TEXAS CAPITAL BANCSHARES INC/TX 10-Q

ITEM 1. FINANCIAL STATEMENTS TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS - UNAUDITED (in thousands except share data) September 30, 2022 December 31, 2021 Assets Cash and due from banks $ 240,609 $ 180,663 Interest bearing cash and cash equivalents 3,399,638 7,765,996 Available-for-sale debt securities 2,380,774 3,538,201 Held-to-maturity debt securities 955,875 — Equity securities 32,973 45,607 Investment securities 3,369,622 3,583,808 Loans held for sale 3,142,178 8,123 Loans held for investment, mortgage finance 4,908,822 7,475,497 Loans held for investment 14,878,959 15,331,457 Less: Allowance for credit losses on loans 234,613 211,866 Loans held for investment, net 19,553,168 22,595,088 Premises and equipment, net 27,180 20,901 Accrued interest receivable and other assets 648,172 559,897 Other assets held for sale 26,450 — Goodwill and intangible assets, net 1,496 17,262 Total assets $ 30,408,513 $ 34,731,738 Liabilities and Stockholders’ Equity Liabilities: Non-interest bearing deposits $ 11,494,685 $ 13,390,370 Interest bearing deposits 13,003,878 14,718,995 Total deposits 24,498,563 28,109,365 Accrued interest payable 18,465 7,699 Other liabilities 297,900 273,488 Other liabilities held for sale 75,564 — Short-term borrowings 1,701,480 2,202,832 Long-term debt 930,766 928,738 Total liabilities 27,522,738 31,522,122 Stockholders’ equity: Preferred stock, $ 0.01 par value, $ 1,000 liquidation value: Authorized shares - 10,000,000 Issued shares - 300,000 shares issued at September 30, 2022 and December 31, 2021 300,000 300,000 Common stock, $ 0.01 par value: Authorized shares - 100,000,000 Issued shares - 50,840,022 and 50,618,911 at September 30, 2022 and December 31, 2021, respectively 509 506 Additional paid-in capital 1,020,153 1,008,559 Retained earnings 2,050,563 1,948,274 Treasury stock - 942,296 and 417 shares at cost at September 30, 2022 and December 31, 2021, respectively ( 50,031 ) ( 8 ) Accumulated other comprehensive loss, net of taxes ( 435,419 ) ( 47,715 ) Total stockholders’ equity 2,885,775 3,209,616 Total liabilities and stockholders’ equity $ 30,408,513 $ 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 September 30, Nine months ended September 30, (in thousands except per share data) 2022 2021 2022 2021 Interest income Interest and fees on loans $ 282,473 $ 202,748 $ 688,420 $ 616,153 Investment securities 15,002 10,235 46,969 31,040 Interest bearing cash and cash equivalents 24,596 3,606 37,561 9,500 Total interest income 322,071 216,589 772,950 656,693 Interest expense Deposits 60,317 14,719 94,513 50,994 Short-term borrowings 10,011 748 15,628 3,842 Long-term debt 12,663 10,586 34,651 27,052 Total interest expense 82,991 26,053 144,792 81,888 Net interest income 239,080 190,536 628,158 574,805 Provision for credit losses 12,000 5,000 32,000 ( 20,000 ) Net interest income after provision for credit losses 227,080 185,536 596,158 594,805 Non-interest income Service charges on deposit accounts 5,701 4,622 17,726 13,972 Wealth management and trust fee income 3,631 3,382 11,594 9,380 Brokered loan fees 3,401 6,032 11,504 22,276 Servicing income 212 292 677 15,236 Investment banking and trading income 7,812 4,127 23,117 17,985 Net gain/(loss) on sale of loans held for sale — ( 1,185 ) — 1,317 Other 4,576 7,509 7,239 26,605 Total non-interest income 25,333 24,779 71,857 106,771 Non-interest expense Salaries and benefits 129,336 87,503 333,319 261,855 Occupancy expense 9,433 8,324 27,192 24,463 Marketing 8,282 2,123 21,765 5,720 Legal and professional 16,775 11,055 38,365 28,479 Communications and technology 18,470 28,374 48,819 58,695 Federal Deposit Insurance Corporation (“FDIC”) insurance assessment 3,953 4,500 11,252 16,339 Servicing-related expenses — 2,396 — 27,740 Other 10,798 8,712 33,730 29,072 Total non-interest expense 197,047 152,987 514,442 452,363 Income before income taxes 55,366 57,328 153,573 249,213 Income tax expense 13,948 13,938 38,346 60,404 Net income 41,418 43,390 115,227 188,809 Preferred stock dividends 4,313 4,312 12,938 14,408 Net income available to common stockholders $ 37,105 $ 39,078 $ 102,289 $ 174,401 Other comprehensive income/(loss): Change in unrealized gain/(loss) $ ( 207,204 ) $ ( 18,131 ) $ ( 494,261 ) $ ( 71,501 ) Amounts reclassified into net income 609 — 3,498 — Other comprehensive income/(loss) ( 206,595 ) ( 18,131 ) ( 490,763 ) ( 71,501 ) Income tax expense/(benefit) ( 43,384 ) ( 3,808 ) ( 103,059 ) ( 15,015 ) Other comprehensive income/(loss), net of tax ( 163,211 ) ( 14,323 ) ( 387,704 ) ( 56,486 ) Comprehensive income/(loss) $ ( 121,793 ) $ 29,067 $ ( 272,477 ) $ 132,323 Basic earnings per common share $ 0.74 $ 0.77 $ 2.03 $ 3.45 Diluted earnings per common share $ 0.74 $ 0.76 $ 2.00 $ 3.41 See accompanying notes to consolidated financial statements. 4 TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED Preferred Stock Common Stock Additional Treasury Stock Accumulated Other Paid-in Retained Comprehensive (in thousands except share data) Shares Amount Shares Amount Capital Earnings Shares Amount Income/(Loss) Total Balance at June 30, 2021 300,000 $ 300,000 50,592,618 $ 506 $ 992,469 $ 1,848,379 ( 417 ) $ ( 8 ) $ ( 26,389 ) $ 3,114,957 Comprehensive income: Net income — — — — — 43,390 — — — 43,390 Change in other comprehensive income/(loss), net of taxes — — — — — — — — ( 14,323 ) ( 14,323 ) Total comprehensive income 29,067 Stock-based compensation expense recognized in earnings — — — — 8,324 — — — — 8,324 Preferred stock dividend — — — — — ( 4,312 ) — — — ( 4,312 ) Issuance of stock related to stock-based awards — — 13,425 — ( 284 ) — — — — ( 284 ) Balance at September 30, 2021 300,000 $ 300,000 50,606,043 $ 506 $ 1,000,509 $ 1,887,457 ( 417 ) $ ( 8 ) $ ( 40,712 ) $ 3,147,752 Balance at June 30, 2022 300,000 $ 300,000 50,820,337 $ 508 $ 1,015,105 $ 2,013,458 ( 942,296 ) $ ( 50,031 ) $ ( 272,208 ) $ 3,006,832 Comprehensive income: Net income — — — — — 41,418 — — — 41,418 Change in other comprehensive income/(loss), net of taxes — — — — — — — — ( 163,211 ) ( 163,211 ) Total comprehensive loss ( 121,793 ) Stock-based compensation expense recognized in earnings — — — — 5,376 — — — — 5,376 Preferred stock dividend — — — — — ( 4,313 ) — — — ( 4,313 ) Issuance of stock related to stock-based awards — — 19,685 1 ( 328 ) — — — — ( 327 ) Balance at September 30, 2022 300,000 $ 300,000 50,840,022 $ 509 $ 1,020,153 $ 2,050,563 ( 942,296 ) $ ( 50,031 ) $ ( 435,419 ) $ 2,885,775 See accompanying notes to consolidated financial statements. 5 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: Net income — — — — — 188,809 — — — 188,809 Change in other comprehensive income/(loss), net of taxes — — — — — — — — ( 56,486 ) ( 56,486 ) Total comprehensive income 132,323 Stock-based compensation expense recognized in earnings — — — — 22,100 — — — — 22,100 Issuance of preferred stock 300,000 300,000 — — ( 10,277 ) — — — — 289,723 Preferred stock dividend — — — — — ( 14,408 ) — — — ( 14,408 ) Issuance of stock related to stock-based awards — — 135,176 2 ( 3,212 ) — — — — ( 3,210 ) Redemption of preferred stock ( 6,000,000 ) ( 150,000 ) — — — — — — — ( 150,000 ) Balance at September 30, 2021 300,000 $ 300,000 50,606,043 $ 506 $ 1,000,509 $ 1,887,457 ( 417 ) $ ( 8 ) $ ( 40,712 ) $ 3,147,752 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: Net income — — — — — 115,227 — — — 115,227 Change in other comprehensive income/(loss), net of taxes — — — — — — — — ( 387,704 ) ( 387,704 ) Total comprehensive loss ( 272,477 ) Stock-based compensation expense recognized in earnings — — — — 15,805 — — — — 15,805 Preferred stock dividend — — — — — ( 12,938 ) — — — ( 12,938 ) Issuance of stock related to stock-based awards — — 221,111 3 ( 4,211 ) — — — — ( 4,208 ) Repurchase of common stock — — — — — — ( 941,879 ) ( 50,023 ) — ( 50,023 ) Balance at September 30, 2022 300,000 $ 300,000 50,840,022 $ 509 $ 1,020,153 $ 2,050,563 ( 942,296 ) $ ( 50,031 ) $ ( 435,419 ) $ 2,885,775 See accompanying notes to consolidated financial statements. 6 TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED Nine months ended September 30, (in thousands) 2022 2021 Operating activities Net income $ 115,227 $ 188,809 Adjustments to reconcile net income to net cash provided by operating activities: Provision/(benefit) for credit losses 32,000 ( 20,000 ) Depreciation and amortization expense 35,360 65,943 Net (gain)/loss on sale of loans held for sale — ( 1,317 ) Decrease in valuation allowance on mortgage servicing rights — ( 16,448 ) Stock-based compensation expense 15,991 23,192 Purchases and originations of loans held for sale ( 1,642 ) ( 1,413,899 ) Proceeds from sales and repayments of loans held for sale 5,050 1,675,246 Changes in operating assets and liabilities: Accrued interest receivable and other assets ( 2,152 ) 86,707 Accrued interest payable and other liabilities 14,266 ( 41,920 ) Net cash provided by operating activities 214,100 546,313 Investing activities Purchases of available-for-sale debt securities ( 665,388 ) ( 952,982 ) Proceeds from maturities, redemptions and pay-downs of available-for-sale debt securities 388,223 400,429 Proceeds from maturities, redemptions and pay-downs of held-to-maturity debt securities 66,500 — Sales/(purchases) of equity securities, net 3,421 — Originations of loans held for investment, mortgage finance ( 77,518,608 ) ( 128,503,055 ) Proceeds from pay-offs of loans held for investment, mortgage finance 80,085,283 129,054,151 Proceeds from sale of mortgage servicing rights — 108,925 Net (increase)/decrease in loans held for investment, excluding mortgage finance ( 2,690,164 ) 118,166 Purchases of premises and equipment, net ( 10,456 ) ( 2,619 ) Net cash provided by/(used in) investing activities ( 341,189 ) 223,015 Financing activities Net decrease in deposits ( 3,610,802 ) ( 1,182,921 ) Issuance of stock related to stock-based awards ( 4,208 ) ( 3,210 ) Net proceeds from issuance of preferred stock — 289,723 Redemption of preferred stock — ( 150,000 ) Preferred stock dividends paid ( 12,938 ) ( 14,408 ) Repurchase of common stock ( 50,023 ) — Net decrease in short-term borrowings ( 501,352 ) ( 908,281 ) Net proceeds from issuance of long-term debt — 639,440 Redemption of long-term debt — ( 111,000 ) Net cash used in financing activities ( 4,179,323 ) ( 1,440,657 ) Net decrease in cash and cash equivalents ( 4,306,412 ) ( 671,329 ) Cash and cash equivalents at beginning of period 7,946,659 9,206,380 Cash and cash equivalents at end of period $ 3,640,247 $ 8,535,051 Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 134,026 $ 84,118 Cash paid during the period for income taxes 48,569 99,915 Transfers of loans from held for investment to held for sale 3,137,792 — Transfers of debt securities from available-for-sale to held-to-maturity 1,019,365 — See accompanying notes to consolidated financial statements. 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (1) Operations and Summary of Significant Accounting Policies Organization and Nature of Business Texas Capital Bancshares, Inc. (“we,” “us”, 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 in or with operations in Texas. Our national lines of business provide specialized lending products to businesses throughout the United States. On September 6, 2022, we announced the sale of BankDirect Capital Finance (“BDCF” or “disposal group”), our insurance premium finance subsidiary, to AFCO Credit Corporation, an indirect wholly-owned subsidiary of Truist Financial Corp. The sale of BDCF includes its business operations and loan portfolio of approximately $ 3.1 billion as of September 30, 2022. The sale is an all-cash transaction for a purchase price of approximately $ 3.4 billion, representing an 8.5 % asset premium compared to the value of the purchased loan portfolio as of September 30, 2022. The transaction resulted in the recognition of a disposal group that is classified as held for sale but does not meet the criteria for discontinued operations reporting. As such, the loans, assets and liabilities related to the disposal group were transferred at the lower of cost or fair value to loans held for sale, other assets held for sale and other liabilities held for sale, respectively, on the consolidated balance sheet as of September 30, 2022. The pre-tax net income for the disposal group for the three months ended September 30, 2022 and 2021 was $ 11.9 million and $ 17.4 million, respectively, and was $ 49.5 million and $ 48.7 million for the nine months ended September 30, 2022 and 2021, respectively. The sale is expected to close in the fourth quarter of 2022, subject to various customary closing conditions. 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 present a fair presentation of our financial position and results of operations. The consolidated financial statements have been prepared in accordance with GAAP for interim financial information and the instructions to Form 10-Q adopted by the U.S. Securities and Exchange Commission (“SEC”). Accordingly, the financial statements and the notes to the consolidated unaudited financial statements required by GAAP for complete annual financial statements do not include all of the information and should be read in conjunction with 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. 8 (2) Earnings Per Share The following table presents the computation of basic and diluted earnings per share: Three months ended September 30, Nine months ended September 30, (in thousands except share and per share data) 2022 2021 2022 2021 Numerator: Net income $ 41,418 $ 43,390 $ 115,227 $ 188,809 Preferred stock dividends 4,313 4,312 12,938 14,408 Net income available to common stockholders $ 37,105 $ 39,078 $ 102,289 $ 174,401 Denominator: Denominator for basic earnings per common share—weighted average common shares 49,891,727 50,600,732 50,506,364 50,568,439 Effect of dilutive outstanding stock-settled awards 526,157 538,823 584,151 555,836 Denominator for dilutive earnings per common share—weighted average diluted common shares 50,417,884 51,139,555 51,090,515 51,124,275 Basic earnings per common share $ 0.74 $ 0.77 $ 2.03 $ 3.45 Diluted earnings per common share $ 0.74 $ 0.76 $ 2.00 $ 3.41 Anti-dilutive outstanding stock-settled awards 174,706 208,813 315,499 104,174 (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 September 30, 2022 Available-for-sale debt securities: U.S. Treasury securities $ 668,093 $ — $ ( 30,812 ) $ 637,281 U.S. government agency securities 125,000 — ( 23,310 ) 101,690 Residential mortgage-backed securities 1,980,590 7 ( 350,496 ) 1,630,101 Credit risk transfer (“CRT”) securities 14,713 — ( 3,011 ) 11,702 Total available-for-sale debt securities 2,788,396 7 ( 407,629 ) 2,380,774 Held-to-maturity debt securities: Residential mortgage-backed securities 955,875 — ( 136,174 ) 819,701 Total held-to-maturity debt securities 955,875 — ( 136,174 ) 819,701 Equity securities 32,973 Total investment securities(2) $ 3,369,622 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 $ 4.2 million and $ 6.6 million at September 30, 2022 and December 31, 2021, respectively, related to available-for-sale debt securities, and $ 1.5 million at September 30, 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 9 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. In the second quarter of 2022, our tax-exempt asset-backed securities were redeemed at par. The outstanding certificates were cancelled and related trusts were terminated. Unrealized gains and losses previously recorded, net of tax, in AOCI were reversed and no additional gains or losses were recognized as a result of the redemption. The amortized cost and estimated fair value as of September 30, 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 $ 41 $ 41 $ — $ — Due after one year through five years 668,093 637,281 — — Due after five years through ten years 156,587 127,368 — — Due after ten years 1,963,675 1,616,084 955,875 819,701 Total $ 2,788,396 $ 2,380,774 $ 955,875 $ 819,701 The following table discloses our available-for-sale debt securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months: Less Than 12 Months 12 Months or Longer Total (in thousands) Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss September 30, 2022 U.S. treasury securities $ 637,281 $ ( 30,812 ) $ — $ — $ 637,281 $ ( 30,812 ) U.S. government agency securities — — 101,690 ( 23,310 ) 101,690 ( 23,310 ) Residential mortgage-backed securities 310,838 ( 67,167 ) 1,318,654 ( 283,329 ) 1,629,492 ( 350,496 ) CRT securities — — 11,702 ( 3,011 ) 11,702 ( 3,011 ) Total $ 948,119 $ ( 97,979 ) $ 1,432,046 $ ( 309,650 ) $ 2,380,165 $ ( 407,629 ) 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 September 30, 2022, we had 98 available-for-sale debt securities in an unrealized loss position, comprised of twelve U.S. treasury securities, five U.S. government agency securities, 79 residential mortgage-backed securities, and two CRT securities. The unrealized losses on the available-for-sale debt securities were the result of changes in market interest rates compared to the date the securities were acquired rather than the credit quality of the issuers or underlying loans. We do not intend to sell and it is not more likely than not that we will be required to sell these available-for-sale debt securities before recovery of the amortized cost of such securities in an unrealized loss position and have, therefore, 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 September 30, 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 $ 18.6 million and $ 1.4 million were pledged to secure certain customer repurchase agreements and deposits, respectively, at September 30, 2022. The comparative amounts at December 31, 2021 were $ 22.0 million and $ 2.0 million, respectively. 10 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 September 30, Nine months ended September 30, (in thousands) 2022 2021 2022 2021 Net gains/(losses) recognized during the period $ ( 1,165 ) $ 850 $ ( 9,801 ) $ 4,496 Less: Realized net gains/(losses) recognized on securities sold ( 587 ) 347 ( 589 ) 1,096 Unrealized net gains/(losses) recognized on securities held $ ( 578 ) $ 503 $ ( 9,212 ) $ 3,400 (4) Loans and Allowance for Credit Losses on Loans Loans are summarized by portfolio segment as follows: (in thousands) September 30, 2022 December 31, 2021 Loans held for investment(1): Commercial $ 8,813,614 $ 9,897,561 Energy 1,106,097 721,373 Mortgage finance 4,908,822 7,475,497 Real estate 5,015,704 4,777,530 Gross loans held for investment 19,844,237 22,871,961 Unearned income (net of direct origination costs) ( 56,456 ) ( 65,007 ) Total loans held for investment 19,787,781 22,806,954 Allowance for credit losses on loans ( 234,613 ) ( 211,866 ) Total loans held for investment, net $ 19,553,168 $ 22,595,088 Loans held for sale: Insurance premium finance loans, at lower of cost or fair value (2) $ 3,137,791 $ — Mortgage loans, at fair value 4,387 8,123 Total loans held for sale $ 3,142,178 $ 8,123 (1) Excludes accrued interest receivable of $ 71.8 million and $ 50.9 million at September 30, 2022 and December 31, 2021, respectively, that is recorded in accrued interest receivable and other assets on the consolidated balance sheets. (2) September 30, 2022 includes $ 1.3 million in non-accrual loans and $ 3.1 million in loans past due 90 days and still accruing that were transferred from loans held for investment to loans held for sale as of September 30, 2022. 11 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 September 30, 2022 Commercial (1-7) Pass $ 1,530,588 $ 776,714 $ 252,321 $ 366,245 $ 225,307 $ 316,001 $ 5,004,072 $ 27,344 $ 8,498,592 (8) Special mention 28,302 38,477 6,398 37,809 7,526 5,769 35,967 3,820 164,068 (9) Substandard - accruing — 42,148 315 30,647 15,133 6,365 28,378 — 122,986 (9+) Non-accrual 7,622 602 — 36 9,947 6,875 2,886 — 27,968 Total commercial $ 1,566,512 $ 857,941 $ 259,034 $ 434,737 $ 257,913 $ 335,010 $ 5,071,303 $ 31,164 $ 8,813,614 Energy (1-7) Pass $ 129,764 $ 23,517 $ — $ — $ 20,000 $ 5,743 $ 912,936 $ — $ 1,091,960 (8) Special mention — — — — — — — — — (9) Substandard - accruing — — — — — — 7,637 — 7,637 (9+) Non-accrual — — — — — — 6,500 — 6,500 Total energy $ 129,764 $ 23,517 $ — $ — $ 20,000 $ 5,743 $ 927,073 $ — $ 1,106,097 Mortgage finance (1-7) Pass $ 7,913 $ 457,792 $ 196,598 $ 393,675 $ 555,480 $ 3,292,412 $ — $ — $ 4,903,870 (8) Special mention — — — — — — — — — (9) Substandard - accruing — — — — 1,464 3,488 — — 4,952 (9+) Non-accrual — — — — — — — — — Total mortgage finance $ 7,913 $ 457,792 $ 196,598 $ 393,675 $ 556,944 $ 3,295,900 $ — $ — $ 4,908,822 Real estate CRE (1-7) Pass $ 800,519 $ 611,459 $ 657,829 $ 487,368 $ 183,225 $ 366,644 $ 60,672 $ 15,969 $ 3,183,685 (8) Special mention 2,396 7,249 7,940 5,297 33,454 22,063 — — 78,399 (9) Substandard - accruing — 17,850 — — 11,522 18,629 — — 48,001 (9+) Non-accrual — — — — — 187 — — 187 RBF (1-7) Pass 82,515 85,477 19,560 13,915 7,462 1,162 390,476 — 600,567 (8) Special mention — — — — — — — — — (9) Substandard - accruing — — — — — — — — — (9+) Non-accrual — — — — — — — — — Other (1-7) Pass 129,406 137,275 103,917 79,637 79,984 170,709 39,074 27,316 767,318 (8) Special mention — — 10,711 — — 10,099 — — 20,810 (9) Substandard - accruing — — — — — 1,058 — — 1,058 (9+) Non-accrual — — 1,081 — — — — — 1,081 Secured by 1-4 family (1-7) Pass 45,887 90,434 55,261 26,854 19,439 72,329 4,056 — 314,260 (8) Special mention — — — — — 44 — — 44 (9) Substandard - accruing — — — — — 166 — — 166 (9+) Non-accrual — — — — — 128 — — 128 Total real estate $ 1,060,723 $ 949,744 $ 856,299 $ 613,071 $ 335,086 $ 663,218 $ 494,278 $ 43,285 $ 5,015,704 Total $ 2,764,912 $ 2,288,994 $ 1,311,931 $ 1,441,483 $ 1,169,943 $ 4,299,871 $ 6,492,654 $ 74,449 $ 19,844,237 12 (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 13 The following table details activity in the allowance for credit losses on loans. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. (in thousands) Commercial Energy Mortgage Finance Real Estate Total Nine months ended September 30, 2022 Beginning balance $ 102,202 $ 52,568 $ 6,083 $ 51,013 $ 211,866 Provision for credit losses on loans 31,257 ( 18,636 ) 4,073 10,923 27,617 Charge-offs 3,210 2,903 — 350 6,463 Recoveries 549 1,044 — — 1,593 Net charge-offs (recoveries) 2,661 1,859 — 350 4,870 Ending balance $ 130,798 $ 32,073 $ 10,156 $ 61,586 $ 234,613 Nine months ended September 30, 2021 Beginning balance $ 73,061 $ 84,064 $ 4,699 $ 92,791 $ 254,615 Provision for credit losses on loans 26,549 ( 24,730 ) 1,729 ( 24,325 ) ( 20,777 ) Charge-offs 8,211 6,418 — 1,192 15,821 Recoveries 2,462 1,366 — 112 3,940 Net charge-offs (recoveries) 5,749 5,052 — 1,080 11,881 Ending balance $ 93,861 $ 54,282 $ 6,428 $ 67,386 $ 221,957 We recorded a $ 32.0 million provision for credit losses for the nine months ended September 30, 2022, compared to a negative provision of $ 20.0 million for the same period in 2021. The $ 32.0 million provision for credit losses resulted primarily from updated views on the downside risks to the economic forecast, partially offset by a decline in criticized loans. We recorded $ 4.9 million in net charge-offs during the nine months ended September 30, 2022, compared to net charge-offs of $ 11.9 million during the same period in 2021. Criticized loans totaled $ 484.0 million at September 30, 2022, compared to $ 582.9 million and $ 728.9 million at December 31, 2021 and September 30, 2021, respectively. The decrease in criticized loans as compared to June 30, 2022 was primarily due to the resolution of one mortgage finance credit that was downgraded in the second quarter of 2022 and resolved in the third quarter of 2022 with no losses recorded. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. At September 30, 2022, we had no collateral-dependent loans . 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 Total Past Due Non-Accrual Loans(1) Current Total Non-Accrual With No Allowance September 30, 2022 Commercial $ 10,405 $ 151 $ 30,602 $ 41,158 $ 27,968 $ 8,744,488 $ 8,813,614 $ 3,637 Energy — — — — 6,500 1,099,597 1,106,097 — Mortgage finance — — — — — 4,908,822 4,908,822 — Real estate: CRE 52 — — 52 187 3,310,033 3,310,272 — RBF — — — — — 600,567 600,567 — Other 700 2,453 — 3,153 1,081 786,033 790,267 — Secured by 1-4 family — — 62 62 128 314,408 314,598 — Total $ 11,157 $ 2,604 $ 30,664 $ 44,425 $ 35,864 $ 19,763,948 $ 19,844,237 $ 3,637 (3) As of September 30, 2022 and December 31, 2021, $ 1.8 million of our non-accrual loans were earning interest income on a cash basis. Additionally, $ 801,000 in interest income was recognized on non-accrual loans for the nine months ended September 30, 2022. Accrued interest of $ 100,000 was reversed during the nine months ended September 30, 2022. As of September 30, 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 September 30, 2022 and December 31, 2021, $ 2.2 million and $ 19.4 million, respectively, met the criteria for restructured. These loans had no unfunded commitments at their respective balance sheet dates. 14 The following table details the recorded investment of loans restructured during the nine months ended September 30, 2022: Extended Maturity Adjusted Payment Schedule Total (in thousands, except number of contracts) Number of Contracts Balance at Period End Number of Contracts Balance at Period End Number of Contracts Balance at Period End Nine months ended September 30, 2022 Commercial loans — $ — 1 $ 604 1 $ 604 Total — $ — 1 $ 604 1 $ 604 We did not have any loans that were restructured during the nine months ended September 30, 2021. The restructuring of the loans did not have a significant impact on our allowance for credit losses at September 30, 2022. As of September 30, 2022 and 2021, we did not have any loans that were restructured within the last 12 months that subsequently defaulted. (5) Short-term Borrowings and Long-term Debt The table below presents a summary of short-term borrowings: (in thousands) September 30, 2022 December 31, 2021 Customer repurchase agreements $ 1,480 $ 2,832 Federal Home Loan Bank borrowings 1,700,000 2,200,000 Total short-term borrowings $ 1,701,480 $ 2,202,832 The table below presents a summary of long-term debt: (in thousands) September 30, 2022 December 31, 2021 Bank-issued floating rate senior unsecured credit-linked notes due 2024 $ 271,991 $ 270,487 Bank-issued 5.25 % fixed rate subordinated notes due 2026 174,131 173,935 Company-issued 4.00 % fixed rate subordinated notes due 2031 371,238 370,910 Trust preferred floating rate subordinated debentures due 2032 to 2036 113,406 113,406 Total long-term debt $ 930,766 $ 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 September 30, Nine months ended September 30, (in thousands) 2022 2021 2022 2021 Beginning balance of allowance for off-balance sheet credit losses $ 17,981 $ 16,747 $ 17,265 $ 17,434 Provision for off-balance sheet credit losses 3,667 1,464 4,383 777 Ending balance of allowance for off-balance sheet credit losses $ 21,648 $ 18,211 $ 21,648 $ 18,211 (in thousands) September 30, 2022 December 31, 2021 Commitments to extend credit - period end balance $ 9,182,739 $ 9,445,763 Standby letters of credit - period end balance 419,828 357,672 (7) Regulatory Ratios and Capital The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The Basel III 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 15 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. No dividends were declared or paid on our common stock during the nine months ended September 30, 2022 or during the year ended December 31, 2021. On April 19, 2022, our board of directors authorized a share repurchase program under which we may repurchase up to $ 150.0 million in shares of our outstanding common stock. During the nine months ended September 30, 2022, the Company repurchased 941,879 shares of its common stock for an aggregate price of $ 50.0 million, at a weighted average price of $ 53.11 per share. In February 2019, the federal bank regulatory agencies issued a final rule (the “2019 CECL Rule”) that revised certain capital regulations to account for changes to credit loss accounting under GAAP. The 2019 CECL Rule included a transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of adopting the new accounting standard related to the measurement of current expected credit losses on their regulatory capital ratios (three-year transition option). In March 2020, the federal bank regulatory agencies issued an interim final rule that maintains the three-year transition option of the 2019 CECL Rule and also provides banking organizations that were required under GAAP to implement CECL before the end of 2020 the option to delay for two years an estimate of the effect of CECL on regulatory capital, relative to the incurred loss methodology's effect on regulatory capital, followed by a three-year transition period (five-year transition option). 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 September 30, 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 September 30, 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 financial 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. 16 The table below summarizes our actual and required capital ratios under the Basel III Capital Rules. The ratios presented below include the effects of our election to utilize the five-year CECL transition described above. Actual Minimum Capital Required(2) Capital Required to be Well Capitalized (dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio September 30, 2022 CET1 Company $ 3,011,505 11.08 % $ 1,902,047 7.00 % N/A N/A Bank 3,175,750 11.70 % 1,899,579 7.00 % 1,763,895 6.50 % Total capital (to risk-weighted assets) Company 4,143,219 15.25 % 2,853,071 10.50 % 2,717,210 10.00 % Bank 3,736,226 13.77 % 2,849,369 10.50 % 2,713,685 10.00 % Tier 1 capital (to risk-weighted assets) Company 3,421,505 12.59 % 2,309,629 8.50 % 1,630,326 6.00 % Bank 3,335,750 12.29 % 2,306,632 8.50 % 2,170,948 8.00 % Tier 1 capital (to average assets)(1) Company 3,421,505 10.67 % 1,282,691 4.00 % N/A N/A Bank 3,335,750 10.41 % 1,281,909 4.00 % 1,602,386 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 the fully phased-in 2.5% CET1 capital buffer under the Basel III Capital Rules. 17 (8) Stock-based Compensation We have long-term incentive plans under which stock-based compensation awards are granted to employees and directors by the Company’s board of directors or its designated committee. Grants are subject to vesting requirements and may include, among other things, nonqualified stock options, stock appreciation rights, restricted stock units (“RSUs”), restricted stock and performance units, or any combination thereof. 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 September 30, Nine months ended September 30, (in thousands) 2022 2021 2022 2021 Stock-settled awards: RSUs $ 5,376 $ 8,324 $ 15,805 $ 22,099 Restricted stock — — — 1 Cash-settled units 3 64 186 1,092 Total $ 5,379 $ 8,388 $ 15,991 $ 23,192 (in thousands except period data) September 30, 2022 Unrecognized compensation expense related to unvested stock-settled awards $ 37,492 Weighted average period over which expense is expected to be recognized, in years 2.4 18 (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 September 30, 2022 Available-for-sale debt securities:(1) U.S. Treasury securities $ 637,281 $ — $ — U.S. government agency securities — 101,690 — Residential mortgage-backed securities — 1,630,101 — CRT securities — — 11,702 Equity securities(1)(2) 21,932 11,041 — Mortgage loans held for sale(3) — — 4,387 Derivative assets(4) — 24,093 — Derivative liabilities(4) — 108,608 — Non-qualified deferred compensation plan liabilities(5) 20,028 — — 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 — Mortgage 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. 19 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 September 30, 2022 Available-for-sale debt securities:(1) CRT securities $ 11,670 $ — $ — $ — $ 32 $ 11,702 Loans held for sale(2) 4,266 571 ( 450 ) — — 4,387 Three months ended September 30, 2021 Available-for-sale debt securities:(1) Tax-exempt asset-backed securities $ 185,954 $ — $ ( 2,270 ) $ — $ 1,136 $ 184,820 CRT securities 11,713 — — — 91 11,804 Loans held for sale(2) 8,227 440 ( 870 ) — ( 96 ) 7,701 Nine months ended September 30, 2022 Available-for-sale debt securities:(1) Tax-exempt asset-backed securities $ 180,033 $ — $ ( 170,626 ) $ — $ ( 9,407 ) $ — CRT securities 11,846 — — — ( 144 ) 11,702 Loans held for sale(2) 7,658 1,898 ( 5,050 ) — ( 119 ) 4,387 Nine months ended September 30, 2021 Available-for-sale debt securities:(1) Tax-exempt asset-backed securities $ 199,176 $ — $ ( 13,783 ) $ — $ ( 573 ) $ 184,820 CRT securities 11,417 — — — 387 11,804 Loans held for sale(2) 6,933 2,125 ( 1,395 ) 5 33 7,701 (1) Unrealized gains/(losses) on available-for-sale debt securities are recorded in AOCI. Realized gains/(losses) are recorded in other non-interest income on the consolidated statements of income and other comprehensive income/(loss). (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. The securities were redeemed in full prior to September 30, 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 September 30, 2022, the discount rates utilized ranged from 6.97 % to 11.52 % and the weighted-average life ranged from 5.23 years to 8.93 years. On a combined amortized cost weighted-average basis, a discount rate of 8.49 % and a weighted-average life of 6.46 years were utilized to determine the fair value of these securities at September 30, 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. Mortgage loans held for sale The fair value of mortgage loans held for sale using Level 3 inputs include loans that cannot be sold through normal sale channels and thus require significant management judgment or estimation when determining the fair value. The fair value of such loans is generally based upon quoted prices of comparable loans with a liquidity discount applied. At September 30, 2022, the fair value of these loans was calculated using a weighted-average discounted price of 90.4 %, compared to 97.8 % at December 31, 2021. 20 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 September 30, 2022 Financial assets: Cash and cash equivalents $ 3,640,247 $ 3,640,247 $ 3,640,247 $ — $ — Available-for-sale debt securities 2,380,774 2,380,774 637,281 1,731,791 11,702 Held-to-maturity debt securities 955,875 819,701 — 819,701 — Equity securities 32,973 32,973 21,932 11,041 — Loans held for sale 3,142,178 3,113,806 — — 3,113,806 Loans held for investment, net 19,553,168 19,472,586 — — 19,472,586 Derivative assets 24,093 24,093 — 24,093 — Financial liabilities: Total deposits 24,498,563 24,502,640 — — 24,502,640 Short-term borrowings 1,701,480 1,701,480 — 1,701,480 — Long-term debt 930,766 873,342 — 873,342 — Derivative liabilities 108,608 108,608 — 108,608 — 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 — 21 (10) Derivative Financial Instruments The notional amounts and estimated fair values of derivative positions outstanding are presented in the following table. September 30, 2022 December 31, 2021 Estimated Fair Value Estimated Fair Value (in thousands) Notional Amount Asset Derivative Liability Derivative Notional Amount Asset Derivative Liability Derivative Derivatives designated as hedges Cash flow hedges: Interest rate contracts: Swaps hedging loans $ 3,000,000 $ 357 $ 80,135 $ — $ — $ — Non-hedging derivatives Customer-initiated and other derivatives: Interest rate contracts: Swaps 3,989,586 86,138 86,138 3,536,090 40,922 40,922 Caps and floors written 130,415 — 1,489 191,291 94 — Caps and floors purchased 130,415 1,489 — 191,291 — 94 Forward contracts 1,025,581 12,536 12,429 — — — Gross derivatives 100,520 180,191 41,016 41,016 Netting adjustment - offsetting derivative assets/liabilities ( 2,476 ) ( 2,476 ) ( 3,228 ) ( 3,228 ) Netting adjustment - cash collateral received/posted ( 73,951 ) ( 69,107 ) — — Net derivatives included on the consolidated balance sheets $ 24,093 $ 108,608 $ 37,788 $ 37,788 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 $ 24.1 million at September 30, 2022, and approximately $ 37.8 million at December 31, 2021. Collateral levels are monitored and adjusted on a regular basis for changes in the value of derivative instruments. At September 30, 2022, we had $ 73.0 million in cash collateral pledged to counterparties included in interest-bearing cash and cash equivalents on the consolidated balance sheet and $ 74.0 million in cash collateral received from counterparties included in interest bearing deposits on the consolidated balance sheet. The comparative amounts at December 31, 2021, were $ 40.3 million in cash collateral pledged to counterparties and no cash collateral received from counterparties. 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 18 risk participation agreements where we are a participant bank with a notional amount of $ 343.3 million at September 30, 2022, compared to seven risk participation agreements with 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 $ 10.4 million at September 30, 2022 and $ 2.3 million at December 31, 2021. The fair value of these exposures was insignificant to the consolidated financial statements at both September 30, 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 with a notional amount of $ 201.1 million at September 30, 2022, compared to 15 agreements with a notional amount of $ 156.1 million at December 31, 2021. Derivatives Designated as Cash Flow Hedges During the nine months ended September 30, 2022, we entered into interest rate derivative contracts that were designated as qualifying cash flow hedges to hedge the exposure to variability in expected future cash flows attributable to changes in a contractually specified interest rate. To qualify for hedge accounting, a formal assessment is prepared to determine whether the hedging relationship, both at inception and on an ongoing basis, is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the hedge if a cash flow hedge. At inception a statistical regression analysis is prepared to determine hedge effectiveness. At each reporting period thereafter, a statistical regression or qualitative analysis is performed. If it is determined that hedge effectiveness has not been or will not continue to be highly effective, then hedge accounting ceases and any gain or loss in AOCI is recognized in earnings immediately. The cash flow hedges are recorded at fair value in other assets and other liabilities on the consolidated balance sheets with changes in fair value recorded in AOCI, net of tax. Amounts recorded to AOCI are reclassified into earnings in the same period in which the hedged asset or 22 liability affects earnings and are presented in the same income statement line item as the earnings effect of the hedged asset or liability. During the three and nine months ended September 30, 2022, we recorded $ 78.2 million and $ 77.9 million, respectively, in unrealized losses to adjust our cash flow hedges to fair value, which was recorded net of tax to AOCI, and reclassified $ 1.8 million and $ 2.5 million, respectively, from AOCI into interest income on loans. Based on current market conditions, we estimate that during the next 12 months, an additional $ 31.7 million will be reclassified from AOCI as a decrease to interest income. As of September 30, 2022, the maximum length of time over which forecasted transactions are hedged is 4.00 years. (11) Accumulated Other Comprehensive Income The following table provides the change in AOCI by component: (in thousands) Cash Flow Hedges Available-for-Sale Securities Held-to-Maturity Securities Total Three months ended September 30, 2022 Beginning balance $ ( 316 ) $ ( 220,090 ) $ ( 51,802 ) $ ( 272,208 ) Change in unrealized gain/(loss) ( 78,177 ) ( 129,027 ) — ( 207,204 ) Amounts reclassified into net income ( 1,760 ) — 2,369 609 Total other comprehensive income/(loss) ( 79,937 ) ( 129,027 ) 2,369 ( 206,595 ) Income tax expense/(benefit) ( 16,786 ) ( 27,095 ) 497 ( 43,384 ) Total other comprehensive income/(loss), net of tax ( 63,151 ) ( 101,932 ) 1,872 ( 163,211 ) Ending balance $ ( 63,467 ) $ ( 322,022 ) $ ( 49,930 ) $ ( 435,419 ) Three months ended September 30, 2021 Beginning balance $ — $ ( 26,389 ) $ — $ ( 26,389 ) Change in unrealized gain/(loss) — ( 18,131 ) — ( 18,131 ) Amounts reclassified into net income — — — — Total other comprehensive income/(loss) — ( 18,131 ) — ( 18,131 ) Income tax expense/(benefit) — ( 3,808 ) — ( 3,808 ) Total other comprehensive income/(loss), net of tax — ( 14,323 ) — ( 14,323 ) Ending balance $ — $ ( 40,712 ) $ — $ ( 40,712 ) Nine months ended September 30, 2022 Beginning balance $ — $ ( 47,715 ) $ — $ ( 47,715 ) Change in unrealized gain/(loss) ( 77,873 ) ( 347,223 ) ( 69,165 ) ( 494,261 ) Amounts reclassified into net income ( 2,464 ) — 5,962 3,498 Total other comprehensive income/(loss) ( 80,337 ) ( 347,223 ) ( 63,203 ) ( 490,763 ) Income tax expense/(benefit) ( 16,870 ) ( 72,916 ) ( 13,273 ) ( 103,059 ) Total other comprehensive income/(loss), net of tax ( 63,467 ) ( 274,307 ) ( 49,930 ) ( 387,704 ) Ending balance $ ( 63,467 ) $ ( 322,022 ) $ ( 49,930 ) $ ( 435,419 ) Nine months ended September 30, 2021 Beginning balance $ — $ 15,774 $ — $ 15,774 Change in unrealized gain/(loss) — ( 71,501 ) — ( 71,501 ) Amounts reclassified into net income — — — — Total other comprehensive income/(loss) — ( 71,501 ) — ( 71,501 ) Income tax expense/(benefit) — ( 15,015 ) — ( 15,015 ) Total other comprehensive income/(loss), net of tax — ( 56,486 ) — ( 56,486 ) Ending balance $ — $ ( 40,712 ) $ — $ ( 40,712 ) (12) New Accounting Standards 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. 23 Accounting Standard Update 2022-04, “Liabilities - Supplier Finance Programs (Subtopic 405-50)” (“ASU 2022-04”) enhances the transparency of supplier finance programs and the related financial statement disclosures. The amendments require that a buyer in a supplier finance program disclose information about the key terms of the program, outstanding confirmed amounts as of the end of the period, a rollforward of such amounts during each annual period and a description of where in the financial statements outstanding amounts are presented. ASU 2022-04 is effective January 1, 2023, except for the disclosure of rollforward information, which is effective January 1, 2024, and is not expected to have an impact on our consolidated financial statements. 24