TEXAS CAPITAL BANCSHARES INC/TX 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Page Reference Report of Ernst & Young LLP, Independent Registered Public Accounting Firm ( Ernst & Young LLP , Dallas, TX , Auditor Firm ID: 42 ) 53 Consolidated Balance Sheets — December 31, 202 2 and December 31, 202 1 55 Consolidated Statements of Income and Other Comprehensive Income — Years ended December 31, 2022, 2021 and 2020 56 Consolidated Statements of Stockholders’ Equity — Years ended December 31, 2022, 2021 and 2020 57 Consolidated Statements of Cash Flows — Years ended December 31, 2022, 2021 and 2020 58 Notes to Consolidated Financial Statements 59 52 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Texas Capital Bancshares, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Texas Capital Bancshares, Inc. (the Company) as of December 31, 2022, and 2021, the related consolidated statements of income and other comprehensive income , stockholders' equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 9, 2023, expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates. 53 Table of Contents Allowance for Credit Losses - Loans Description of the Matter The Company’s loans held for investment portfolio totaled $19.3 billion as of December 31, 2022, and the associated allowance for credit losses (ACL) was $275.3 million. The ACL represents management’s best estimate of expected credit losses over the contractual life of loans and for off-balance sheet commitments. The ACL is estimated using relevant available information relating to past events, current conditions, and reasonable and supportable forecasts, as well as qualitative adjustments using a Portfolio Level Qualitative Factor and/or Portfolio Segment Level Qualitative Factor (collectively the “qualitative factors”). The qualitative factors are used to bring the ACL to the level management believes is appropriate based on factors that are otherwise unaccounted for in the quantitative process. The ACL also includes reserves for loans evaluated on an individual basis, such as certain loans graded substandard or worse. Management applies judgment in the determination and usage of the qualitative factors, and in the use of a single or a blend of forecast scenarios used to calculate the reasonable and supportable forecast. Auditing management’s estimate of the ACL is complex due to the models utilized and involves a high degree of subjectivity due to the judgment required in evaluating management’s determination and usage of the qualitative factors, and in the use of a single or blend of forecast scenarios used to calculate the reasonable and supportable forecast. How We Addressed the Matter in Our Audit Our considerations and procedures performed included evaluation of the process utilized by management to challenge the model results and determine the best estimate of the ACL as of the balance sheet date. We obtained an understanding of the Company’s process for establishing the ACL, including determination and usage of the qualitative factors and determination of a single or blend of multiple forecast scenarios used to calculate the reasonable and supportable forecast. We evaluated the design and tested the operating effectiveness of the controls associated with the ACL process, including controls around the reliability and accuracy of data used in the model, management’s review and approval of the selected qualitative factors, the single or blend of multiple forecast scenarios used to calculate the reasonable and supportable forecast, the governance of the credit loss methodology, and management’s review and approval of the ACL. We performed specific substantive tests of the models utilized, qualitative factors and the single or blend of forecast scenarios used to calculate the reasonable and supportable forecast. We involved EY specialists to assist in testing management models including evaluating model methodology and key modeling assumptions, as well as the appropriateness of management’s qualitative and reasonable and supportable forecast framework. We evaluated if the qualitative factors were applied based on a comprehensive framework and compared the adjustments utilized by management to both internal portfolio metrics and external macroeconomic data (as applicable) to support the adjustments and evaluate trends in such adjustments. We searched for and evaluated information that corroborates or contradicts management’s reasonable and supportable forecast as well as identification and measurement of qualitative factors. In addition, we evaluated the Company’s estimate of the overall ACL, giving consideration to the Company’s borrowers, loan portfolio, and macroeconomic trends, independently obtained and compared such information to comparable financial institutions and considered whether new or contrary information existed. /s/ Ernst & Young LLP We have served as the Company's auditor since 1999. Dallas, TX February 9, 2023 54 Table of Contents TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS December 31, (in thousands except share data) 2022 2021 Assets Cash and due from banks $ 233,637 $ 180,663 Interest bearing cash and cash equivalents 4,778,623 7,765,996 Available-for-sale debt securities 2,615,644 3,538,201 Held-to-maturity debt securities 935,514 — Equity securities 33,956 45,607 Investment securities 3,585,114 3,583,808 Loans held for sale 36,357 8,123 Loans held for investment, mortgage finance 4,090,033 7,475,497 Loans held for investment 15,197,307 15,331,457 Less: Allowance for credit losses on loans 253,469 211,866 Loans held for investment, net 19,033,871 22,595,088 Premises and equipment, net 26,382 20,901 Accrued interest receivable and other assets 719,162 559,897 Goodwill and intangible assets, net 1,496 17,262 Total assets $ 28,414,642 $ 34,731,738 Liabilities and Stockholders’ Equity Liabilities: Non-interest bearing deposits $ 9,618,081 $ 13,390,370 Interest bearing deposits 13,238,799 14,718,995 Total deposits 22,856,880 28,109,365 Accrued interest payable 24,000 7,699 Other liabilities 345,827 273,488 Short-term borrowings 1,201,142 2,202,832 Long-term debt 931,442 928,738 Total liabilities 25,359,291 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 December 31, 2022 and 2021 300,000 300,000 Common stock, $ 0.01 par value: Authorized shares - 100,000,000 Issued shares - 50,867,298 and 50,618,911 at December 31, 2022 and 2021, respectively 509 506 Additional paid-in capital 1,025,593 1,008,559 Retained earnings 2,263,502 1,948,274 Treasury stock shares at cost: 2,083,535 and 417 at December 31, 2022 and 2021, respectively ( 115,310 ) ( 8 ) Accumulated other comprehensive loss, net of taxes ( 418,943 ) ( 47,715 ) Total stockholders’ equity 3,055,351 3,209,616 Total liabilities and stockholders’ equity $ 28,414,642 $ 34,731,738 See accompanying notes to consolidated financial statements. 55 Table of Contents TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME Year ended December 31, (in thousands except per share data) 2022 2021 2020 Interest income Interest and fees on loans $ 983,787 $ 820,532 $ 993,670 Investment securities 63,179 42,820 17,475 Interest bearing cash and cash equivalents 97,271 13,233 28,262 Total interest income 1,144,237 876,585 1,039,407 Interest expense Deposits 190,663 65,507 146,117 Short-term borrowings 29,077 4,613 22,006 Long-term debt 48,739 37,628 19,963 Total interest expense 268,479 107,748 188,086 Net interest income 875,758 768,837 851,321 Provision for credit losses 66,000 ( 30,000 ) 258,000 Net interest income after provision for credit losses 809,758 798,837 593,321 Non-interest income Service charges on deposit accounts 22,876 18,674 11,620 Wealth management and trust fee income 15,036 13,173 9,998 Brokered loan fees 14,159 27,954 46,423 Servicing income 857 15,513 27,029 Investment banking and trading income 35,054 24,441 22,687 Net gain/(loss) on sale of loans held for sale ( 990 ) 1,317 58,026 Gain on disposal of subsidiary 248,526 — — Other 14,011 37,158 27,198 Total non-interest income 349,529 138,230 202,981 Non-interest expense Salaries and benefits 436,809 350,930 340,529 Occupancy expense 44,222 33,232 34,955 Marketing 32,388 10,006 23,581 Legal and professional 75,858 41,152 52,132 Communications and technology 69,253 75,185 103,054 Federal Deposit Insurance Corporation insurance assessment 14,344 21,027 25,955 Servicing-related expenses — 27,765 64,585 Merger-related expenses — — 17,756 Other 54,658 39,715 41,809 Total non-interest expense 727,532 599,012 704,356 Income before income taxes 431,755 338,055 91,946 Income tax expense 99,277 84,116 25,657 Net income 332,478 253,939 66,289 Preferred stock dividends 17,250 18,721 9,750 Net income available to common stockholders $ 315,228 $ 235,218 $ 56,539 Other comprehensive income/(loss): Change in unrealized gain/(loss) $ ( 479,814 ) $ ( 80,366 ) $ 8,639 Amounts reclassified into net income 9,905 — — Other comprehensive income/(loss) ( 469,909 ) ( 80,366 ) 8,639 Income tax expense/(benefit) ( 98,681 ) ( 16,877 ) 1,815 Other comprehensive income/(loss), net of tax ( 371,228 ) ( 63,489 ) 6,824 Comprehensive income/(loss) $ ( 38,750 ) $ 190,450 $ 73,113 Basic earnings per common share $ 6.25 $ 4.65 $ 1.12 Diluted earnings per common share $ 6.18 $ 4.60 $ 1.12 See accompanying notes to consolidated financial statements. 56 Table of Contents TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Preferred Stock Common Stock Additional Treasury Stock Accumulated Other Paid-in Retained Comprehensive (in thousands except share data) Shares Amount Shares Amount Capital Earnings Shares Amount Income/(Loss) Total Balance at December 31, 2019 6,000,000 $ 150,000 50,338,158 $ 503 $ 978,205 $ 1,663,671 ( 417 ) $ ( 8 ) $ 8,950 $ 2,801,321 Impact of adoption of new accounting standards(1) — — — — — ( 7,154 ) — — — ( 7,154 ) Comprehensive income/(loss): Net income — — — — — 66,289 — — — 66,289 Change in other comprehensive income/(loss), net of taxes — — — — — — — — 6,824 6,824 Total comprehensive income 73,113 Stock-based compensation expense recognized in earnings — — — — 15,681 — — — — 15,681 Preferred stock dividend — — — — — ( 9,750 ) — — — ( 9,750 ) Issuance of stock related to stock-based awards — — 132,709 1 ( 1,988 ) — — — — ( 1,987 ) Balance at December 31, 2020 6,000,000 $ 150,000 50,470,867 $ 504 $ 991,898 $ 1,713,056 ( 417 ) $ ( 8 ) $ 15,774 $ 2,871,224 Comprehensive income/(loss): Net income — — — — — 253,939 — — — 253,939 Change in other comprehensive income/(loss), net of taxes — — — — — — — — ( 63,489 ) ( 63,489 ) Total comprehensive income 190,450 Stock-based compensation expense recognized in earnings — — — — 30,061 — — — — 30,061 Issuance of preferred stock 300,000 300,000 — — ( 10,277 ) — — — — 289,723 Preferred stock dividend — — — — — ( 18,721 ) — — — ( 18,721 ) Issuance of stock related to stock-based awards — — 148,044 2 ( 3,123 ) — — — — ( 3,121 ) Redemption of preferred stock ( 6,000,000 ) ( 150,000 ) — — — — — — — ( 150,000 ) Balance at December 31, 2021 300,000 $ 300,000 50,618,911 $ 506 $ 1,008,559 $ 1,948,274 ( 417 ) $ ( 8 ) $ ( 47,715 ) $ 3,209,616 Comprehensive income (loss): Net income — — — — — 332,478 — — — 332,478 Change in other comprehensive income/(loss), net of taxes — — — — — — — — ( 371,228 ) ( 371,228 ) Total comprehensive loss ( 38,750 ) Stock-based compensation expense recognized in earnings — — — — 21,246 — — — — 21,246 Preferred stock dividend — — — — — ( 17,250 ) — — — ( 17,250 ) Issuance of stock related to stock-based awards — — 248,387 3 ( 4,212 ) — — — — ( 4,209 ) Repurchase of common stock — — — — — — ( 2,083,118 ) ( 115,302 ) — ( 115,302 ) Balance at December 31, 2022 300,000 $ 300,000 50,867,298 $ 509 $ 1,025,593 $ 2,263,502 ( 2,083,535 ) $ ( 115,310 ) $ ( 418,943 ) $ 3,055,351 (1) Represents the impact of adopting Accounting Standard Update (“ASU”) 2016-13. See Note 1 - Operations and Summary of Significant Accounting Policies to the consolidated financial statements for more information. See accompanying notes to consolidated financial statements. 57 Table of Contents TEXAS CAPITAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, (in thousands) 2022 2021 2020 Operating activities Net income $ 332,478 $ 253,939 $ 66,289 Adjustments to reconcile net income to net cash provided by/(used in) operating activities: Provision/(benefit) for credit losses 66,000 ( 30,000 ) 258,000 Deferred tax expense/(benefit) ( 17,395 ) ( 20,253 ) ( 7,964 ) Depreciation and amortization expense 45,284 93,406 74,925 Net (gain)/loss on sale of loans held for sale 990 ( 1,317 ) ( 58,026 ) Increase/(decrease) in valuation allowance on mortgage servicing rights — ( 16,448 ) 20,164 Stock-based compensation expense 21,432 31,326 17,441 Purchases and originations of loans held for sale ( 37,461 ) ( 1,413,899 ) ( 11,366,986 ) Proceeds from sales and repayments of loans held for sale 8,132 1,676,601 13,619,623 Gain on sale of subsidiary ( 248,526 ) — — Changes in operating assets and liabilities: Accrued interest receivable and other assets ( 25,482 ) 154,114 10,654 Accrued interest payable and other liabilities 2,518 ( 70,154 ) 5,749 Net cash provided by operating activities 147,970 657,315 2,639,869 Investing activities Purchases of available-for sale debt securities ( 920,217 ) ( 1,059,897 ) ( 3,001,746 ) Proceeds from maturities, redemptions and pay-downs of available-for-sale debt securities 432,175 569,931 52,609 Proceeds from maturities, redemptions and pay-downs of held-to-maturity debt securities 87,945 — — Net decrease in equity securities 11,651 — — Originations of loans held for investment, mortgage finance ( 102,438,943 ) ( 167,084,439 ) ( 216,234,122 ) Proceeds from pay-offs of loans held for investment, mortgage finance 105,824,407 168,688,351 215,324,562 Proceeds from sale of mortgage servicing rights — 115,891 — Net (increase)/decrease in loans held for investment, excluding mortgage finance loans ( 3,001,340 ) 7,076 926,176 Proceeds from sale of subsidiary 3,324,159 — — Purchase of premises and equipment, net ( 11,270 ) ( 4,127 ) ( 2,796 ) Net cash provided by/(used in) investing activities 3,308,567 1,232,786 ( 2,935,317 ) Financing activities Net increase/(decrease) in deposits ( 5,252,485 ) ( 2,887,224 ) 4,517,996 Issuance of stock related to stock-based awards ( 4,209 ) ( 3,121 ) ( 1,986 ) Net proceeds from issuance of preferred stock — 289,723 — Redemption of preferred stock — ( 150,000 ) — Preferred dividends paid ( 17,250 ) ( 18,721 ) ( 9,750 ) Repurchase of common stock ( 115,302 ) — — Net proceeds from issuance of long-term debt — 639,440 — Redemption of long-term debt — ( 111,000 ) — Net increase/(decrease) in short-term borrowings ( 1,001,690 ) ( 908,919 ) 569,985 Net cash provided by/(used in) financing activities ( 6,390,936 ) ( 3,149,822 ) 5,076,245 Net increase/(decrease) in cash and cash equivalents ( 2,934,399 ) ( 1,259,721 ) 4,780,797 Cash and cash equivalents at beginning of period 7,946,659 9,206,380 4,425,583 Cash and cash equivalents at end of period $ 5,012,260 $ 7,946,659 $ 9,206,380 Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 252,178 $ 111,199 $ 189,696 Cash paid during the period for income taxes 128,435 101,101 26,152 Transfers of debt securities from available-for-sale to held-to-maturity 1,019,365 — — See accompanying notes to consolidated financial statements. 58 Table of Contents (1) Operations and Summary of Significant Accounting Policies Organization and Nature of Business Texas Capital Bancshares, Inc. (“TCBI” or the “Company”), a Delaware corporation, was incorporated in November 1996 and commenced banking operations in December 1998. The consolidated financial statements include the accounts of TCBI and its wholly owned subsidiary, Texas Capital Bank (the “Bank”). The Company serves the needs of commercial businesses, entrepreneurs and professionals located in Texas through a custom array of financial products and services with high-quality personal service. On September 6, 2022, the Company announced the sale of BankDirect Capital Finance, LLC (“BDCF”), its insurance premium finance subsidiary, to AFCO Credit Corporation, an indirect wholly-owned subsidiary of Truist Financial Corporation. The sale of BDCF included its business operations and loan portfolio of approximately $ 3.1 billion. The sale was an all-cash transaction for a purchase price of $ 3.4 billion, representing a pre-tax gain of $ 248.5 million. This transaction did not meet the criteria for discontinued operations reporting, and the sale was completed on November 1, 2022. Basis of Presentation The Company’s accounting and reporting policies conform to accounting principles generally accepted in the United States (“GAAP”) and to generally accepted practices within the banking industry. Certain prior period balances have been reclassified to conform to the current period presentation. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for credit losses, the fair value of financial instruments and the status of contingencies are particularly susceptible to significant change. Basic and Diluted Earnings Per Common Share Basic earnings per common share is based on net income available to common stockholders divided by the weighted-average number of common shares outstanding during the period excluding non-vested stock-settled awards. Diluted earnings per common share include the dilutive effect of non-vested stock-settled awards granted using the treasury stock method. Cash and Cash Equivalents Cash equivalents include amounts due from banks, interest bearing deposits in other banks and federal funds sold. Investment Securities Investment securities include debt securities and equity securities. Debt Securities Debt securities are classified as trading, available-for-sale or held-to-maturity. Debt securities not classified as held-to-maturity or trading are classified as available-for-sale. Management classifies securities at the time of purchase and re-assesses such designation at each balance sheet date. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization and accretion are included in interest income from investment securities. Gains or losses realized upon the sale of debt securities is recorded in other non-interest income on the consolidated statements of income and other comprehensive income. The cost of securities sold is based on the specific identification method. The Company has made a policy election to exclude accrued interest from the amortized cost basis of debt securities and report accrued interest separately in accrued interest and other assets on the consolidated balance sheets. Available-for-sale and held-to-maturity debt securities are placed on non-accrual status when management no longer expects to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on non-accrual status. Accordingly, the Company does not recognize an allowance for credit loss against accrued interest receivable Trading Account Debt securities acquired for resale in anticipation of short-term market movements are classified as trading and recorded at fair value, with realized and unrealized gains and losses recognized in income. 59 Table of Contents Held-to-Maturity Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, net of any allowance for credit losses. Management may transfer debt securities classified as available-for-sale to held-to-maturity when upon reassessment it is determined that the Company has both the positive intent and ability to hold these securities to maturity. The debt securities are transferred at fair value resulting in a premium or discount recorded on transfer date. Unrealized gains or losses at the date of transfer continue to be reported as a separate component of accumulated other comprehensive income/loss, net (“AOCI”). The premium or discount and the unrealized gain or loss, net of tax, in AOCI will be amortized to interest income over the remaining life of the securities using the interest method. Available-for-Sale Available-for-sale debt securities are recorded at fair value, with unrealized gains and losses, net of tax, reported as a separate component of AOCI. For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more-likely-than-not that it will be required to sell, the securities before recovery of the amortized cost basis. If either of these criteria is met, the securities’ amortized cost basis is written down to fair value as a current period expense recorded on the consolidated statements of income and other comprehensive income. If either of the above criteria is not met, management evaluates whether the decline in fair value is the result of credit losses or other factors. In making this assessment, management may consider various factors including the extent to which fair value is less than amortized cost, performance of any underlying collateral and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit losses, limited to the amount by which the fair value is less than the amortized cost basis. Any impairment not recorded through an allowance for credit losses is recognized in AOCI, net of tax, as a non-credit related impairment. Included in debt securities available-for-sale are credit risk transfer (“CRT”) securities, which represent unsecured obligations issued by government sponsored entities (“GSEs”) such as Freddie Mac and are designed to transfer mortgage credit risk from the GSE to private investors. CRT securities are structured to be subject to the performance of a reference pool of mortgage loans in which the Company shares in 50% of the first losses with the GSE. If the reference pool incurs losses, the amount the Company will recover on the notes is reduced by its share of the amount of such losses, which could potentially be up to 100% of the amount outstanding. Unrealized losses recognized in AOCI for the CRT securities are primarily related to the difference between the current market rate for similar securities and the stated interest rate and are not considered to be related to credit loss events. The CRT securities are generally interest-only for an initial period of time and may be restricted from being transferred until a future date. Equity Securities Equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in income. Equity securities without readily determinable fair values are recorded at cost less any impairment. Loans Loans Held for Sale The Company transitioned its mortgage correspondent aggregation (“MCA”) program to a third party in 2021. Prior to transition, the Company committed to purchase residential mortgage loans from independent correspondent lenders and delivered those loans into the secondary market via whole loan sales to independent third parties or in securitization transactions to third parties such as Ginnie Mae or to GSEs. In some cases, the Company retained the mortgage servicing rights. Once purchased, these loans were classified as held for sale and carried at fair value pursuant to the election of the fair value option in accordance with Accounting Standards Codification (“ASC”) 825, Financial Instruments . At the commitment date, the Company entered into a corresponding forward sale commitment with a third party, typically Ginnie Mae or a GSE, to deliver the loans within a specified timeframe. The estimated gain/(loss) for the entire transaction (from initial purchase commitment to final delivery of loans) was recorded as an asset or liability. The fair value of loans held for sale is derived from observable current market prices, when available, and includes the fair value of the mortgage servicing rights. Adjustments to reflect unrealized gains and losses resulting from changes in fair value and realized gains and losses upon ultimate sale of the loans are classified as gain/(loss) on sale of loans held for sale on the consolidated statements of income and other comprehensive income. Residential mortgage loans held for sale are subject to both credit and interest rate risk. Credit risk is managed through underwriting policies and procedures, including collateral requirements, which are generally accepted by the secondary loan markets. Exposure to interest rate fluctuations is partially managed through forward sales contracts, which set the price for loans that will be delivered in the next 60 to 90 days. From time to time the Company holds for sale certain commercial loans and also the guaranteed portion of Small Business Administration 7(a) loans, which are carried at lower of cost or fair value. 60 Table of Contents Loans Held for Investment Loans held for investment (including financing leases) are stated at the amount of unpaid principal reduced by unearned income, net of direct loan origination costs. Interest on loans is recognized using the simple interest method on the daily balances of the principal amounts outstanding. Loan origination fees, net of direct loan origination costs, and commitment fees are deferred and amortized as an adjustment to yield over the life of the loan, or over the commitment period, as applicable. Restructured loans are loans on which, due to the borrower’s financial difficulties, the Company has granted a concession that it would not otherwise consider for borrowers of similar credit quality. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two. Modifications of terms that could potentially qualify as a restructuring include reduction of contractual interest rate, extension of the maturity date at a contractual interest rate lower than the current rate for new debt with similar risk, an adjustment to payment terms, a reduction of the face amount of debt or forgiveness of either principal or accrued interest. A loan continues to qualify as restructured until a consistent payment history or change in the borrower’s financial condition has been evidenced, generally for no less than twelve months. If the restructuring agreement specifies an interest rate at the time of the restructuring that is greater than or equal to the rate that the Company is willing to accept for a new extension of credit with comparable risk, then the loan is no longer considered a restructuring if it is in compliance with the modified terms in calendar years after the year of the restructure. A loan is considered past due when a contractually due payment has not been received by the contractual due date. The Company places a loan on non-accrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed as a reduction of current period interest income. Interest income is subsequently recognized on a cash basis as long as the remaining book balance of the asset is deemed to be collectible. If collectability is questionable, then cash payments are applied to principal. A loan is placed back on accrual status when both principal and interest are current and it is probable that all amounts due will be collected (both principal and interest) according to the terms of the loan agreement. Loans held for investment includes legal ownership interests in mortgage loans that the Company purchases through its mortgage finance division. The ownership interests are purchased from unaffiliated mortgage originators who are seeking additional liquidity to facilitate their ability to originate loans. The mortgage originator has no obligation to offer and the Company has no obligation to purchase these interests. The originator closes mortgage loans consistent with underwriting standards established by approved investors, and, at the time of the sale to the investor, the Company’s ownership interest and that of the originator are delivered to the investor selected by the originator and approved. The Company typically purchases up to a 99% ownership interest in each mortgage with the originator owning the remaining percentage. These mortgage ownership interests are generally held for a period of less than 30 days and more typically 10-20 days. Because of conditions in agreements with originators designed to reduce transaction risks, under ASC 860, Transfers and Servicing of Financial Assets (“ASC 860”), the ownership interests do not qualify as participating interests. Under ASC 860, the ownership interests are deemed to be loans to the originators and payments received from investors are deemed to be payments made by or on behalf of the originator to repay the loan. Because the Company has an actual, legal ownership interest in the underlying residential mortgage loan, these interests are reported as extensions of credit to the originators that are secured by the mortgage loans as collateral. Due to market conditions or events of default by the investor or the originator, the Company could be required to purchase the remaining interests in the mortgage loans and hold them beyond the expected 10-20 days. Mortgage loans acquired under these conditions would require mark-to-market adjustments to income and could require further allocations of the allowance for credit losses or be subject to charge-off in the event the loans become impaired. Allowance for Credit Losses On January 1, 2020, the Company adopted ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"), which uses the current expected credit loss ("CECL") model to determine the allowance for credit losses. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with ASU 2016-02 "Leases (Topic 842)" . The following is discussion of the allowance for credit losses on loans held for investment. See “ Investment Securities - Debt Securities ” above for discussion of the allowance for credit losses on available-for-sale and held-to maturity debt securities. The CECL methodology recognizes lifetime expected credit losses immediately when a financial asset is originated or purchased. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance 61 Table of Contents when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, credit quality, or term, as well as for changes in macroeconomic conditions, such as changes in unemployment rates, crude oil prices, property values or other relevant factors. The allowance for credit losses is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Reserves on loans that do not share risk characteristics are evaluated on an individual basis. In order to determine the allowance for credit losses, all loans are assigned a credit grade. Loans graded substandard or worse and greater than $500,000 are specifically reviewed for loss potential and when deemed appropriate are assigned a reserve based on an individual evaluation. For purposes of determining the pool-basis reserve, the remainder of the portfolio, representing all loans not assigned an individual reserve, is segregated first by portfolio segment, then by product type, to recognize differing risk profiles within portfolio segments, and finally by credit grade. Each credit grade within each product type is assigned a historical loss rate. These historical loss rates are then modified to incorporate a reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments using a Portfolio Level Qualitative Factor (“PLQF”) and/or a Portfolio Segment Level Qualitative Factor (“SLQF”). These modified historical loss rates are multiplied by the outstanding principal balance of each loan to calculate a required reserve. A similar process is employed to calculate a reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and letters of credit, and any needed reserve is recorded in other liabilities on the consolidated balance sheets. The PLQF and SLQF are utilized to address factors that are not present in historical loss rates and are otherwise unaccounted for in the quantitative process. The PLQF is used to apply a qualitative adjustment across the entire portfolio of loans, while the SLQF is designed to apply a qualitative adjustment across a single portfolio segment. Even though portions of the allowance may be allocated to specific loans, the entire allowance is available for any credit that, in management’s judgment, should be charged off. The Company generally uses a two-year forecast period, based on a single forecast scenario or a blend of multiple forecast scenarios, using variables management believes are most relevant to each portfolio segment. For periods beyond which management is able to develop reasonable and supportable forecasts, they immediately revert to the average historical loss rate. The forecast period and scenario(s) used are reviewed on a quarterly basis and may be adjusted based on management's view of the current economic conditions and level of predictability the forecast can provide. Portfolio segments are used to pool loans with similar risk characteristics and align with the Company’s methodology for measuring expected credit losses. A summary of the primary portfolio segments is as follows: Commercial . The commercial loan portfolio is comprised of lines of credit for working capital, term loans and leases to finance equipment and other business assets across a variety of industries. These loans are used for general corporate purposes including financing working capital, internal growth, acquisitions and business insurance premiums and are generally secured by accounts receivable, inventory, equipment and other assets of clients’ businesses. The commercial loan portfolio also includes consumer loans because the Company’s small portfolio of consumer loans is largely comprised of accommodation loans to individuals associated with its commercial clients. Energy . The energy loan portfolio is primarily comprised of loans to exploration and production companies that are generally collateralized with proven reserves based on appropriate valuation standards that take into account the risk of oil and gas price volatility. The majority of this portfolio is first lien, senior secured, reserve-based lending, which the Company believes is the lowest-risk form of energy lending. Energy loans are impacted by commodity price volatility, as well as changes in consumer and business demand. Mortgage finance . Mortgage finance loans relate to mortgage warehouse lending operations in which the Company purchases mortgage loan ownership interests from unaffiliated mortgage originators that are generally held for a period of less than 30 days and more typically 10-20 days before they are sold to an approved investor. Volumes fluctuate based on the level of market demand for the product and the number of days between purchase and sale of the loans, which can be affected by changes in overall market interest rates and housing demand and tend to peak at the end of each month. Mortgage finance loans are consistently underwritten based on standards established by the approved investors. Market conditions or events of default by an investor or originator could require that the Company repurchases the remaining interests in the mortgage loans and hold them beyond the expected 10-20 days. Real estate . The real estate portfolio is comprised of the following types of loans: Commercial real estate (“CRE”) . The CRE portfolio is comprised of both construction/development financing and limited term financing provided to professional real estate developers and owners/managers of commercial real estate 62 Table of Contents projects and properties who have a demonstrated record of past success with similar properties. Collateral properties include office buildings, warehouse/distribution buildings, shopping centers, hotels/motels, senior living, apartment buildings and residential and commercial tract development. The primary source of repayment on these loans is expected to come from the sale, permanent financing or lease of the real property collateral. CRE loans are impacted by fluctuations in collateral values, as well as the ability of the borrower to obtain permanent financing. Residential homebuilder finance (“RBF”) . The RBF portfolio is comprised of loans made to residential builders and developers. Loans to residential builders are typically in the form of uncommitted guidance lines and are for the purpose of developing lots into single-family homes, while loans to developers are typically in the form of borrowing base lines extended for the purpose of acquiring and developing raw land into lots that can be further sold to home builders. RBF loans, if not structured and monitored correctly, can be impacted by volatility in consumer demand, as well as fluctuation in housing prices. Secured by 1-4 family . This category of loans includes both first and second lien loans made for the purpose of purchasing or constructing 1-4 family residential dwellings, as well as home equity revolving lines of credit and loans to purchase lots for future construction of 1-4 family residential dwellings. Other . The “other” category is primarily comprised of real estate loans originated through a Small Business Administration (SBA) program where repayment is partially guaranteed by the SBA, as well as other loans secured by real estate where the primary source of repayment is not expected to come from the sale or lease of the real property collateral. The Company has several pass credit grades that are assigned to loans based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to watch credits which have all the characteristics of an acceptable credit risk but warrant more than the normal level of monitoring. Within the criticized/classified credit grades are special mention, substandard and doubtful. Special mention loans are those that are currently protected by the sound worth and paying capacity of the borrower, but that are potentially weak and constitute an additional credit risk. These loans have the potential to deteriorate to a substandard grade due to the existence of financial or administrative deficiencies. Substandard loans have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Some substandard loans are inadequately protected by the sound worth and paying capacity of the borrower and of the collateral pledged and may be considered impaired. Substandard loans can be accruing or can be on non-accrual depending on the circumstances of the individual loans. Loans classified as doubtful have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection in full highly questionable and improbable. The possibility of loss is extremely high. All doubtful loans are on non-accrual. The methodology used in the estimation of the allowance, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and forecasted economic conditions. Changes are reflected in the pool-basis allowance and in reserves assigned on an individual basis as the collectability of classified loans is evaluated with new information. As the Company’s portfolio has matured, historical loss ratios have been closely monitored. The review of the appropriateness of the allowance is performed by executive management and presented to the audit and risk committees of the board of directors for their review. The committees report to the board as part of the board's quarterly review of the Company’s consolidated financial statements. When management determines that foreclosure is probable, and for certain collateral-dependent loans where foreclosure is not considered probable, expected credit losses are based on the estimated fair value of the collateral adjusted for selling costs, when appropriate. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless either of the following applies: management has a reasonable expectation that a loan will be restructured or the extension or renewal options are included in the borrower contract and are not unconditionally cancellable. The Company does not measure an allowance for credit losses on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when loans are placed on non-accrual status as discussed above. Other Real Estate Owned Other real estate owned (“OREO”), which is included in other assets on the consolidated balance sheet, consists of real estate that has been foreclosed. When foreclosure occurs, the acquired asset is recorded at fair value less selling costs, generally based on appraised value, which may result in partial charge-off of the loan through a charge to the allowance for credit losses, if necessary. Subsequent write-downs required for declines in value are recorded through a valuation allowance, or taken directly 63 Table of Contents to the asset, and are recorded in other non-interest expense on the consolidated statements of income and other comprehensive income. Gains or losses on sale of OREO are recorded in other non-interest income on the consolidated statements of income and other comprehensive income. Goodwill and Other Intangible Assets, Net Intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. The Company’s goodwill and intangible assets relate primarily to customer relationships purchased as part of business acquisitions. Intangible assets with definite useful lives are amortized over their estimated life. Goodwill and intangible assets are tested for impairment at least annually or whenever changes in circumstances indicate the carrying amount of the assets may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value. Premises and Equipment, Net Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Furniture and equipment is generally depreciated over three to five years , while leasehold improvements are generally depreciated over the term of their respective lease. Gains or losses on disposals of premises and equipment are included in other non-interest income on the consolidated statements of income and other comprehensive income. Software Costs incurred in connection with development or purchase of internal use software and cloud computing arrangements, including in-substance software licenses, are capitalized. Amortization is computed on a straight-line basis over the estimated useful life of the asset, which generally ranges from one to five years . Capitalized software is included in other assets on the consolidated balance sheets. Financial Instruments with Off-Balance Sheet Risk The Company has undertaken certain guarantee obligations in the ordinary course of business which include liabilities with off-balance sheet risk. The Company considers the following arrangements to be guarantees: commitments to extend credit, standby letters of credit and indemnification agreements included within third party contractual arrangements. The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit that involve varying degrees of credit risk in excess of the amount recognized on the consolidated balance sheets. The Company’s exposure to credit loss in the event of non-performance by the other party to these financial instruments is represented by the contractual amount of the instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the borrower. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. Commitments to extend credit do not include mortgage finance arrangements with mortgage loan originators through the mortgage warehouse lending division, which are established as uncommitted “guidance” purchase and sale facilities under which the mortgage originator has no obligation to offer and the Company has no obligation to purchase interests in the mortgage loans subject to the arrangements. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In conjunction with the sale and securitization of loans held for sale and their related servicing rights, the Company may be exposed to liability resulting from recourse, repurchase and make-whole agreements. If it is determined subsequent to the sale of a loan or its related servicing rights that a breach of the representations or warranties made in the applicable sale agreement has occurred, which may include guarantees that prepayments will not occur within a specified and customary time frame, the Company may have an obligation to either (a) repurchase the loan for the unpaid principal balance, accrued interest and related advances, (b) indemnify the purchaser against any loss it suffers or (c) make the purchaser whole for the economic benefits of the loan and its related servicing rights. The repurchase, indemnification and make-whole obligations vary based upon the terms of the applicable agreements, the nature of the asserted breach and the status of the mortgage loan at the time a claim is made. The Company establishes reserves for estimated losses of this nature inherent in the sale of mortgage loans by estimating the 64 Table of Contents losses inherent in the population of all loans sold based on trends in claims and actual loss severities experienced. The reserve will include accruals for probable contingent losses in addition to those identified in the pipeline of claims received. Leases Right of use (“ROU”) assets represent the Company’s right to use an underlying asset during the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Lease agreements may contain extension options which typically provide for an extension of a lease term at the then fair market rental rates. As these extension options are not generally considered reasonably certain of exercise, they are not included in the lease term. Operating leases relate primarily to real estate used for corporate offices and bank branches and finance leases relate primarily to equipment. The Company does not separate lease and non-lease components for real estate leases. For those leases with a term greater than one year, ROU assets and lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the incremental borrowing rate on the effective date of the lease, which is based on the Company’s collateralized borrowing capabilities over a similar term as the related lease payments. ROU assets are further adjusted for lease incentives. Operating leases in which the Company is the lessee are recorded as operating lease ROU assets and operating lease liabilities, and are included in other assets and other liabilities, respectively, on the consolidated balance sheets. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term and recorded in net occupancy expense on the consolidated statements of income and other comprehensive income. Finance leases in which the Company is the lessee are recorded as finance lease ROU assets and finance lease liabilities and are included in premises and equipment, net, and other liabilities, respectively, on the consolidated balance sheets. Finance lease expense is comprised of amortization of the ROU asset, which is recognized on a straight-line basis over the lease term and recorded in net occupancy expense on the consolidated statements of income and other comprehensive income, and the implicit interest accreted on the operating lease liability, which is recognized using the effective interest method over the lease term and recorded in interest expense on the consolidated statements of income and other comprehensive income. Revenue Recognition ASC 606, Revenue from Contracts with Customers (“ASC 606”), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. The majority of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as loans, letters of credit, derivatives and investment securities, as well as revenue related to mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within the Company’s disclosures. Descriptions of revenue-generating activities that are within the scope of ASC 606, which are presented in the income statements as components of non-interest income are as follows: • Service charges on deposit accounts - these represent general service fees for monthly account maintenance and activity- or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when the performance obligation is completed, which is generally monthly for account maintenance services or when a transaction has been completed (such as a stop payment). Payments for these activities are generally received at the time the performance obligations are satisfied. • Wealth management and trust fee income - this represents monthly fees due from wealth management customers as consideration for managing the customers' assets. Wealth management and trust services include custody of assets, investment management, escrow services, fees for trust services and similar fiduciary activities. These fees are typically paid on a quarterly basis and recognized ratably throughout the quarter as the performance obligation is satisfied each month. • Brokered loan fees - these represent fees for the administration and funding of purchased mortgage loan interests as well as facility renewal and application fees received from mortgage originator customers in the mortgage warehouse lending business. Also included are fees received from independent correspondent mortgage lenders as consideration for the purchase of individual residential mortgage loans through the Company’s MCA business. Revenue related to the mortgage warehouse lending business is recognized when the related loan interest is disposed (i.e., through sale or payoff) or upon receipt of the facility renewal or application. Revenue related to the MCA business is recognized at the time a loan is purchased. 65 Table of Contents • Investment banking and trading income - these include fees for merger, acquisition, divestiture and restructuring advisory services, fees for securities underwriting activities, loan syndication fees, and swap fees. Advisory fees are generally earned as performance obligations of the advisory service are satisfied. Underwriting fees are generally recognized upon execution of the client’s issuance of debt or equity instruments. Loan syndication fees are generally recognized upon closing of a loan syndication transaction. • Other non-interest income includes items such as letter of credit fees, bank owned life insurance income, dividends on FHLB and FRB stock and other general operating income, none of which are subject to the requirements of ASC 606. Also included in other-non-interest income are interchange fees earned when commercial credit card clients process transactions through card networks. The Company’s performance obligations are generally complete when the transactions generating the fees are processed. Stock-based Compensation The Company accounts for all stock-based compensation transactions in accordance with ASC 718, Compensation — Stock Compensation (“ASC 718”), which requires that stock compensation transactions be recognized as compensation expense on the consolidated statements of income and other comprehensive income based on their fair values on the measurement date, which is generally the date of the grant. Income Taxes The Company and its subsidiary file a consolidated federal income tax return. The Company utilizes the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based upon the difference between the values of the assets and liabilities as reflected in the financial statements and their related tax basis using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. As changes in tax law or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance is provided against deferred tax assets unless it is more likely than not that such deferred tax assets will be realized. Deferred tax assets, net, are included in other assets on the consolidated balance sheets. The tax effect of unrealized gains and losses on available-for-sale debt securities is recorded to other comprehensive income and is not a component of income tax expense/(benefit). GAAP does not permit the adjustment of tax amounts in AOCI for changes in tax rates; as a result the effects become “stranded” in AOCI. Stranded tax effects caused by the revaluation of deferred taxes are reclassified from AOCI to retained earnings in accordance with ASU 2018-02 “ Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” Unrecognized tax benefits for the uncertain portion of recorded tax benefits and related interest may result from the application of complex tax laws, rules, regulations and interpretations. Unrecognized tax benefits, as well as estimated penalties and interest, are assessed quarterly and may be adjusted through current income tax expense in future periods based on changing facts and circumstances, completion of examinations by taxing authorities or expiration of a statute of limitations. Fair Values of Financial Instruments ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. The standard describes three levels of inputs that may be used to measure fair value as provided below. Level 1 Quoted prices in active markets for identical assets or liabilities. Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair values requires significant management judgment or estimation. Also required are disclosures of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The disclosure of fair value information about financial instruments does not and is not intended to represent the fair value of the Company. 66 Table of Contents The following are descriptions of the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial instruments: Cash and Cash Equivalents, Variable Rate Loans, Variable Rate Short-term Borrowings and Variable Rate Long-term Debt The fair value of these financial instruments approximates carrying value. Investment Securities The fair value of the Company’s U.S. Treasury, U.S. government agency and residential mortgage-backed securities are based on prices obtained from independent pricing services. The Company’s U.S. Treasury securities are valued based on quoted market prices for identical securities in an active market and are classified as Level 1 assets in the fair value hierarchy, while the Company’s U.S. government agency and residential mortgage-backed securities are valued based on quoted market prices for the same or similar securities and are characterized as Level 2 assets in the fair value hierarchy. Management obtains documentation from the primary independent pricing service regarding the processes and controls applicable to pricing investment securities, and on a quarterly basis independently verify the prices that were received from the service provider using two additional independent pricing sources. Tax-exempt asset-backed securities and CRT securities are valued using a discounted cash flow model, which utilizes Level 3 inputs, and are classified as Level 3 assets in the fair value hierarchy. Within the investment securities portfolio, the Company holds equity securities that consist of investments that qualify for consideration under the regulations implementing the Community Reinvestment Act and investments related to non-qualified deferred compensation plan. Some of these equity securities are valued using quoted market prices for identical equity securities in an active market and are classified as Level 1 assets in the fair value hierarchy and others are traded in less active markets and are classified as Level 2 assets in the fair value hierarchy. Loans Held for Sale The fair value for loans held for sale is derived from quoted market prices for similar loans, in which case they are characterized as Level 2 assets in the fair value hierarchy, or is derived from third party pricing models, in which case they are characterized as Level 3 assets in the fair value hierarchy. Derivative Assets and Liabilities The estimated fair value of derivative assets and liabilities is obtained from independent pricing services based on quoted market prices for similar derivative contracts and these financial instruments are characterized as Level 2 assets and liabilities in the fair value hierarchy. On a quarterly basis, management independently verifies the fair value using an additional independent pricing source. Derivative Financial Instruments All contracts that satisfy the definition of a derivative are recorded at fair value in other assets and other liabilities on the consolidated balance sheets, and the related cash flows are recorded in the operating activities section of the consolidated statement of cash flows. The Company records the derivatives on a net basis when a right of offset exists with a single counterparty that is subject to a legally enforceable master netting agreement. Non-Hedging Derivatives The Company enters into an interest rate swap, cap and/or floor derivative instruments with customers while at the same time entering into offsetting interest rate swap, cap and/or floor derivative instruments with another financial institution. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the customer to effectively convert a variable rate loan to a fixed rate. Because the Company acts as an intermediary for its customers, changes in the fair value of the underlying derivative instruments substantially offset each other and do not have a material impact on the Company’s results of operations. The Company offers forward contract derivative instruments, such as to-be-announced U.S. agency residential mortgage-back securities, to its mortgage banking customers to allow the customers to mitigate exposure to market risks associated with the purchase or origination of mortgage loans. To mitigate the Company’s exposure to these forward contracts, the Company will enter offsetting forward contracts, most typically with a financial institution. Any changes in fair value to the forward contract derivative instruments are recorded in investment banking and trading income on the consolidated statements of income and other comprehensive income. The Company also offers foreign currency forward contracts derivative instruments in which the Company enters into a contract with a customer to buy or sell a foreign currency at a future date for a specified price while at the same time entering into an offsetting contract with a financial institution to buy or sell the same currency at the same future date for a specified 67 Table of Contents price. The transaction allows the customer to manage their exposure to foreign currency exchange rate fluctuations. Because the Company acts as an intermediary for its customers, changes in the fair value of the underlying derivative instruments substantially offset each other and do not have a material impact on the Company’s results of operations. Prior to the transition of its MCA program to a third party in 2021, the Company entered into loan purchase commitment contracts with mortgage originators to purchase residential mortgage loans at a future date, as well as forward sales commitment contracts to sell residential mortgage loans or to deliver mortgage-backed securities at a future date. The objective of these transactions was to mitigate the Company’s exposure to interest rate risk associated with the purchase of mortgage loans held for sale. Any changes in fair value were recorded in gain/(loss) on sale of loans held for sale on the consolidated statements of income and other comprehensive income. Prior to the sale of its portfolio of MSRs to a third party in 2021, the Company entered into interest rate derivative contracts, primarily interest rate swap futures and forward sale commitments of mortgage-backed securities, in order to mitigate exposure to potential impairment losses from adverse changes in the fair value of the Company’s residential MSR portfolio. These derivative instruments were considered highly liquid and could be settled daily, which allowed the Company to dynamically manage its exposure. The derivative instruments were used to economically hedge the fair value of the residential MSR portfolio impacted by changes in anticipated prepayments resulting from mortgage interest rate movements and were classified as other assets and other liabilities on the consolidated balance sheets. Any unrealized or realized gains/(losses) related to derivatives economically hedging the residential MSR portfolio were recognized in servicing-related expenses along with changes to the MSR valuation allowance. Derivatives Designated as Hedges The Company enters into interest rate derivative contracts that are designated as qualifying cash flow hedges to hedge the exposure to variability in expected future cash flows attributable to changes in a contractually specified interest rate. To qualify for hedge accounting, a formal assessment is prepared to determine whether the hedging relationship, both at inception and on an ongoing basis, is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the hedge if a cash flow hedge. At inception a statistical regression analysis is prepared to determine hedge effectiveness. At each reporting period thereafter, a statistical regression or qualitative analysis is performed. If it is determined that hedge effectiveness has not been or will not continue to be highly effective, then hedge accounting ceases and any gain or loss in AOCI is recognized in earnings immediately. The cash flow hedges are recorded at fair value in other assets and other liabilities on the consolidated balance sheets with changes in fair value recorded in AOCI, net of tax. Amounts recorded to AOCI are reclassified into earnings in the same period in which the hedged asset or liability affects earnings and are presented in the same income statement line item as the earnings effect of the hedged asset or liability. Segment Reporting The Company has determined that all of its banking divisions and subsidiaries meet the aggregation criteria of ASC 280, Segment Reporting , as its current operating model is structured whereby banking divisions and subsidiaries serve a similar base of primarily commercial clients utilizing a company-wide offering of similar products and services managed through similar processes and platforms that are collectively reviewed by the chief operating decision maker. (2) Earnings Per Share The following table presents the computation of basic and diluted earnings per share: Year ended December 31, (in thousands except share and per share data) 2022 2021 2020 Numerator: Net income $ 332,478 $ 253,939 $ 66,289 Preferred stock dividends 17,250 18,721 9,750 Net income available to common stockholders $ 315,228 $ 235,218 $ 56,539 Denominator: Denominator for basic earnings per common share—weighted average common shares 50,457,746 50,580,660 50,430,326 Effect of dilutive outstanding stock-settled awards 588,996 560,314 152,653 Denominator for dilutive earnings per common share—weighted average diluted common shares 51,046,742 51,140,974 50,582,979 Basic earnings per common share $ 6.25 $ 4.65 $ 1.12 Diluted earnings per common share $ 6.18 $ 4.60 $ 1.12 Anti-dilutive outstanding stock-settled awards 311,226 93,945 453,024 68 Table of Contents (3) Investment Securities The following is a summary of the Company’s investment securities: (in thousands) Amortized Cost(1) Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value December 31, 2022 Available-for-sale debt securities: U.S. Treasury securities $ 698,769 $ — $ ( 28,187 ) $ 670,582 U.S. government agency securities 125,000 — ( 22,846 ) 102,154 Residential mortgage-backed securities 2,162,364 3 ( 331,320 ) 1,831,047 Tax-exempt asset-backed securities — — — — CRT securities 14,713 — ( 2,852 ) 11,861 Total available-for-sale debt securities 3,000,846 3 ( 385,205 ) 2,615,644 Held-to-maturity debt securities: Residential mortgage-backed securities 935,514 — ( 118,600 ) 816,914 Total held-to-maturity debt securities 935,514 — ( 118,600 ) 816,914 Equity securities 33,956 Total investment securities(2) $ 3,585,114 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 $ 6.6 million and $ 6.6 million at December 31, 2022 and December 31, 2021, respectively, related to available-for-sale debt securities and $ 1.5 million at December 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, the Company 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 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. There were no gains or losses recognized as a result of this transfer. In the second quarter of 2022, the Company’s 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 December 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 $ 14 $ 14 $ — $ — Due after one year through five years 698,769 670,582 — — Due after five years through ten years 156,551 128,026 — — Due after ten years 2,145,512 1,817,022 935,514 816,914 Total $ 3,000,846 $ 2,615,644 $ 935,514 $ 816,914 69 Table of Contents The following table discloses the Company’s available-for-sale debt securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months: Less Than 12 Months 12 Months or Longer Total (in thousands) Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss December 31, 2022 U.S. Treasury securities $ 670,582 $ ( 28,187 ) $ — $ — $ 670,582 $ ( 28,187 ) U.S. government agency securities — — 102,154 ( 22,846 ) 102,154 ( 22,846 ) Residential mortgage-backed securities 261,502 ( 9,481 ) 1,569,107 ( 321,839 ) 1,830,609 ( 331,320 ) CRT securities — — 11,861 ( 2,852 ) 11,861 ( 2,852 ) Total $ 932,084 $ ( 37,668 ) $ 1,683,122 $ ( 347,537 ) $ 2,615,206 $ ( 385,205 ) 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 December 31, 2022, the Company had 103 available-for-sale debt securities in an unrealized loss position, comprised of 13 U.S. Treasury securities, five U.S. government agency securities, 83 residential mortgage-backed securities and two CRT securities. The unrealized losses on the available-for-sale debt securities were the result of changes in market interest rates compared to the date the securities were acquired rather than the credit quality of the issuers or underlying loans. The Company does not intend to sell and it is not more likely than not that the Company will be required to sell these available-for-sale debt securities before recovery of the amortized cost of such securities in an unrealized loss position and has, therefore recorded the unrealized losses related to this portfolio in AOCI. Held-to-maturity securities consist of government guaranteed securities for which no loss is expected. At December 31, 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 $ 16.1 million and $ 1.4 million were pledged to secure certain customer repurchase agreements and deposits, respectively, at December 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 the Company’s 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: Year Ended December 31, 2022 (in thousands) 2022 2021 Net gains/(losses) recognized during the period $ ( 7,876 ) 2,277 Less: Realized net gains/(losses) recognized on securities sold 714 1,065 Unrealized net gains/(losses) recognized on securities still held $ ( 8,590 ) 1,212 70 Table of Contents (4) Loans and Allowance for Credit Losses on Loans Loans are summarized by portfolio segment as follows: December 31, (in thousands) 2022 2021 Loans held for investment(1): Commercial $ 8,902,948 $ 9,897,561 Energy 1,159,296 721,373 Mortgage finance 4,090,033 7,475,497 Real estate 5,198,643 4,777,530 Gross loans held for investment 19,350,920 22,871,961 Unearned income (net of direct origination costs) ( 63,580 ) ( 65,007 ) Total loans held for investment 19,287,340 22,806,954 Allowance for credit losses on loans ( 253,469 ) ( 211,866 ) Total loans held for investment, net $ 19,033,871 $ 22,595,088 Loans held for sale: Mortgage loans, at fair value $ — $ 8,123 Non-mortgage loans, at lower of cost or fair value 36,357 — Total loans held for sale $ 36,357 $ 8,123 (1) Excludes accrued interest receivable of $ 100.4 million and $ 50.9 million at December 31, 2022 and December 31, 2021, respectively, that is recorded in accrued interest receivable and other assets on the consolidated balance sheets. 71 Table of Contents The following tables summarize 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 December 31, 2022 Commercial (1-7) Pass $ 1,903,529 $ 671,459 $ 244,568 $ 255,444 $ 325,201 $ 244,373 $ 4,877,753 $ 21,063 $ 8,543,390 (8) Special mention 9,141 7,740 3,628 37,794 11,998 4,975 95,310 2,250 172,836 (9) Substandard - accruing 18,670 71,147 514 1,666 14,933 6,305 30,070 — 143,305 (9+) Non-accrual 376 512 751 30,425 6,226 2,520 2,607 — 43,417 Total commercial $ 1,931,716 $ 750,858 $ 249,461 $ 325,329 $ 358,358 $ 258,173 $ 5,005,740 $ 23,313 $ 8,902,948 Energy (1-7) Pass $ 124,691 $ 12,517 $ — $ — $ — $ 3,317 $ 1,007,776 $ — $ 1,148,301 (8) Special mention — — — — — — — — — (9) Substandard - accruing — — — — — — 7,337 — 7,337 (9+) Non-accrual — — — — — — 3,658 — 3,658 Total energy $ 124,691 $ 12,517 $ — $ — $ — $ 3,317 $ 1,018,771 $ — $ 1,159,296 Mortgage finance (1-7) Pass $ 30,485 $ 482,477 $ 197,045 $ 267,758 $ 464,753 $ 2,647,515 $ — $ — $ 4,090,033 (8) Special mention — — — — — — — — — (9) Substandard - accruing — — — — — — — — — (9+) Non-accrual — — — — — — — — — Total mortgage finance $ 30,485 $ 482,477 $ 197,045 $ 267,758 $ 464,753 $ 2,647,515 $ — $ — $ 4,090,033 Real estate CRE (1-7) Pass $ 1,085,254 $ 756,180 $ 563,341 $ 447,346 $ 183,634 $ 284,698 $ 97,337 $ 11,944 $ 3,429,734 (8) Special mention 2,765 6,524 37,791 5,295 19,350 3,652 — — 75,377 (9) Substandard - accruing — 17,850 — — 11,458 17,698 — — 47,006 (9+) Non-accrual — — — — — 182 — — 182 RBF (1-7) Pass 94,066 70,951 12,161 6,106 2,655 — 326,164 — 512,103 (8) Special mention — — — — — — — — — (9) Substandard - accruing 7,840 — — — — — — — 7,840 (9+) Non-accrual — — — — — — — — — Other (1-7) Pass 182,840 131,538 94,611 67,518 76,951 163,838 42,333 31,293 790,922 (8) Special mention 729 — 8,721 — — 386 — — 9,836 (9) Substandard - accruing — — — 247 — 1,035 — — 1,282 (9+) Non-accrual — — 1,081 — — — — — 1,081 Secured by 1-4 family (1-7) Pass 64,050 89,967 53,003 24,314 16,953 70,082 4,911 — 323,280 (8) Special mention — — — — — — — — — (9) Substandard - accruing — — — — — — — — — (9+) Non-accrual — — — — — — — — — Total real estate $ 1,437,544 $ 1,073,010 $ 770,709 $ 550,826 $ 311,001 $ 541,571 $ 470,745 $ 43,237 $ 5,198,643 Total $ 3,524,436 $ 2,318,862 $ 1,217,215 $ 1,143,913 $ 1,134,112 $ 3,450,576 $ 6,495,256 $ 66,550 $ 19,350,920 72 Table of Contents (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 73 Table of Contents The following table details activity in the allowance for credit losses on loans. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. (in thousands) Commercial Energy Mortgage Finance Real Estate Total Year Ended December 31, 2022 Beginning balance $ 102,202 $ 52,568 $ 6,083 $ 51,013 $ 211,866 Provision for credit losses on loans 51,571 ( 981 ) 4,662 6,220 61,472 Charge-offs 17,614 5,605 — 350 23,569 Recoveries 682 3,018 — — 3,700 Net charge-offs (recoveries) 16,932 2,587 — 350 19,869 Ending balance $ 136,841 $ 49,000 $ 10,745 $ 56,883 $ 253,469 Year Ended December 31, 2021 Beginning balance $ 73,061 $ 84,064 $ 4,699 $ 92,791 $ 254,615 Provision for credit losses on loans 36,733 ( 27,045 ) 1,384 ( 40,903 ) ( 29,831 ) Charge-offs 11,987 6,418 — 1,192 19,597 Recoveries 4,395 1,967 — 317 6,679 Net charge-offs (recoveries) 7,592 4,451 — 875 12,918 Ending balance $ 102,202 $ 52,568 $ 6,083 $ 51,013 $ 211,866 The Company recorded a $ 61.5 million provision for credit losses for the year ended December 31, 2022, compared to a $ 29.8 million negative provision for the same period of 2021. The $ 61.5 million provision for credit losses resulted primarily from updated views on the downside risks to the economic forecast and an increase in net charge-offs during 2022. Net charge-offs for the year ended December 31, 2022 were $ 19.9 million, compared to $ 12.9 million during the same period of 2021. Criticized loans totaled $ 513.2 million at December 31, 2022 and $ 582.9 million at December 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. There were no loans that met these criteria at December 31, 2022. The table below provides an age analysis of 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(2) Current Total Non-accrual With No Allowance December 31, 2022 Commercial $ 6,714 $ 3,041 $ 131 $ 9,886 $ 43,417 $ 8,849,645 $ 8,902,948 $ 41,476 Energy — — — — 3,658 1,155,638 1,159,296 3,658 Mortgage finance — — — — — 4,090,033 4,090,033 — Real estate CRE 440 — — 440 182 3,551,677 3,552,299 — RBF — — — — — 519,943 519,943 — Other 2,438 — — 2,438 1,081 799,602 803,121 — Secured by 1-4 family — — — — — 323,280 323,280 — Total $ 9,592 $ 3,041 $ 131 $ 12,764 $ 48,338 $ 19,289,818 $ 19,350,920 $ 45,134 (1) As of December 31, 2022 $ 2.2 million of non-accrual loans were earning interest income on a cash basis compared to none as of December 31, 2021. Additionally, $ 801,000 and $ 624,000 of interest income was recognized on non-accrual loans for the years ended December 31, 2022 and 2021, respectively. Accrued interest of $ 1.6 million and $ 1.2 million was reversed during the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022 and December 31, 2021, the Company did not have any loans considered restructured that were not on non-accrual. Of the non-accrual loans at December 31, 2022 and 2021, $ 531,000 and $ 19.4 million, respectively, met the criteria for restructured. These loans had no unfunded commitments at their respective balance sheet dates. 74 Table of Contents The following table details the recorded investment at December 31, 2022 of loans restructured during the year ended December 31, 2022: Extended Maturity Adjusted Payment Schedule Total (dollars in thousands) Number of Contracts Balance at Period End Number of Contracts Balance at Period End Number of Contracts Balance at Period End Year Ended December 31, 2022 Commercial — $ — 1 $ 531 1 $ 531 Total — — 1 531 1 531 The Company did not have any loans that were restructured during the year ended December 31, 2021. The restructuring of these loans did not have a significant impact on the allowance for credit losses at December 31, 2022 or 2021. As of December 31, 2022 and 2021, the Company did not have any loans that were restructured within the last 12 months that subsequently defaulted. (5) Leases The following table presents ROU assets and lease liabilities: Year Ended December 31, (in thousands) 2022 2021 ROU assets: Finance leases $ 2,865 $ 259 Operating leases 79,889 55,330 Total $ 82,754 $ 55,589 Lease liabilities Finance leases $ 2,877 $ 259 Operating leases 103,814 69,184 Total $ 106,691 $ 69,443 As of December 31, 2022, operating leases had remaining lease terms of generally 1 year to 17 years, while finance leases had remaining terms of generally 2 years. The table below summarizes the Company’s net lease cost: Year Ended December 31, (in thousands) 2022 2021 Finance lease cost: Amortization of ROU assets $ 1,108 $ 32 Interest on lease liabilities 34 1 Operating lease cost 23,463 15,608 Short-term lease cost 19 19 Variable lease cost 5,122 4,747 Sublease income ( 18 ) ( 107 ) Net lease cost $ 29,728 $ 20,299 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from finance leases $ 34 $ 1 Operating cash flows from operating leases 21,910 17,666 Financing cash flows from finance leases 1,096 32 ROU assets obtained in exchange for new finance leases 3,714 291 ROU assets obtained in exchange for new operating leases 57,544 2,109 75 Table of Contents The table below summarizes other information related to operating and finance leases: Year Ended December 31, 2022 2021 Weighted-average remaining lease term - finance leases, in years 2.2 2.7 Weighted-average remaining lease term - operating leases, in years 11.5 5.9 Weighted-average discount rate - finance leases 1.74 % 0.77 % Weighted-average discount rate - operating leases 4.16 % 2.30 % The table below summarizes the maturity of remaining lease liabilities as of December 31, 2022: (in thousands) Finance Leases Operating Leases Total 2023 $ 1,367 $ 16,993 $ 18,360 2024 1,334 13,130 14,464 2025 237 9,756 9,993 2026 — 10,022 10,022 2027 — 9,921 9,921 2028 and thereafter — 78,306 78,306 Total lease payments 2,938 138,128 141,066 Less: Interest ( 61 ) ( 34,314 ) ( 34,375 ) Present value of lease liabilities $ 2,877 $ 103,814 $ 106,691 (6) Goodwill and Other Intangible Assets Goodwill and other intangible assets are summarized as follows: (in thousands) Goodwill and Intangible Assets Accumulated Amortization Goodwill and Intangible Assets, Net December 31, 2022 Goodwill $ 1,870 $ ( 374 ) $ 1,496 Intangible assets—customer relationships and trademarks — — — Total goodwill and intangible assets $ 1,870 $ ( 374 ) $ 1,496 December 31, 2021 Goodwill $ 15,468 $ ( 374 ) $ 15,094 Intangible assets—customer relationships and trademarks 9,006 ( 6,838 ) 2,168 Total goodwill and intangible assets $ 24,474 $ ( 7,212 ) $ 17,262 On November 1, 2022, the sale of BDCF was completed, resulting in the removal of goodwill and other intangible assets, net of accumulated amortization, of $ 15.4 million. In 2022 and 2021, the annual test of goodwill impairment was performed, and in both periods, no impairment was indicated. Amortization expense related to intangible assets totaled $ 338,000 in 2022, $ 405,000 in 2021 and $ 432,000 in 2020. (7) Premises & Equipment Premises and equipment are summarized as follows: December 31, (in thousands) 2022 2021 Premises $ 34,930 $ 32,609 Furniture and equipment 54,581 43,852 Total cost 89,511 76,461 Accumulated depreciation ( 63,129 ) ( 55,560 ) Total premises and equipment, net $ 26,382 $ 20,901 Depreciation and amortization expense for the above premises and equipment was approximately $ 9.5 million, $ 8.1 million and $ 9.5 million in 2022, 2021 and 2020, respectively. 76 Table of Contents (8) Deposits Deposits are summarized as follows: December 31, (in thousands) 2022 2021 Non-interest bearing deposits $ 9,618,081 $ 13,390,370 Interest bearing deposits: Transaction 683,562 2,837,521 Savings 11,042,658 10,682,768 Time 1,512,579 1,198,706 Total interest bearing deposits 13,238,799 14,718,995 Total deposits $ 22,856,880 $ 28,109,365 The scheduled maturities of interest bearing time deposits were as follows at December 31, 2022: (in thousands) 2023 $ 1,482,377 2024 26,777 2025 3,272 2026 52 2027 101 2028 and after — Total $ 1,512,579 At December 31, 2022 and 2021, interest bearing time deposits greater than $250,000 were approximately $ 258.4 million and $ 186.0 million, respectively. (9) Short-Term Borrowings and Long-Term Debt The table below presents a summary of the Company’s short-term borrowings, all of which mature within one year: (dollars in thousands) Federal Funds Purchased Customer Repurchase Agreements FHLB Borrowings December 31, 2022 Amount outstanding at year-end $ — $ 1,142 $ 1,200,000 Interest rate at year-end — % 0.25 % 4.25 % Average balance outstanding during the year $ 30,741 $ 1,928 $ 1,797,082 Weighted-average interest rate during the year 1.17 % 0.28 % 1.60 % Maximum month-end outstanding during the year $ 525,000 $ 2,320 $ 2,650,000 December 31, 2021 Amount outstanding at year-end $ — $ 2,832 $ 2,200,000 Interest rate at year-end — % 0.25 % 0.13 % Average balance outstanding during the year $ 88,916 $ 4,199 $ 2,306,165 Weighted-average interest rate during the year 0.15 % 0.28 % 0.19 % Maximum month-end outstanding during the year $ 302,301 $ 5,487 $ 2,600,000 77 Table of Contents The table below presents a summary of long-term debt: December 31, (in thousands) 2022 2021 Bank-issued floating rate senior unsecured credit-linked notes due 2024 $ 272,492 $ 270,487 Bank-issued 5.25 % fixed rate subordinated notes due 2026 174,196 173,935 Company-issued 4.00 % fixed rate subordinated notes due 2031 371,348 370,910 Trust preferred floating rate subordinated debentures due 2032 to 2036 113,406 113,406 Total long-term debt $ 931,442 $ 928,738 The following table summarizes the significant terms of the Company’s trust preferred subordinated debentures: (dollars in thousands) Texas Capital Statutory Trust I Texas Capital Statutory Trust II Texas Capital Statutory Trust III Texas Capital Statutory Trust IV Texas Capital Statutory Trust V Date issued November 19, 2002 April 10, 2003 October 6, 2005 April 28, 2006 September 29, 2006 Trust preferred securities issued $ 10,310 $ 10,310 $ 25,774 $ 25,774 $ 41,238 Floating or fixed rate securities Floating Floating Floating Floating Floating Interest rate on subordinated debentures 3 month LIBOR + 3.35 % 3 month LIBOR + 3.25 % 3 month LIBOR + 1.51 % 3 month LIBOR + 1.60 % 3 month LIBOR + 1.71 % Maturity date November 2032 April 2033 December 2035 June 2036 December 2036 (10) Financial Instruments with Off-Balance Sheet Risk The table below presents the Company’s financial instruments with off-balance sheet risk, as well as the activity in the allowance for off-balance sheet credit losses related to those financial instruments: Year Ended December 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 4,528 ( 169 ) Ending balance of allowance for off-balance sheet credit losses $ 21,793 $ 17,265 December 31, (in thousands) 2022 2021 Commitments to extend credit - period end balance $ 9,673,082 $ 9,445,763 Standby letters of credit - period end balance 417,896 357,672 (11) 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 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 the Company maintains 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 the Company’s common stock during 2022, 2021 or 2020. On April 19, 2022, the Company’s board of directors authorized the Company to repurchase up to $ 150.0 million in shares of its outstanding common stock. During the year ended December 31, 2022, the Company repurchased 2,083,118 shares 78 Table of Contents of its common stock for an aggregate price of $ 115.3 million, at a weighted average price of $ 55.35 per share. On January 18, 2023, the Company’s board of directors authorized a new share repurchase program under which the Company may repurchase up to $ 150.0 million in shares of its outstanding common stock. In February 2019, the federal bank regulatory agencies issued a final rule (the “2019 CECL Rule”) that revised certain capital regulations to account for changes to credit loss accounting under GAAP. The 2019 CECL Rule included a transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of adopting the new accounting standard related to the measurement of current expected credit losses on their regulatory capital ratios (three-year transition option). In March 2020, the federal bank regulatory agencies issued an interim final rule that maintains the three-year transition option of the 2019 CECL Rule and also provides banking organizations that were required under GAAP to implement CECL before the end of 2020 the option to delay for two years an estimate of the effect of CECL on regulatory capital, relative to the incurred loss methodology's effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company adopted CECL on January 1, 2020 and 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 December 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 Bank’s capital ratios exceeded the regulatory definition of well capitalized as of December 31, 2022 and 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 the Bank’s condition and results of operations. Because the Bank had less than $ 15.0 billion in total consolidated assets as of December 31, 2009, it is allowed to continue to classify the trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1 capital. At the beginning of each of the last five years of the life of the Bank issued fixed rate subordinated notes due 2026, the amount that is eligible to be included in Tier 2 capital is reduced by 20% of the original amount of the notes (net of redemptions). In 2022, the amount of the notes that qualify as Tier 2 capital has been reduced by 40%. 79 Table of Contents The table below summarizes the Company’s and the Bank’s actual and required capital ratios under the Basel III Capital Rules. The ratios presented below include the effects of the election to utilize the five-year CECL transition described above. Actual Minimum Capital Required(2) Capital Required to be Well Capitalized (dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio December 31, 2022 CET1 Company $ 3,180,208 13.00 % $ 1,712,608 7.00 % N/A N/A Bank 3,408,178 13.95 % 1,710,056 7.00 % 1,587,909 6.50 % Total capital (to risk-weighted assets) Company 4,331,098 17.70 % 2,568,912 10.50 % 2,446,583 10.00 % Bank 3,987,720 16.32 % 2,565,083 10.50 % 2,442,937 10.00 % Tier 1 capital (to risk-weighted assets) Company 3,590,208 14.67 % 2,079,595 8.50 % 1,467,950 6.00 % Bank 3,568,178 14.61 % 2,076,496 8.50 % 1,954,349 8.00 % Tier 1 capital (to average assets)(1) Company 3,590,208 11.54 % 1,244,494 4.00 % N/A N/A Bank 3,568,178 11.48 % 1,243,232 4.00 % 1,554,039 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. The Company is required to maintain reserve balances in cash and on deposit with the Federal Reserve based on a percentage of transactional deposits; however, the Federal Reserve reduced the reserve requirement ratio to zero effective March 26, 2020, therefore the total requirement was zero at both December 31, 2022 and 2021. (12) Stock-Based Compensation and Employee Benefits The Company has a qualified retirement plan with a salary deferral feature designed to qualify under Section 401 of the Internal Revenue Code (“the 401(k) Plan”). The 401(k) Plan permits employees to defer a portion of their compensation. Matching contributions may be made in amounts and at times determined by the Company. These contributions were approximately $ 13.3 million, $ 10.2 million and $ 10.3 million for the years ended December 31, 2022, 2021 and 2020, respectively. Employees are eligible to participate in the 401(k) Plan when they meet certain requirements concerning minimum age and period of credited service. All contributions to the 401(k) Plan are invested in accordance with participant elections among certain investment options. The Company also offers a non-qualified deferred compensation plan for executives and key members of management in order to assist in attracting and retaining these individuals. Participants in the plan may elect to defer up to 75% of their annual salary and/or short-term incentive payout into deferral accounts that mirror the gains or losses of investments selected by the participants. The plan allows the Company to make discretionary contributions on behalf of a participant as well as matching contributions. The Company did not make a matching contribution in 2022, compared to matching contributions of $ 274,000 in 2021 and $ 1.0 million in 2020. All participant contributions to the plan and any related earnings are immediately vested and may be withdrawn upon the participant's separation from service, death or disability or upon a date specified by the participant. 80 Table of Contents Salary deferrals are recorded as salaries and employee benefits expense on the consolidated statements of income with an offsetting payable to participants in other liabilities on the consolidated balance sheets. The Company has an Employee Stock Purchase Plan (“ESPP”). Employees are eligible for the ESPP when they meet certain requirements concerning period of credited service and minimum hours worked. Eligible employees may contribute between 1 % and 10 % of eligible compensation up to the Section 423 of the Internal Revenue Code limit of $25,000. Employee contributions to the ESPP were temporarily suspended throughout 2020. On January 1, 2021, the suspension was removed and employee contributions commenced. In 2006, stockholders approved the ESPP, which allocated 400,000 shares for purchase. As of December 31, 2022, 2021 and 2020, 184,263 , 164,033 and 155,933 shares, respectively, had been purchased on behalf of employees under the ESPP. The Company has stock-based compensation plans under which equity-based compensation grants are made by the board of directors, or its designated committee. Grants are subject to vesting requirements and may be settled in shares of common stock or paid in cash. Under the plans, the Company may grant, among other things, non-qualified stock options, incentive stock options, restricted stock, restricted stock units (“RSUs”), stock appreciation rights (“SARs”), performance awards or any combination thereof to employees and non-employee directors. A total of 1,400,000 shares are authorized for grant under the current plan. Total shares remaining available for grant under the current plan at December 31, 2022 were 1,143,773 . A summary of the Company’s SAR activity and related information is as follows. Grants of SARs include time-based vesting conditions that generally vest ratably over a period of five years . December 31, 2022 December 31, 2021 December 31, 2020 SARs Weighted Average Exercise Price SARs Weighted Average Exercise Price SARs Weighted Average Exercise Price Outstanding at beginning of year 3,000 $ 44.20 12,400 $ 43.48 21,200 $ 33.95 Exercised ( 3,000 ) 44.20 ( 9,400 ) 43.24 ( 8,800 ) 20.52 Outstanding at year-end — $ — 3,000 $ 44.20 12,400 $ 43.48 Vested and exercisable at year-end — $ — 3,000 $ 44.20 12,400 $ 43.48 Weighted average remaining contractual life of vested (in years) 0.00 1.66 2.26 Weighted average remaining contractual life of outstanding (in years) 0.00 1.66 2.26 Compensation expense $ — $ — $ — Unrecognized compensation expense $ — $ — $ — Intrinsic value of exercised $ 64,000 $ 302,000 $ 294,000 A summary of the Company’s RSU activity and related information is as follows. Grants of RSUs include time-based vesting conditions that generally vest ratably over a period of three to five years . Additionally, from time to time, grants of RSUs with both time-based and performance-based vesting conditions are made that generally vest at the end of a three or four year period. December 31, 2022 December 31, 2021 December 31, 2020 RSUs Weighted Average Grant Date Fair Value RSUs Weighted Average Grant Date Fair Value RSUs Weighted Average Grant Date Fair Value Outstanding at beginning of year 1,206,862 $ 56.06 955,594 $ 48.76 558,312 $ 64.95 Granted 454,314 68.15 677,472 66.31 631,092 39.37 Vested ( 308,771 ) 54.51 ( 187,530 ) 58.82 ( 171,494 ) 65.17 Forfeited ( 196,753 ) 58.42 ( 238,674 ) 53.76 ( 62,316 ) 56.92 Outstanding at year-end 1,155,652 $ 61.12 1,206,862 $ 56.06 955,594 $ 48.76 Compensation expense $ 21,246,000 $ 30,060,000 $ 15,655,000 Unrecognized compensation expense $ 32,148,000 $ 32,525,000 $ 29,146,000 Weighted average years over which unrecognized compensation expense is expected to be recognized 2.31 2.79 2.83 The Company may make grants of restricted common stock to various non-employee directors as to which restrictions lapse ratably over a period of three years . No grants of restricted stock were made during 2022, 2021 or 2020 and no compensation expense was recorded during 2022, compared to compensation expense of $ 1,000 and $ 26,000 for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2022, there were no remaining restrictions on any grants of restricted common stock. Total compensation cost for grants of stock-settled units was $ 21.2 million, $ 30.1 million and $ 15.7 million for the years ended December 31, 2022, 2021 and 2020, respectively. 81 Table of Contents The Company did not have cash-settled RSUs outstanding at December 31, 2022. No grants of cash-settled RSUs were made in 2022, 2021 or 2020. Since these units have a cash payout feature, they are accounted for under the liability method with related expense based on the stock price at period end. Compensation cost for the cash-settled units was $ 186,000 , $ 1.3 million and $ 1.8 million for the years ended December 31, 2022, 2021 and 2020, respectively. (13) Income Taxes Income tax expense/(benefit) consists of the following: Year ended December 31, (in thousands) 2022 2021 2020 Current: Federal $ 109,370 $ 97,608 $ 32,701 State 7,302 6,761 920 Total 116,672 104,369 33,621 Deferred: Federal ( 16,178 ) ( 19,020 ) ( 7,964 ) State ( 1,217 ) ( 1,233 ) — Total ( 17,395 ) ( 20,253 ) ( 7,964 ) Total expense: Federal 93,192 78,588 24,737 State 6,085 5,528 920 Total $ 99,277 $ 84,116 $ 25,657 The reconciliation of income tax at the U.S. federal statutory tax rate to income tax expense and effective tax rate is as follows: Year ended December 31, 2022 2021 2020 (dollars in thousands) Amount Rate Amount Rate Amount Rate U.S. statutory rate $ 90,669 21 % $ 70,992 21 % $ 19,309 21 % State taxes 6,822 2 % 4,108 1 % 726 1 % Tax-exempt income ( 1,061 ) — % ( 1,855 ) ( 1 ) % ( 3,356 ) ( 4 ) % Tax credits ( 128 ) — % ( 179 ) — % ( 1,216 ) ( 1 ) % Disallowed FDIC 1,491 — % 2,936 1 % 3,920 4 % Disallowed compensation 2,771 1 % 6,377 2 % 3,098 3 % Other ( 1,287 ) ( 1 ) % 1,737 1 % 3,176 4 % Total $ 99,277 23 % $ 84,116 25 % $ 25,657 28 % At December 31, 2022, 2021 and 2020, the Company had unrecognized tax benefits of $ 889,000 , $ 722,000 and $ 1.1 million, respectively. The Company is no longer subject to U.S. federal income tax examinations for years before 2019 or state and local income tax examinations for years before 2018. 82 Table of Contents The table below summarizes significant components of deferred tax assets and liabilities utilizing the federal corporate income tax rate of 21%. Management believes it is more likely than not that all of the deferred tax assets will be realized. December 31, (in thousands) 2022 2021 Deferred tax assets: Allowance for credit losses $ 62,154 $ 51,738 Lease liabilities 24,091 15,615 Loan origination fees 14,385 11,204 Stock compensation 5,031 4,649 Non-accrual interest 1,132 1,874 Non-qualified deferred compensation 4,782 6,705 Net unrealized losses in AOCI 111,365 12,684 Other 4,678 1,671 Total deferred tax assets 227,618 106,140 Deferred tax liabilities: Loan origination costs ( 3,217 ) ( 3,110 ) Leases ( 12,863 ) ( 8,414 ) Lease ROU assets ( 19,807 ) ( 14,266 ) Depreciation ( 9,034 ) ( 10,567 ) Other ( 284 ) ( 3,446 ) Total deferred tax liabilities ( 45,205 ) ( 39,803 ) Net deferred tax asset $ 182,413 $ 66,337 (14) Fair Value Disclosures The Company determines the fair market values of its assets and liabilities measured at fair value on a recurring and nonrecurring basis using the fair value hierarchy as prescribed in ASC 820. See Note 1 - Operations and Summary of Significant Accounting Policies for information regarding the fair value hierarchy and a description of the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial statements. Assets and liabilities measured at fair value are as follows: Fair Value Measurements Using (in thousands) Level 1 Level 2 Level 3 December 31, 2022 Available-for-sale debt securities:(1) U.S. Treasury securities $ 670,582 $ — $ — U.S. government agency securities — 102,154 — Residential mortgage-backed securities — 1,831,047 — CRT securities — — 11,861 Equity securities(1)(2) 22,879 11,077 — Derivative assets(4) — 13,504 — Derivative liabilities(4) — 91,758 — Non-qualified deferred compensation plan liabilities(5) 21,177 — — 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 — — 83 Table of Contents (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 non-qualified deferred compensation plan. (3) Mortgage loans held for sale 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. Level 3 Valuations The following table presents a reconciliation of the level 3 fair value category measured at fair value on a recurring basis: Net Realized/Unrealized Gains (Losses) (in thousands) Balance at Beginning of Period Purchases / Additions Sales / Reductions Realized Unrealized Balance at End of Period Year Ended December 31, 2022 Available-for-sale debt securities:(1) Tax-exempt asset-backed securities $ 180,033 $ — $ ( 170,626 ) $ — $ ( 9,407 ) $ — CRT securities 11,846 — — — 15 11,861 Loans held for sale(2) 7,658 1,569 ( 8,132 ) ( 1,095 ) — — Year Ended December 31, 2021 Available-for-sale debt securities:(1) Tax-exempt asset-backed securities $ 199,176 $ — $ ( 14,314 ) $ — $ ( 4,829 ) $ 180,033 CRT securities 11,417 — — — 429 11,846 Loans held for sale(2) 6,933 2,125 ( 1,428 ) 5 23 7,658 (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 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 weighted-average life. The securities were redeemed in full in the second quarter of 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 weighted-average life. At December 31, 2022, the discount rates utilized ranged from 6.67 % to 11.37 % and the weighted-average life ranged from 5.06 years to 8.67 years. On a combined amortized cost weighted-average basis a discount rate of 8.24 % and a weighted-average life of 6.26 years were utilized to determine the fair value of these securities at December 31, 2022. At December 31, 2021, the combined weighted-average discount rate and weighted-average life utilized were 4.97 % and 6.35 years, respectively. 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. There were no loans held for sale that were measured at fair value on a recurring basis at December 31, 2022. At December 31, 2021, the fair value of loans held for sale was calculated using a weighted-average discounted price of 97.8 %. 84 Table of Contents Fair Value of Financial Instruments A summary of the carrying amounts and estimated fair values of financial instruments is as follows: Carrying Amount Estimated Fair Value (in thousands) Total Level 1 Level 2 Level 3 December 31, 2022 Financial assets: Cash and cash equivalents $ 5,012,260 $ 5,012,260 $ 5,012,260 $ — $ — Available-for-sale debt securities 2,615,644 2,615,644 670,582 1,933,201 11,861 Held-to-maturity debt securities 935,514 816,914 — 816,914 — Equity securities 33,956 33,956 22,879 11,077 — Loans held for sale 36,357 36,357 — — 36,357 Loans held for investment, net 19,033,871 18,969,922 — — 18,969,922 Derivative assets 13,504 13,504 — 13,504 — Financial liabilities: Total deposits 22,856,880 22,857,949 — — 22,857,949 Short-term borrowings 1,201,142 1,201,142 — 1,201,142 — Long-term debt 931,442 881,716 — 881,716 — Derivative liabilities 91,758 91,758 — 91,758 — 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 — 85 Table of Contents (15) Derivative Financial Instruments The notional amounts and estimated fair values of derivative positions outstanding are presented in the following table. December 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 Derivatives designated as hedges Cash flow hedges: Interest rate contracts: Swaps hedging loans $ 3,000,000 $ — $ 86,378 $ — $ — $ — Non-hedging derivatives Customer-initiated and other derivatives: Interest rate contracts: Swaps 4,396,367 83,529 83,529 3,536,090 40,922 40,922 Caps and floors written 220,142 — 2,583 191,291 94 — Caps and floors purchased 220,142 2,583 — 191,291 — 94 Forward contracts 1,569,326 4,431 4,053 — — — Gross derivatives 90,543 176,543 41,016 41,016 Netting adjustment - offsetting derivative assets/liabilities ( 5,164 ) ( 5,164 ) ( 3,228 ) ( 3,228 ) Netting adjustment - cash collateral received/posted ( 71,875 ) ( 79,621 ) — — Net derivatives included on the consolidated balance sheets $ 13,504 $ 91,758 $ 37,788 $ 37,788 The Company’s credit exposure on derivative instruments is limited to the net favorable value and interest payments by each counterparty. In some cases collateral may be required from the counterparties involved if the net value of the derivative instruments exceeds a nominal amount. The Company’s credit exposure associated with these instruments, net of any collateral pledged, was approximately $ 13.5 million at December 31, 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 December 31, 2022, the Company had $ 89.2 million in cash collateral pledged to counterparties included in interest bearing cash and cash equivalents on the consolidated balance sheet and $ 72.5 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. The Company also enters into credit risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which the Company is either a participant or a lead bank. The risk participation agreements entered into by the Company as a participant bank provide credit protection to the financial institution counterparty should the borrower fail to perform on its interest rate derivative contract with that financial institution. The Company is party to 19 risk participation agreements where it acts as a participant bank with a notional amount of $ 291.2 million at December 31, 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 $ 8.9 million at December 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 December 31, 2022 and December 31, 2021. Risk participation agreements entered into by the Company as the lead bank provide credit protection should the borrower fail to perform on its interest rate derivative contract. The Company is party to 18 risk participation agreements where the Company acts as the lead bank having a notional amount of $ 222.0 million at December 31, 2022, compared to 15 agreements having a notional amount of $ 156.1 million at December 31, 2021. Derivatives Designated as Cash Flow Hedges During 2022, the Company 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. During 2022, the Company recorded $ 85.8 million in unrealized losses to adjust its cash flow hedges to fair value, which was recorded net of tax to AOCI, and reclassified $ 1.8 million from AOCI into interest income on loans. Based on current market conditions, the Company estimates that during the next 12 months, an additional $ 50.9 million will be reclassified from AOCI as a decrease to interest income. As of December 31, 2022, the maximum length of time over which forecasted transactions are hedged is 3.75 years. 86 Table of Contents (16) Accumulated Other Comprehensive Income The following table provides the change in AOCI by component: (in thousands) Cash Flow Hedges Available-for-Sale Securities Held-to-Maturity Securities Total Year Ended December 31, 2022 Beginning balance $ — $ ( 47,715 ) $ — $ ( 47,715 ) Change in unrealized gain/(loss) ( 85,846 ) ( 324,803 ) ( 69,165 ) ( 479,814 ) Amounts reclassified into net income 1,803 — 8,102 9,905 Total other comprehensive income/(loss) ( 84,043 ) ( 324,803 ) ( 61,063 ) ( 469,909 ) Income tax expense/(benefit) ( 17,649 ) ( 68,209 ) ( 12,823 ) ( 98,681 ) Total other comprehensive income/(loss), net of tax ( 66,394 ) ( 256,594 ) ( 48,240 ) ( 371,228 ) Ending balance $ ( 66,394 ) $ ( 304,309 ) $ ( 48,240 ) $ ( 418,943 ) Year Ended December 31, 2021 Beginning balance $ — $ 15,774 $ — $ 15,774 Change in unrealized gain/(loss) — ( 80,366 ) — ( 80,366 ) Amounts reclassified into net income — — — — Total other comprehensive income/(loss) — ( 80,366 ) — ( 80,366 ) Income tax expense/(benefit) — ( 16,877 ) — ( 16,877 ) Total other comprehensive income/(loss), net of tax — ( 63,489 ) — ( 63,489 ) Ending balance $ — $ ( 47,715 ) $ — $ ( 47,715 ) (17) Related Party Transactions During 2022 and 2021, the Company has had transactions with its directors, executive officers and their affiliates and its employees. These transactions were made in the ordinary course of business and include extensions of credit and deposit transactions, all made on the same terms as the then prevailing market and credit terms extended to other customers. The Bank had approximately $ 23.1 million in deposits from related parties, including directors, stockholders and their affiliates at December 31, 2022 and $ 10.2 million at December 31, 2021. (18) Parent Company Only Summarized financial information for Texas Capital Bancshares, Inc. are as follows: Balance Sheet December 31, (in thousands) 2022 2021 Assets Cash and cash equivalents $ 245,777 $ 438,761 Investment in subsidiaries 3,183,767 3,155,954 Other assets 93,395 91,301 Total assets $ 3,522,939 $ 3,686,016 Liabilities and Stockholders’ Equity Liabilities: Other liabilities $ 6,754 $ 3,668 Long-term debt 484,754 484,316 Total liabilities 491,508 487,984 Stockholders’ Equity: Preferred stock 300,000 300,000 Common stock 509 506 Additional paid-in capital 1,025,593 1,018,711 Retained earnings 2,239,582 1,926,538 Treasury stock ( 115,310 ) ( 8 ) Accumulated other comprehensive income/(loss) ( 418,943 ) ( 47,715 ) Total stockholders’ equity 3,031,431 3,198,032 Total liabilities and stockholders’ equity $ 3,522,939 $ 3,686,016 87 Table of Contents Statement of Income Year ended December 31, (in thousands) 2022 2021 2020 Interest on notes receivable $ 3,250 $ 3,404 $ 3,402 Dividend income 10,529 10,472 10,496 Other income 9 5 3 Total income 13,788 13,881 13,901 Interest expense 19,721 15,946 10,515 Salaries and employee benefits 782 720 725 Legal and professional 1,583 1,803 3,238 Other non-interest expense 1,636 4,375 4,553 Total expense 23,722 22,844 19,031 Loss before income taxes and equity in undistributed income of subsidiary ( 9,934 ) ( 8,963 ) ( 5,130 ) Income tax benefit ( 2,282 ) ( 2,179 ) ( 1,135 ) Loss before equity in undistributed income of subsidiary ( 7,652 ) ( 6,784 ) ( 3,995 ) Equity in undistributed income of subsidiary 337,946 258,539 68,100 Net income 330,294 251,755 64,105 Preferred stock dividends 17,250 18,721 9,750 Net income available to common stockholders $ 313,044 $ 233,034 $ 54,355 Statements of Cash Flows Year ended December 31, (in thousands) 2022 2021 2020 Operating Activities Net income $ 330,294 $ 251,755 $ 64,105 Adjustments to reconcile net income to net cash provided by/(used in) operating activities: Equity in undistributed income of subsidiary ( 337,946 ) ( 258,539 ) ( 68,100 ) Amortization expense 438 2,469 101 Changes in operating assets and liabilities: Accrued interest receivable and other assets ( 2,095 ) ( 1,750 ) ( 912 ) Accrued interest payable and other liabilities 3,086 2,348 ( 448 ) Net cash used in operating activities ( 6,223 ) ( 3,717 ) ( 5,254 ) Investing Activities Net decrease in loans held for investment — 7,500 3,000 Investments in and advances to subsidiaries ( 50,000 ) — — Net cash provided by/(used in) investing activities ( 50,000 ) 7,500 3,000 Financing Activities Issuance of stock related to stock-based awards ( 4,209 ) ( 3,121 ) ( 1,986 ) Net proceeds from issuance of preferred stock — 289,723 — Redemption of preferred stock — ( 150,000 ) — Preferred stock dividends paid ( 17,250 ) ( 18,721 ) ( 9,750 ) Repurchase of common stock ( 115,302 ) — — Redemption of long-term debt — ( 111,000 ) — Net proceeds from Issuance of long-term debt — 370,625 — Net cash provided by/(used in) financing activities ( 136,761 ) 377,506 ( 11,736 ) Net increase/(decrease) in cash and cash equivalents ( 192,984 ) 381,289 ( 13,990 ) Cash and cash equivalents at beginning of year 438,761 57,472 71,462 Cash and cash equivalents at end of year $ 245,777 $ 438,761 $ 57,472 88 Table of Contents (19) Material Transactions Affecting Stockholders' Equity On April 19, 2022, the Company’s board of directors authorized the Company to repurchase up to $ 150.0 million in shares of its outstanding common stock. During the year ended December 31, 2022, the Company repurchased 2,083,118 shares of its common stock for an aggregate price of $ 115.3 million, at a weighted average price of $ 55.35 per share. On January 18, 2023, the Company’s board of directors authorized a new share repurchase program under which the Company may repurchase up to $ 150.0 million in shares of its outstanding common stock. On March 3, 2021, the Company completed an issuance of 5.75 % fixed rate non-cumulative perpetual preferred stock, Series B, with a liquidation preference of $ 1,000 per share (equivalent to $ 25 per depositary share) (the “Series B Preferred Stock”) and an issuance and sale of 12,000,000 depositary shares, each representing a 1/40th interest in a share of the Series B Preferred Stock. Dividends on the Series B Preferred Stock are not cumulative and will be paid when declared by the board of directors to the extent that the Company has legally available funds to pay dividends. If declared, dividends will accrue and be payable quarterly, in arrears, on the liquidation preference amount, on a non-cumulative basis, at a rate of 5.75 % per annum. Holders of preferred stock will not have voting rights, except with respect to certain changes in the terms of the preferred stock, certain dividend non-payments and as otherwise required by applicable law. Net proceeds from the sale totaled $ 289.7 million, providing additional capital to be used for general corporate purposes. A portion of the proceeds were also used to redeem, in whole, the 6.50 % non-cumulative perpetual preferred stock Series A, par value $ 0.01 per share, in accordance with its terms. The redemption of the Series A preferred stock occurred on June 15, 2021. (20) Quarterly Financial Data (unaudited) The tables below summarize quarterly financial information: 2022 Selected Quarterly Financial Data (in thousands except per share data) Fourth Third Second First Interest income $ 371,287 $ 322,071 $ 242,349 $ 208,530 Interest expense 123,687 82,991 36,818 24,983 Net interest income 247,600 239,080 205,531 183,547 Provision for credit losses 34,000 12,000 22,000 ( 2,000 ) Net interest income after provision for credit losses 213,600 227,080 183,531 185,547 Non-interest income 277,672 25,333 26,242 20,282 Non-interest expense 213,090 197,047 164,303 153,092 Income before income taxes 278,182 55,366 45,470 52,737 Income tax expense 60,931 13,948 11,311 13,087 Net income 217,251 41,418 34,159 39,650 Preferred stock dividends 4,312 4,313 4,312 4,313 Net income available to common stockholders $ 212,939 $ 37,105 $ 29,847 $ 35,337 Basic earnings per share $ 4.28 $ 0.74 $ 0.59 $ 0.70 Diluted earnings per share $ 4.23 $ 0.74 $ 0.59 $ 0.69 2021 Selected Quarterly Financial Data (in thousands except per share data) Fourth Third Second First Interest income $ 219,892 $ 216,589 $ 216,953 $ 223,151 Interest expense 25,860 26,053 27,496 28,339 Net interest income 194,032 190,536 189,457 194,812 Provision for credit losses ( 10,000 ) 5,000 ( 19,000 ) ( 6,000 ) Net interest income after provision for credit losses 204,032 185,536 208,457 200,812 Non-interest income 31,459 24,779 37,639 44,353 Non-interest expense 146,649 152,987 149,060 150,316 Income before income taxes 88,842 57,328 97,036 94,849 Income tax expense 23,712 13,938 23,555 22,911 Net income 65,130 43,390 73,481 71,938 Preferred stock dividends 4,313 4,312 6,317 3,779 Net income available to common stockholders $ 60,817 $ 39,078 $ 67,164 $ 68,159 Basic earnings per share $ 1.20 $ 0.76 $ 1.31 $ 1.33 Diluted earnings per share $ 1.19 $ 0.76 $ 1.31 $ 1.33 89 Table of Contents (21) 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 is not expected to have a significant impact on the Company’s financial statements. 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 the Company’s consolidated financial statements. ASU 2022-06, “Reference Rate Reform (Topic 848)” (“ASU 2022-06”) provides optional guidance to ease the potential burden in account for (or recognizing the effects of) reference rate reform on financial reporting. The objective of the guidance is to provide temporary relief during the transition period away from LIBOR toward new interest rate benchmarks. The amendments in ASU 2022-06 defer the sunset date provision from December 31, 2022 to December 31, 2024. ASU 2022-06 was effective immediately upon issuance and is not expected to have an impact on the Company’s financial statements or disclosures. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None.