of $ 69.2 million. The discount and unrealized loss, net of tax, in AOCI will be amortized to interest income over the remaining life of the securities using the interest method. There were no gains or losses recognized as a result of this transfer. The amortized cost and estimated fair value as of March 31, 2022, excluding accrued interest receivable, of available-for-sale and held-to-maturity debt securities are presented below by contractual maturity. Actual maturities may differ from contractual maturities of mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without prepayment penalties. Available-for-sale Held-to-maturity (in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Due within one year $ 95 $ 101 $ — $ — Due after one year through five years 376,612 367,899 — — Due after five years through ten years 156,492 140,462 — — Due after ten years 2,249,872 2,082,756 1,009,972 973,591 Total $ 2,783,071 $ 2,591,218 $ 1,009,972 $ 973,591 8 The following table discloses our available-for-sale debt securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months: Less Than 12 Months 12 Months or Longer Total (in thousands) Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss March 31, 2022 U.S. treasury securities $ 367,854 $ ( 8,715 ) $ — $ — $ 367,854 $ ( 8,715 ) U.S. government agency securities — — 113,516 ( 11,484 ) 113,516 ( 11,484 ) Residential mortgage-backed securities 962,312 ( 77,250 ) 967,491 ( 90,594 ) 1,929,803 ( 167,844 ) Tax-exempt asset-backed securities 70,464 ( 1,970 ) — — 70,464 ( 1,970 ) CRT securities — — 11,901 ( 2,812 ) 11,901 ( 2,812 ) Total $ 1,400,630 $ ( 87,935 ) $ 1,092,908 $ ( 104,890 ) $ 2,493,538 $ ( 192,825 ) 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 ) At March 31, 2022, we had 81 available-for-sale debt securities in an unrealized loss position, comprised of five U.S. treasury securities, five U.S. government agency securities, 68 residential mortgage-backed securities, one tax-exempt asset-backed security and two CRT securities. The unrealized losses on the available-for-sale debt securities were the result of changes in market interest rates compared to the date the securities were acquired rather than the credit quality of the issuers or underlying loans. We do not intend to sell and it is not more likely than not that we will be required to sell before recovery of the amortized cost of the available-for-sale debt securities in an unrealized loss position and have recorded the unrealized losses related to this portfolio in AOCI. Held-to-maturity debt securities consist of government guaranteed securities for which no loss is expected. At March 31, 2022 and December 31, 2021, no allowance for credit losses was established for available-for-sale or held-to-maturity debt securities. Debt securities with carrying values of approximately $ 19.5 million and $ 1.9 million were pledged to secure certain customer repurchase agreements and deposits, respectively, at March 31, 2022. The comparative amounts at December 31, 2021 were $ 22.0 million and $ 2.0 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. 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/(loss): Three months ended March 31, (in thousands) 2022 2021 Net gains/(losses) recognized during the period $ ( 3,640 ) $ 378 Less: Realized net gains/(losses) recognized on securities sold 202 398 Unrealized net gains/(losses) recognized on securities held $ ( 3,842 ) $ ( 20 ) 9 (4) Loans and Allowance for Credit Losses on Loans Loans are summarized by portfolio segment as follows: (in thousands) March 31, 2022 December 31, 2021 Loans held for investment: Commercial $ 10,175,668 $ 9,897,561 Energy 797,191 721,373 Mortgage finance 5,827,965 7,475,497 Real estate 4,943,195 4,777,530 Gross loans held for investment(1) 21,744,019 22,871,961 Unearned income (net of direct origination costs) ( 66,620 ) ( 65,007 ) Total loans held for investment(1) 21,677,399 22,806,954 Allowance for credit losses on loans ( 211,151 ) ( 211,866 ) Total loans held for investment, net(1) $ 21,466,248 $ 22,595,088 Loans held for sale: Mortgage loans, at fair value $ 8,085 $ 8,123 Total loans held for sale $ 8,085 $ 8,123 (1) Excludes accrued interest receivable of $ 49.7 million and $ 50.3 million at March 31, 2022 and December 31, 2021, respectively, that is recorded in accrued interest receivable and other assets on the consolidated balance sheets. 10 The following tables summarize our gross loans held for investment by year of origination and internally assigned credit grades: (in thousands) 2022 2021 2020 2019 2018 2017 and prior Revolving lines of credit Revolving lines of credit converted to term loans Total March 31, 2022 Commercial (1-7) Pass $ 234,841 $ 3,863,274 $ 330,939 $ 453,566 $ 305,767 $ 430,483 $ 4,264,331 $ 34,280 $ 9,917,481 (8) Special mention 3,118 26,848 4,077 26,776 — 5,043 28,622 3,907 98,391 (9) Substandard - accruing — 666 3,410 77,915 24,366 16,847 9,458 1,664 134,326 (9+) Non-accrual — 2,003 — 44 12,898 6,918 3,607 — 25,470 Total commercial $ 237,959 $ 3,892,791 $ 338,426 $ 558,301 $ 343,031 $ 459,291 $ 4,306,018 $ 39,851 $ 10,175,668 Energy (1-7) Pass $ 34,710 $ 61,000 $ — $ — $ — $ 1,581 $ 673,649 $ — $ 770,940 (8) Special mention — — — — — — — — — (9) Substandard - accruing — — — — — 7,984 — — 7,984 (9+) Non-accrual — 8,584 — — — — 9,683 — 18,267 Total energy $ 34,710 $ 69,584 $ — $ — $ — $ 9,565 $ 683,332 $ — $ 797,191 Mortgage finance (1-7) Pass $ — $ 385,449 $ 599,899 $ 512,708 $ 550,246 $ 3,779,663 $ — $ — $ 5,827,965 (8) Special mention — — — — — — — — — (9) Substandard - accruing — — — — — — — — — (9+) Non-accrual — — — — — — — — — Total mortgage finance $ — $ 385,449 $ 599,899 $ 512,708 $ 550,246 $ 3,779,663 $ — $ — $ 5,827,965 Real estate CRE (1-7) Pass $ 152,474 $ 548,881 $ 640,761 $ 602,864 $ 277,042 $ 552,259 $ 100,734 $ 25,101 $ 2,900,116 (8) Special mention — — — — — 39,697 — 451 40,148 (9) Substandard - accruing — 17,850 — — 40,658 40,292 — 411 99,211 (9+) Non-accrual — — — — — 194 — — 194 RBF (1-7) Pass 23,129 138,381 27,533 13,382 10,434 9,080 471,488 — 693,427 (8) Special mention — — — — — — — — — (9) Substandard - accruing — — — — — — — — — (9+) Non-accrual — — — — — — — — — Other (1-7) Pass 61,121 167,638 146,058 112,818 89,998 197,678 37,600 29,107 842,018 (8) Special mention — — 6,698 — — 16,217 — — 22,915 (9) Substandard - accruing — — 6,373 — — 4,816 — — 11,189 (9+) Non-accrual — — — — — 2,544 — 12,666 15,210 Secured by 1-4 family (1-7) Pass 21,493 95,823 58,845 29,654 21,551 84,616 4,035 — 316,017 (8) Special mention — 1,084 — — — 289 — — 1,373 (9) Substandard - accruing — — — — — 1,191 — — 1,191 (9+) Non-accrual — — — — — 186 — — 186 Total real estate $ 258,217 $ 969,657 $ 886,268 $ 758,718 $ 439,683 $ 949,059 $ 613,857 $ 67,736 $ 4,943,195 Total $ 530,886 $ 5,317,481 $ 1,824,593 $ 1,829,727 $ 1,332,960 $ 5,197,578 $ 5,603,207 $ 107,587 $ 21,744,019 11 (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 $ 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 12 The following table details activity in the allowance for credit losses on loans. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. (in thousands) Commercial Energy Mortgage Finance Real Estate Total Three months ended March 31, 2022 Beginning balance $ 102,202 $ 52,568 $ 6,083 $ 51,013 $ 211,866 Provision for credit losses on loans 5,437 ( 24,522 ) 4,159 13,699 ( 1,227 ) Charge-offs 110 — — 350 460 Recoveries 217 755 — — 972 Net charge-offs (recoveries) ( 107 ) ( 755 ) — 350 ( 512 ) Ending balance $ 107,746 $ 28,801 $ 10,242 $ 64,362 $ 211,151 Three months ended March 31, 2021 Beginning balance $ 73,061 $ 84,064 $ 4,699 $ 92,791 $ 254,615 Provision for credit losses on loans ( 1,001 ) ( 5,852 ) 211 929 ( 5,713 ) Charge-offs 2,451 5,732 — — 8,183 Recoveries 1,050 715 — — 1,765 Net charge-offs (recoveries) 1,401 5,017 — — 6,418 Ending balance $ 70,659 $ 73,195 $ 4,910 $ 93,720 $ 242,484 We recorded a negative $ 2.0 million provision for credit losses for the three months ended March 31, 2022, compared to a negative provision of $ 6.0 million for the same period in 2021, resulting from a decline in criticized loans, partially offset by an increase in loans held for investment, excluding mortgage finance. We recorded $ 512,000 in net recoveries during the three months ended March 31, 2022, compared to net charge-offs of $ 6.4 million during the same period in 2021. Criticized loans totaled $ 476.1 million at March 31, 2022, compared to $ 945.1 million at March 31, 2021. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. At March 31, 2021, we had $ 12.7 million in collateral-dependent real estate loans, collateralized by real estate property. The table below provides an age analysis of our gross loans held for investment: (in thousands) 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due(1) Total Past Due Non-Accrual Loans(2) Current Total Non-Accrual With No Allowance March 31, 2022 Commercial $ 13,349 $ 2,142 $ 3,808 $ 19,299 $ 25,470 $ 10,130,899 $ 10,175,668 $ 4,277 Energy — — — — 18,267 778,924 797,191 8,584 Mortgage finance — — — — — 5,827,965 5,827,965 — Real estate: CRE 187 194 1,986 2,367 194 3,037,108 3,039,669 — RBF — — — — — 693,427 693,427 — Other — — — — 15,210 876,122 891,332 15,210 Secured by 1-4 family — — 237 237 186 318,344 318,767 — Total $ 13,536 $ 2,336 $ 6,031 $ 21,903 $ 59,327 $ 21,662,789 $ 21,744,019 $ 28,071 (1) Loans past due 90 days and still accruing includes premium finance loans of $ 3.2 million. These loans are generally secured by obligations of insurance carriers to refund premiums on canceled insurance policies. The receipt of the refund of premiums from the insurance carriers can take 180 days or longer from the cancellation date. (2) As of March 31, 2022 and December 31, 2021, none of our non-accrual loans were earning interest income on a cash basis. Additionally, no interest income was recognized on non-accrual loans for the three months ended March 31, 2022. Accrued interest of $ 4,000 was reversed during the three months ended March 31, 2022. As of March 31, 2022 and December 31, 2021, we did not have any loans considered restructured that were not on non-accrual. Of the non-accrual loans at March 31, 2022 and December 31, 2021, $ 18.0 million and $ 19.4 million, respectively, met the criteria for restructured. These loans had no unfunded commitments at their respective balance sheet dates. We did not have any loans that were restructured during the three months ended March 31, 2022 or 2021. 13 (5) Short-term Borrowings and Long-term Debt The table below presents a summary of short-term borrowings: (in thousands) March 31, 2022 December 31, 2021 Customer repurchase agreements $ 2,033 $ 2,832 Federal Home Loan Bank borrowings 1,425,000 2,200,000 Total short-term borrowings $ 1,427,033 $ 2,202,832 The table below presents a summary of long-term debt: (in thousands) March 31, 2022 December 31, 2021 Bank-issued floating rate senior unsecured credit-linked notes due 2024 $ 270,988 $ 270,487 Bank-issued 5.75 % fixed rate subordinated notes due 2026 174,000 173,935 Company-issued 4.00 % fixed rate subordinated notes due 2031 371,020 370,910 Trust preferred floating rate subordinated debentures due 2032 to 2036 113,406 113,406 Total long-term debt $ 929,414 $ 928,738 (6) Financial Instruments with Off-Balance Sheet Risk The table below presents our financial instruments with off-balance sheet risk, as well as the activity in the allowance for off-balance sheet credit losses related to those financial instruments. This allowance is recorded in other liabilities on the consolidated balance sheets. Three months ended March 31, (in thousands) 2022 2021 Beginning balance of allowance for off-balance sheet credit losses $ 17,265 $ 17,434 Provision for off-balance sheet credit losses ( 773 ) ( 287 ) Ending balance of allowance for off-balance sheet credit losses $ 16,492 $ 17,147 (in thousands) March 31, 2022 December 31, 2021 Commitments to extend credit - period end balance $ 9,917,556 $ 9,445,763 Standby letters of credit - period end balance 364,765 357,672 (7) 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 14 transition option of the 2019 CECL Rule and also provides banking organizations that were required under GAAP to implement CECL before the end of 2020 the option to delay for two years an estimate of the effect of CECL on regulatory capital, relative to the incurred loss methodology's effect on regulatory capital, followed by a three-year transition period (five-year transition option). We adopted CECL on January 1, 2020 and have elected to utilize the five-year transition option. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of CET1, Tier 1 and total capital to risk-weighted assets, and of Tier 1 capital to average assets, each as defined in the regulations. Management believes, as of March 31, 2022, that the Company and the Bank meet all capital adequacy requirements to which they are subject. Financial institutions are categorized as well capitalized based on total risk-based, Tier 1 risk-based, CET1 and Tier 1 leverage ratios. As shown in the table below, the Company’s and the Bank’s capital ratios exceeded the regulatory definition of well capitalized as of March 31, 2022 and December 31, 2021. 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 our Bank had less than $ 15.0 billion in total consolidated assets as of December 31, 2009, we are allowed to continue to classify our trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1 capital. The table below summarizes our actual and required capital ratios under the Basel III Capital Rules. The ratios presented below include the effects of our election to utilize the five-year CECL transition described above. Actual Minimum Capital Required(2) Capital Required to be Well Capitalized (dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio March 31, 2022 CET1 Company $ 2,987,142 11.46 % $ 1,824,684 7.00 % N/A N/A Bank 3,059,948 11.74 % 1,824,675 7.00 % 1,694,341 6.50 % Total capital (to risk-weighted assets) Company 4,087,685 15.68 % 2,737,026 10.50 % 2,606,691 10.00 % Bank 3,589,472 13.77 % 2,737,013 10.50 % 2,606,679 10.00 % Tier 1 capital (to risk-weighted assets) Company 3,397,142 13.03 % 2,215,688 8.50 % 1,564,015 6.00 % Bank 3,219,948 12.35 % 2,215,677 8.50 % 2,085,343 8.00 % Tier 1 capital (to average assets)(1) Company 3,397,142 9.89 % 1,373,788 4.00 % N/A N/A Bank 3,219,948 9.38 % 1,373,632 4.00 % 1,717,040 5.00 % 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 % (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. 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 15 be paid by us or our Bank. No dividends were declared or paid on our common stock during the three months ended March 31, 2022, or during the year ended December 31, 2021. On April 19, 2022, our board of directors authorized a new share repurchase program under which we may repurchase up to $ 150.0 million in shares of our outstanding common stock. Any repurchases under the repurchase program will be made in accordance with applicable securities laws from time to time in open market or private transactions. The extent to which we repurchase shares, and the timing of such repurchases, will be at management’s discretion and will depend upon a variety of factors, including market conditions, our capital position and amount of retained earnings, regulatory requirements and other considerations. No time limit was set for the completion of the share repurchase program, and the program may be suspended or discontinued at any time. (8) Stock-based Compensation We have long-term incentive plans under which stock-based compensation awards are granted to employees and directors by the board of directors, or its designated committee. Grants are subject to vesting requirements and may include, among other things, nonqualified stock options, stock appreciation rights (“SARs”), restricted stock units (“RSUs”), restricted stock and performance units, or any combination thereof. On April 19, 2022, the Company’s stockholders approved the Texas Capital Bancshares, Inc. 2022 Long-Term Incentive Plan, which provides for the issuance of 1,124,880 shares of common stock for compensation to the Company’s key employees and non-employee directors. The table below summarizes our stock-based compensation expense: Three months ended March 31, (in thousands) 2022 2021 Stock-settled awards: RSUs $ 5,407 $ 5,460 Restricted stock — 1 Cash-settled units 181 907 Total $ 5,588 $ 6,368 (in thousands except period data) March 31, 2022 Unrecognized compensation expense related to unvested stock-settled awards $ 46,901 Weighted average period over which expense is expected to be recognized, in years 2.7 16 (9) 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 the Accounting Standards Codification (“ASC”) 820, Fair Value Measurement . See Note 1 - Operations and Summary of Significant Accounting Policies in our 2021 Form 10-K for information regarding the fair value hierarchy and a description of the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial instruments. Assets and liabilities measured at fair value are as follows: Fair Value Measurements Using (in thousands) Level 1 Level 2 Level 3 March 31, 2022 Available-for-sale debt securities:(1) U.S. Treasury securities $ 367,854 $ — $ — U.S. government agency securities — 113,516 — Residential mortgage-backed securities — 1,932,102 — Tax-exempt asset-backed securities — — 165,845 CRT securities — — 11,901 Equity securities(1)(2) 29,154 11,671 — Loans held for sale(3) — — 8,085 Derivative assets(4) — 30,238 — Derivative liabilities(4) — 30,238 — Non-qualified deferred compensation plan liabilities(5) 26,474 — — 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(4) — 37,788 — Derivative liabilities(4) — 37,788 — Non-qualified deferred compensation plan liabilities(5) 29,695 — — (1) Investment securities are measured at fair value on a recurring basis, generally monthly, except for tax-exempt asset-backed securities and CRT securities which are measured quarterly. (2) Equity securities consist of investments that qualify for consideration under the regulations implementing the Community Reinvestment Act and investments related to our non-qualified deferred compensation plan. (3) Mortgage loans held for sale are measured at fair value on a recurring basis, generally monthly. (4) Derivative assets and liabilities are measured at fair value on a recurring basis, generally quarterly. (5) 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. 17 Level 3 Valuations The following table summarizes the changes in Level 3 assets measured at fair value on a recurring basis: Net Gains (Losses) (in thousands) Balance at Beginning of Period Purchases / Additions Sales / Reductions Realized Unrealized Balance at End of Period Three months ended March 31, 2022 Available-for-sale debt securities:(1) Tax-exempt asset-backed securities $ 180,033 $ — $ ( 3,736 ) $ — $ ( 10,452 ) $ 165,845 CRT securities 11,846 — — — 55 11,901 Loans held for sale(2) 7,658 933 ( 41 ) — ( 465 ) 8,085 Three months ended March 31, 2021 Available-for-sale debt securities:(1) Tax-exempt asset-backed securities $ 199,176 $ — $ ( 11,371 ) $ — $ ( 6,239 ) $ 181,566 CRT securities 11,417 — — — 48 11,465 Loans held for sale(2) 6,933 537 ( 279 ) 5 79 7,275 (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 on the consolidated statements of income and other comprehensive income/(loss). (2) Realized and unrealized gains/(losses) on loans held for sale are recorded in net gain/(loss) on sale of loans held for sale on the consolidated statements of income and other comprehensive income/(loss). Tax-exempt asset-backed securities The fair value of tax-exempt asset-backed securities is based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs, the most significant of which were a discount rate and a weighted-average life. At March 31, 2022, the discount rates utilized ranged from 4.09 % to 4.16 % and the weighted-average life ranged from 4.33 years to 4.40 years. On a combined amortized cost weighted-average basis a discount rate of 4.12 % and weighted-average life of 4.36 years were utilized to determine the fair value of these securities at March 31, 2022. At December 31, 2021, the combined weighted-average discount rate and weighted-average life utilized were 2.60 % and 4.61 years, respectively. CRT securities The fair value of CRT securities is based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs, the most significant of which were a discount rate and a weighted-average life. At March 31, 2022, the discount rates utilized ranged from 4.57 % to 9.54 % and the weighted-average life ranged from 4.84 years to 9.38 years. On a combined amortized cost weighted-average basis a discount rate of 6.23 % and a weighted-average life of 6.35 years were utilized to determine the fair value of these securities at March 31, 2022. At December 31, 2021, the combined weighted-average discount rate and combined weighted-average life utilized were 4.97 % and 6.35 years, respectively. Loans held for sale The fair value of loans held for sale using Level 3 inputs include loans that cannot be sold through normal sale channels and thus require significant management judgment or estimation when determining the fair value. The fair value of such loans is generally based upon quoted prices of comparable loans with a liquidity discount applied. At March 31, 2022, the fair value of these loans was calculated using a weighted-average discounted price of 92.3 % compared to 97.8 % at December 31, 2021. 18 Fair Value of Financial Instruments A summary of the carrying amounts and estimated fair values of financial instruments is as follows: Estimated Fair Value (in thousands) Carrying Amount Total Level 1 Level 2 Level 3 March 31, 2022 Financial assets: Cash and cash equivalents $ 5,371,533 $ 5,371,533 $ 5,371,533 $ — $ — Available-for-sale debt securities 2,591,218 2,591,218 367,854 2,045,618 177,746 Held-to-maturity debt securities 1,009,972 973,591 — 973,591 — Equity securities 40,825 40,825 29,154 11,671 — Loans held for sale 8,085 8,085 — — 8,085 Loans held for investment, net 21,466,248 21,436,263 — — 21,436,263 Derivative assets 30,238 30,238 — 30,238 — Financial liabilities: Total deposits 25,377,938 25,378,165 — — 25,378,165 Short-term borrowings 1,427,033 1,427,033 — 1,427,033 — Long-term debt 929,414 913,678 — 913,678 — Derivative liabilities 30,238 30,238 — 30,238 — December 31, 2021 Financial assets: Cash and cash equivalents $ 7,946,659 $ 7,946,659 $ 7,946,659 $ — $ — Available-for-sale debt securities 3,538,201 3,538,201 — 3,346,322 191,879 Equity securities 45,607 45,607 33,589 12,018 — Loans held for sale 8,123 8,123 — 465 7,658 Loans held for investment, net 22,595,088 22,631,252 — — 22,631,252 Derivative assets 37,788 37,788 — 37,788 — Financial liabilities: Total deposits 28,109,365 28,109,762 — — 28,109,762 Short-term borrowings 2,202,832 2,202,832 — 2,202,832 — Long-term debt 928,738 952,404 — 952,404 — Derivative liabilities 37,788 37,788 — 37,788 — (10) Derivative Financial Instruments The notional amounts and estimated fair values of derivative positions outstanding are presented in the following table. March 31, 2022 December 31, 2021 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 $ 1,529,665 $ 29,161 $ 8,072 $ 1,768,045 $ 3,228 $ 37,694 Commercial loan/lease interest rate caps 168,701 713 — 191,291 94 — Customer counterparties: Commercial loan/lease interest rate swaps 1,529,665 8,072 29,161 1,768,045 37,694 3,228 Commercial loan/lease interest rate caps 168,701 — 713 191,291 — 94 Gross derivatives 37,946 37,946 41,016 41,016 Offsetting derivative assets/liabilities ( 7,708 ) ( 7,708 ) ( 3,228 ) ( 3,228 ) Net derivatives included on the consolidated balance sheets $ 30,238 $ 30,238 $ 37,788 $ 37,788 19 The weighted-average received and paid interest rates for interest rate swaps outstanding were as follows: March 31, 2022 December 31, 2021 Received Paid Received Paid Non-hedging interest rate swaps - financial institution counterparties 1.58 % 2.83 % 1.15 % 2.65 % Non-hedging interest rate swaps - customer counterparties 2.83 % 1.58 % 2.65 % 1.15 % The weighted-average strike rate for outstanding interest rate caps was 2.47 % at March 31, 2022 and 2.54 % at December 31, 2021. 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 $ 30.2 million at March 31, 2022, and approximately $ 37.8 million at December 31, 2021. 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. We had $ 14.3 million and $ 40.3 million in cash collateral pledged for these derivatives at March 31, 2022 and December 31, 2021, respectively, included in interest-bearing cash and cash equivalents on the consolidated balance sheets. 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 12 risk participation agreements where we are a participant bank with a notional amount of $ 126.8 million at March 31, 2022, compared to seven risk participation agreements having a notional amount of $ 79.2 million at December 31, 2021. The maximum estimated exposure to these agreements, assuming 100% default by all obligors, was approximately $ 750,000 at March 31, 2022 and $ 2.3 million at December 31, 2021. The fair value of these exposures was insignificant to the consolidated financial statements at both March 31, 2022 and December 31, 2021. 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 17 risk participation agreements where we are the lead bank having a notional amount of $ 197.8 million at March 31, 2022, compared to 15 agreements having a notional amount of $ 156.1 million at December 31, 2021. (11) New Accounting Standards Accounting Standard Update (“ASU”) ASU 2022-01, “Derivatives and Hedging (Topic 815)” (“ASU 2022-01”) clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios and financial assets. Among other things, the amended guidance established the “last-of-layer” method for making the fair value hedge accounting for these portfolios more accessible and renamed that method the “portfolio layer” method. ASU 2022-01 is effective January 1, 2023 and is not expected to have a significant impact on our consolidated financial statements. ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326)” (“ASU 2022-02”) eliminates the guidance on troubled debt restructurings and requires entities to evaluate all loan modifications to determine if they result in a new loan or a continuation of the existing loan. ASU 2022-02 also requires that entities disclose current-period gross charge-offs by year of origination for loans and leases. ASU 2022-02 is effective January 1, 2023 and will have an impact on our financial statement disclosures. 20