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Item 1. Financial Statements

2023-04-20 compared with 2022-10-20 · 487 added, 259 removed, 509 unchanged (59% of the section changed)

2 unchanged sentences

CONSOLIDATED BALANCE SHEETS - UNAUDITED

(in thousands except share data) September 30, 2022 December 31, 2021

(in thousands except share data) March 31, 2023 December 31, 2022

Cash and due from banks $ 264,211 $ 233,637

11 unchanged sentences

Accrued interest receivable and other assets 732,468 719,162

Other assets held for sale 26,450 —

Goodwill and intangible assets, net 1,496 17,262

Goodwill and intangibles, net 1,496 1,496

Total assets $ 28,596,653 $ 28,414,642

5 unchanged sentences

Other liabilities 273,665 345,827

Other liabilities held for sale 75,564 —

Short-term borrowings 2,100,000 1,201,142

4 unchanged sentences

Authorized shares - 10,000,000

Issued shares - 300,000 shares issued at September 30, 2022 and December 31, 2021

Issued shares - 300,000 at March 31, 2023 and December 31, 2022

300,000 300,000

1 unchanged sentence

Authorized shares - 100,000,000

Issued shares - 50,840,022 and 50,618,911 at September 30, 2022 and December 31, 2021, respectively

Issued shares - 50,947,306 and 50,867,298 at March 31, 2023 and December 31, 2022, respectively

Additional paid-in capital 1,031,905 1,025,593

Retained earnings 2,297,850 2,263,502

Treasury stock - 942,296 and 417 shares at cost at September 30, 2022 and December 31, 2021, respectively

Treasury stock - 3,095,444 and 2,083,535 shares at cost at March 31, 2023 and December 31, 2022, respectively

( 175,528 ) ( 115,310 )

6 unchanged sentences

COMPREHENSIVE INCOME/(LOSS) - UNAUDITED

Three months ended September 30, Nine months ended September 30,

Three Months Ended March 31,

(in thousands except per share data) 2023 2022

16 unchanged sentences

Brokered loan fees 1,895 3,970

Servicing income 212 292 677 15,236

Investment banking and trading income 18,768 4,179

Net gain/(loss) on sale of loans held for sale — ( 1,185 ) — 1,317

Other 8,289 2,107

6 unchanged sentences

Communications and technology 17,523 14,700

Federal Deposit Insurance Corporation (“FDIC”) insurance assessment 3,953 4,500 11,252 16,339

Servicing-related expenses — 2,396 — 27,740

Federal Deposit Insurance Corporation insurance assessment 2,170 3,981

Other 12,487 10,388

20 unchanged sentences

(in thousands except share data) Shares Amount Shares Amount Capital Earnings Shares Amount Income/(Loss) Total

Balance at June 30, 2021 300,000 $ 300,000 50,592,618 $ 506 $ 992,469 $ 1,848,379 ( 417 ) $ ( 8 ) $ ( 26,389 ) $ 3,114,957

Comprehensive income:

Net income — — — — — 43,390 — — — 43,390

Change in other comprehensive income/(loss), net of taxes — — — — — — — — ( 14,323 ) ( 14,323 )

Total comprehensive income 29,067

Stock-based compensation expense recognized in earnings

— — — — 8,324 — — — — 8,324

Preferred stock dividend — — — — — ( 4,312 ) — — — ( 4,312 )

Issuance of stock related to stock-based awards

Balance at December 31, 2021 (audited)

300,000 $ 300,000 50,618,911 $ 506 $ 1,008,559 $ 1,948,274 ( 417 ) $ ( 8 ) $ ( 47,715 ) $ 3,209,616

Balance at September 30, 2021 300,000 $ 300,000 50,606,043 $ 506 $ 1,000,509 $ 1,887,457 ( 417 ) $ ( 8 ) $ ( 40,712 ) $ 3,147,752

Balance at June 30, 2022 300,000 $ 300,000 50,820,337 $ 508 $ 1,015,105 $ 2,013,458 ( 942,296 ) $ ( 50,031 ) $ ( 272,208 ) $ 3,006,832

Comprehensive income:

Comprehensive income/(loss):

Net income — — — — — 39,650 — — — 39,650

6 unchanged sentences

— — 91,947 1 ( 2,613 ) — — — — ( 2,612 )

Balance at September 30, 2022 300,000 $ 300,000 50,840,022 $ 509 $ 1,020,153 $ 2,050,563 ( 942,296 ) $ ( 50,031 ) $ ( 435,419 ) $ 2,885,775

See accompanying notes to consolidated financial statements.

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 March 31, 2022 300,000 $ 300,000 50,710,858 $ 507 $ 1,011,353 $ 1,983,611 ( 417 ) $ ( 8 ) $ ( 205,425 ) $ 3,090,038

Balance at December 31, 2022 (audited)

Comprehensive income:

Net income — — — — — 188,809 — — — 188,809

Change in other comprehensive income/(loss), net of taxes — — — — — — — — ( 56,486 ) ( 56,486 )

Total comprehensive income 132,323

Stock-based compensation expense recognized in earnings

300,000 $ 300,000 50,867,298 $ 509 $ 1,025,593 $ 2,263,502 ( 2,083,535 ) $ ( 115,310 ) $ ( 418,943 ) $ 3,055,351

Issuance of preferred stock 300,000 300,000 — — ( 10,277 ) — — — — 289,723

Preferred stock dividend — — — — — ( 14,408 ) — — — ( 14,408 )

Issuance of stock related to stock-based awards

— — 135,176 2 ( 3,212 ) — — — — ( 3,210 )

Redemption of preferred stock ( 6,000,000 ) ( 150,000 ) — — — — — — — ( 150,000 )

Balance at September 30, 2021 300,000 $ 300,000 50,606,043 $ 506 $ 1,000,509 $ 1,887,457 ( 417 ) $ ( 8 ) $ ( 40,712 ) $ 3,147,752

Balance at December 31, 2021 (audited) 300,000 $ 300,000 50,618,911 $ 506 $ 1,008,559 $ 1,948,274 ( 417 ) $ ( 8 ) $ ( 47,715 ) $ 3,209,616

Comprehensive income:

Comprehensive income/(loss):

Net income — — — — — 38,661 — — — 38,661

Change in other comprehensive income/(loss), net of taxes — — — — — — — — 44,181 44,181

Total comprehensive loss ( 272,477 )

Total comprehensive income 82,842

Stock-based compensation expense recognized in earnings

4 unchanged sentences

Repurchase of common stock — — — — — — ( 1,011,909 ) ( 60,218 ) — ( 60,218 )

Balance at September 30, 2022 300,000 $ 300,000 50,840,022 $ 509 $ 1,020,153 $ 2,050,563 ( 942,296 ) $ ( 50,031 ) $ ( 435,419 ) $ 2,885,775

Balance at March 31, 2023 300,000 $ 300,000 50,947,306 $ 509 $ 1,031,905 $ 2,297,850 ( 3,095,444 ) $ ( 175,528 ) $ ( 374,762 ) $ 3,079,974

See accompanying notes to consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

Nine months ended September 30,

Three Months Ended March 31,

(in thousands) 2023 2022

1 unchanged sentence

Net income $ 38,661 $ 39,650

Adjustments to reconcile net income to net cash provided by operating activities:

Provision/(benefit) for credit losses 32,000 ( 20,000 )

Depreciation and amortization expense 35,360 65,943

Net (gain)/loss on sale of loans held for sale — ( 1,317 )

Decrease in valuation allowance on mortgage servicing rights — ( 16,448 )

Adjustments to reconcile net income to net cash provided by/(used in) operating activities:

Provision for credit losses 28,000 ( 2,000 )

Depreciation and amortization 8,683 10,604

Net gain recognized on investment securities ( 1,734 ) —

Stock-based compensation expense 8,438 5,588

Purchases and originations of loans held for sale ( 1,642 ) ( 1,413,899 )

Proceeds from sales and repayments of loans held for sale 8,749 571

4 unchanged sentences

Investing activities

Purchases of available-for-sale debt securities ( 665,388 ) ( 952,982 )

Purchases of available-for-sale securities ( 849,391 ) ( 376,415 )

Proceeds from sales of available-for-sale debt securities 56,923 —

Proceeds from maturities, redemptions and pay-downs of available-for-sale debt securities 45,716 104,338

3 unchanged sentences

Proceeds from pay-offs of loans held for investment, mortgage finance 14,926,573 28,550,492

Proceeds from sale of mortgage servicing rights — 108,925

Net (increase)/decrease in loans held for investment, excluding mortgage finance ( 2,690,164 ) 118,166

Purchases of premises and equipment, net ( 10,456 ) ( 2,619 )

Net increase in loans held for investment, excluding mortgage finance loans ( 837,100 ) ( 517,465 )

Purchase of premises and equipment, net ( 1,363 ) ( 2,709 )

Net cash provided by/(used in) investing activities ( 1,535,776 ) 866,103

2 unchanged sentences

Issuance of stock related to stock-based awards ( 2,126 ) ( 2,612 )

Net proceeds from issuance of preferred stock — 289,723

Redemption of preferred stock — ( 150,000 )

Preferred stock dividends paid ( 12,938 ) ( 14,408 )

Preferred dividends paid ( 4,313 ) ( 4,313 )

Repurchase of common stock ( 60,218 ) —

Net decrease in short-term borrowings ( 501,352 ) ( 908,281 )

Net proceeds from issuance of long-term debt — 639,440

Redemption of long-term debt — ( 111,000 )

Net cash used in financing activities ( 4,179,323 ) ( 1,440,657 )

Net increase (decrease) in short-term borrowings 898,858 ( 775,799 )

Net cash provided by/(used in) financing activities 155,018 ( 3,514,151 )

Net decrease in cash and cash equivalents ( 1,362,555 ) ( 2,575,126 )

4 unchanged sentences

Cash paid during the period for income taxes 451 302

Transfers of loans from held for investment to held for sale 3,137,792 —

Transfers of debt securities from available-for-sale to held-to-maturity — 1,019,365

4 unchanged sentences

Texas Capital Bancshares, Inc.

(“we,” “us”, or the “Company”), a Delaware corporation, was incorporated in November 1996 and commenced banking operations in December 1998.

The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiary, Texas Capital Bank (the “Bank”).

We serve the needs of commercial businesses and professionals and entrepreneurs located in Texas as well as operate several lines of business serving a regional or national clientele of commercial borrowers.

We are primarily a secured lender, with the majority of our loans held for investment, excluding mortgage finance loans and other national lines of business, being made to businesses headquartered in or with operations in Texas.

Our national lines of business provide specialized lending products to businesses throughout the United States.

On September 6, 2022, we announced the sale of BankDirect Capital Finance (“BDCF” or “disposal group”), our insurance premium finance subsidiary, to AFCO Credit Corporation, an indirect wholly-owned subsidiary of Truist Financial Corp.

The sale of BDCF includes its business operations and loan portfolio of approximately $ 3.1 billion as of September 30, 2022.

The sale is an all-cash transaction for a purchase price of approximately $ 3.4 billion, representing an 8.5 % asset premium compared to the value of the purchased loan portfolio as of September 30, 2022.

The transaction resulted in the recognition of a disposal group that is classified as held for sale but does not meet the criteria for discontinued operations reporting.

As such, the loans, assets and liabilities related to the disposal group were transferred at the lower of cost or fair value to loans held for sale, other assets held for sale and other liabilities held for sale, respectively, on the consolidated balance sheet as of September 30, 2022.

The pre-tax net income for the disposal group for the three months ended September 30, 2022 and 2021 was $ 11.9 million and $ 17.4 million, respectively, and was $ 49.5 million and $ 48.7 million for the nine months ended September 30, 2022 and 2021, respectively.

The sale is expected to close in the fourth quarter of 2022, subject to various customary closing conditions.

(“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.

Basis of Presentation

Our accounting and reporting policies conform to accounting principles generally accepted in the United States (“GAAP”) and to generally accepted practices within the banking industry.

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.

11 unchanged sentences

The following table presents the computation of basic and diluted earnings per share:

Three months ended September 30, Nine months ended September 30,

Three Months Ended March 31,

(in thousands except share and per share data) 2023 2022

9 unchanged sentences

(3) Investment Securities

The following is a summary of our investment securities:

The following is a summary of the Company’s investment securities:

(in thousands) Amortized

1 unchanged sentence

Losses Estimated

September 30, 2022

March 31, 2023

Available-for-sale debt securities:

2 unchanged sentences

Residential mortgage-backed securities 2,965,866 1,077 ( 312,007 ) 2,654,936

Credit risk transfer (“CRT”) securities 14,713 — ( 3,011 ) 11,702

CRT securities 14,507 — ( 2,579 ) 11,928

Total available-for-sale debt securities 3,750,070 1,077 ( 356,854 ) 3,394,293

6 unchanged sentences

Available-for-sale debt securities:

Treasury securities $ 698,769 $ — $ ( 28,187 ) $ 670,582

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 170,626 9,407 — 180,033

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 securities:

Residential mortgage-backed securities 935,514 — ( 118,600 ) 816,914

Total held-to-maturity securities 935,514 — ( 118,600 ) 816,914

Equity securities 33,956

Total investment securities(2) $ 3,585,114

(1) Excludes accrued interest receivable of $ 4.2 million and $ 6.6 million at September 30, 2022 and December 31, 2021, respectively, related to available-for-sale debt securities, and $ 1.5 million at September 30, 2022 related to held-to-maturity debt securities that is recorded in accrued interest receivable and other assets on the consolidated balance sheets.

(1) Excludes accrued interest receivable of $ 8.4 million and $ 6.6 million at March 31, 2023 and December 31, 2022, respectively, related to available-for-sale debt securities and $ 1.5 million and $ 1.5 million at March 31, 2023 and December 31, 2022, respectively, related to held-to-maturity debt securities that is recorded in accrued interest receivable and other assets on the consolidated balance sheets.

(2) Includes available-for-sale debt securities and equity securities at estimated fair value and held-to-maturity debt securities at amortized cost.

Debt Securities

In the first quarter of 2022, we transferred $ 1.0 billion of available-for-sale debt securities to held-to-maturity at fair value.

The transfer was the result of deliberate actions taken to execute on our asset-liability management strategies in response to rising

interest rates.

Management determined that it has both the positive intent and ability to hold these securities to maturity.

On the date of transfer, the difference between the carrying value and fair value of these securities, which was recorded, net of tax, as a loss in accumulated other comprehensive income/(loss) (“AOCI”), resulted in the securities transferring at a discount of $ 69.2 million.

The discount and unrealized loss, net of tax, in AOCI will be amortized to interest income over the remaining life of the securities using the interest method.

There were no gains or losses recognized as a result of this transfer.

In the second quarter of 2022, our tax-exempt asset-backed securities were redeemed at par.

The outstanding certificates were cancelled and related trusts were terminated.

Unrealized gains and losses previously recorded, net of tax, in AOCI were reversed and no additional gains or losses were recognized as a result of the redemption.

The amortized cost and estimated fair value as of September 30, 2022, excluding accrued interest receivable, of available-for-sale and held-to-maturity debt securities are presented below by contractual maturity.

In the first quarter of 2023, the Company sold U.S.

Treasury securities with an amortized cost of $ 56.4 million and realized a gain of $ 489,000 .

The amortized cost and estimated fair value as of March 31, 2023, 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.

6 unchanged sentences

Total $ 3,750,070 $ 3,394,293 $ 918,962 $ 811,531

The following table discloses our available-for-sale debt securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months:

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

September 30, 2022

March 31, 2023

Treasury securities $ 261,821 $ ( 5,170 ) $ 361,491 $ ( 16,215 ) $ 623,312 $ ( 21,385 )

4 unchanged sentences

December 31, 2022

Treasury securities $ 670,582 $ ( 28,187 ) $ — $ — $ 670,582 $ ( 28,187 )

government agency securities — — 102,154 ( 22,846 ) 102,154 ( 22,846 )

2 unchanged sentences

Total $ 932,084 $ ( 37,668 ) $ 1,683,122 $ ( 347,537 ) $ 2,615,206 $ ( 385,205 )

At September 30, 2022, we had 98 available-for-sale debt securities in an unrealized loss position, comprised of twelve U.S.

At March 31, 2023, the Company had 109 available-for-sale debt securities in an unrealized loss position, comprised of 11 U.S.

Treasury securities, five U.S.

1 unchanged sentence

The unrealized losses on the available-for-sale debt securities were the result of changes in market interest rates compared to the date the securities were acquired rather than the credit quality of the issuers or underlying loans.

We do not intend to sell and it is not more likely than not that we will be required to sell these available-for-sale debt securities before recovery of the amortized cost of such securities in an unrealized loss position and have, therefore, recorded the unrealized losses related to this portfolio in AOCI.

Held-to-maturity debt securities consist of government guaranteed securities for which no loss is expected.

At September 30, 2022 and December 31, 2021, no allowance for credit losses was established for available-for-sale or held-to-maturity debt securities.

Debt securities with carrying values of approximately $ 18.6 million and $ 1.4 million were pledged to secure certain customer repurchase agreements and deposits, respectively, at September 30, 2022.

The Company does not currently intend to sell and based on current conditions it does not believe it is likely that the Company will be required to sell these available-for-sale debt securities before recovery of the amortized cost of such securities in an unrealized loss position and has, therefore recorded the unrealized losses related to this portfolio in AOCI.

Held-to-maturity securities consist of government guaranteed securities for which no loss is expected.

At March 31, 2023 and December 31, 2022, no allowance for credit losses was established for available-for-sale or held-to-maturity debt securities.

Debt securities with carrying values of approximately $ 1.6 billion and $ 1.7 million were pledged to secure certain customer repurchase agreements and deposits, respectively, at March 31, 2023.

The comparative amounts at December 31, 2022 were $ 16.1 million and $ 1.4 million, respectively.

Equity Securities

Equity securities consist of investments that qualify for consideration under the regulations implementing the Community Reinvestment Act and investments related to our non-qualified deferred compensation plan.

The following is a summary of unrealized and realized gains/(losses) recognized on equity securities included in other non-interest income on the consolidated statements of income and other comprehensive income/(loss):

Three months ended September 30, Nine months ended September 30,

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.

Three Months Ended March 31,

(in thousands) 2023 2022

1 unchanged sentence

Realized net gains/(losses) recognized on securities sold ( 596 ) 202

Unrealized net gains/(losses) recognized on securities held $ ( 578 ) $ 503 $ ( 9,212 ) $ 3,400

Unrealized net gains/(losses) recognized on securities still held $ 1,841 $ ( 3,842 )

(4) Loans and Allowance for Credit Losses on Loans

Loans are summarized by portfolio segment as follows:

(in thousands) September 30, 2022 December 31, 2021

(in thousands) March 31, 2023 December 31, 2022

Loans held for investment(1):

9 unchanged sentences

Loans held for sale:

Insurance premium finance loans, at lower of cost or fair value (2)

$ 3,137,791 $ —

Mortgage loans, at fair value 4,387 8,123

Non-mortgage loans, at lower of cost or fair value 27,608 36,357

Total loans held for sale $ 27,608 $ 36,357

(1) Excludes accrued interest receivable of $ 71.8 million and $ 50.9 million at September 30, 2022 and December 31, 2021, respectively, that is recorded in accrued interest receivable and other assets on the consolidated balance sheets.

(2) September 30, 2022 includes $ 1.3 million in non-accrual loans and $ 3.1 million in loans past due 90 days and still accruing that were transferred from loans held for investment to loans held for sale as of September 30, 2022.

The following tables summarize our gross loans held for investment by year of origination and internally assigned credit grades:

(1) Excludes accrued interest receivable of $ 100.0 million and $ 100.4 million at March 31, 2023 and December 31, 2022, respectively, that is recorded in accrued interest receivable and other assets on the consolidated balance sheets.

The following tables summarize gross loans held for investment by year of origination and internally assigned credit grades:

(in thousands) 2023 2022 2021 2020 2019 2018 and prior Revolving lines of credit Revolving lines of credit converted to term loans Total

September 30, 2022

March 31, 2023

(1-7) Pass $ 668,265 $ 1,913,280 $ 594,666 $ 192,154 $ 186,922 $ 440,995 $ 5,079,665 $ 19,786 $ 9,095,733

33 unchanged sentences

Total $ 1,025,381 $ 3,711,422 $ 2,260,417 $ 1,145,857 $ 1,022,041 $ 4,188,492 $ 6,725,534 $ 63,321 $ 20,142,465

Gross charge-offs $ — $ 90 $ 19,828 $ — $ 262 $ 552 $ — $ — $ 20,732

(in thousands) 2022 2021 2020 2019 2018 2017 and prior Revolving lines of credit Revolving lines of credit converted to term loans Total

38 unchanged sentences

(in thousands) Commercial Energy Mortgage

Nine months ended September 30, 2022

Three Months Ended March 31, 2023

Beginning balance $ 136,841 $ 49,000 $ 10,745 $ 56,883 $ 253,469

4 unchanged sentences

Ending balance $ 149,400 $ 50,936 $ 7,400 $ 53,192 $ 260,928

Nine months ended September 30, 2021

Three Months Ended March 31, 2022

Beginning balance $ 102,202 $ 52,568 $ 6,083 $ 51,013 $ 211,866

4 unchanged sentences

Ending balance $ 107,746 $ 28,801 $ 10,242 $ 64,362 $ 211,151

We recorded a $ 32.0 million provision for credit losses for the nine months ended September 30, 2022, compared to a negative provision of $ 20.0 million for the same period in 2021.

The $ 32.0 million provision for credit losses resulted primarily from updated views on the downside risks to the economic forecast, partially offset by a decline in criticized loans.

We recorded $ 4.9 million in net charge-offs during the nine months ended September 30, 2022, compared to net charge-offs of $ 11.9 million during the same period in 2021.

Criticized loans totaled $ 484.0 million at September 30, 2022, compared to $ 582.9 million and $ 728.9 million at December 31, 2021 and September 30, 2021, respectively.

The decrease in criticized loans as compared to June 30, 2022 was primarily due to the resolution of one mortgage finance credit that was downgraded in the second quarter of 2022 and resolved in the third quarter of 2022 with no losses recorded.

The Company recorded a $ 27.4 million provision for credit losses on loans for the three months ended March 31, 2023, compared to a $ 1.2 million negative provision for the same period of 2022.

The $ 27.4 million provision for credit losses on loans resulted primarily from updated views on the downside risks to the economic forecast and increases in net charge-offs and criticized loans during the three months ended March 31, 2023.

Net charge-offs of $ 19.9 million were recorded during the three months ended March 31, 2023, related primarily to a single commercial loan, compared to net recoveries of $ 512,000 during the same period of 2022.

Criticized loans totaled $ 561.1 million at March 31, 2023, $ 513.2 million at December 31, 2022 and $ 476.1 million at March 31, 2022.

A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.

At September 30, 2022, we had no collateral-dependent loans .

The table below provides an age analysis of our gross loans held for investment:

At March 31, 2023, the Company had $ 38.7 million in collateral-dependent commercial loans, collateralized by business assets, and $ 1.1 million in collateral-dependent real estate loans, collateralized by real estate property.

The table below provides an age analysis of gross loans held for investment:

(in thousands) 30-59 Days

1 unchanged sentence

Past Due 90 Days or More Past Due Total Past

Due Non-Accrual Loans(1) Current Total Non-Accrual With No Allowance

September 30, 2022

Due Non-accrual(1) Current Total Non-accrual With No Allowance

March 31, 2023

Commercial $ 3,185 $ 242 $ 3,098 $ 6,525 $ 86,940 $ 9,421,316 $ 9,514,781 $ 71,999

1 unchanged sentence

Mortgage finance — — — — — 4,060,570 4,060,570 —

52 — — 52 187 3,310,033 3,310,272 —

— — — — — 600,567 600,567 —

700 2,453 — 3,153 1,081 786,033 790,267 —

CRE — — — — 179 3,695,103 3,695,282 —

RBF — — — — — 465,181 465,181 —

Other 430 — — 430 3,355 786,435 790,220 3,355

Secured by 1-4 family 2,388 — — 2,388 — 319,372 321,760 —

— — 62 62 128 314,408 314,598 —

Total $ 6,003 $ 242 $ 3,098 $ 9,343 $ 93,951 $ 20,039,171 $ 20,142,465 $ 78,831

(3) As of September 30, 2022 and December 31, 2021, $ 1.8 million of our non-accrual loans were earning interest income on a cash basis.

Additionally, $ 801,000 in interest income was recognized on non-accrual loans for the nine months ended September 30, 2022.

Accrued interest of $ 100,000 was reversed during the nine months ended September 30, 2022.

As of September 30, 2022 and December 31, 2021, we did not have any loans considered restructured that were not on non-accrual.

Of the non-accrual loans at September 30, 2022 and December 31, 2021, $ 2.2 million and $ 19.4 million, respectively, met the criteria for restructured.

These loans had no unfunded commitments at their respective balance sheet dates.

The following table details the recorded investment of loans restructured during the nine months ended September 30, 2022:

Extended Maturity Adjusted Payment Schedule Total

(in thousands, except number of contracts) Number of Contracts Balance at Period End Number of Contracts Balance at Period End Number of Contracts Balance at Period End

Nine months ended September 30, 2022

Commercial loans — $ — 1 $ 604 1 $ 604

(1) As of March 31, 2023, $ 2.1 million of non-accrual loans were earning interest income on a cash basis compared to $ 2.2 million as of December 31, 2022.

We did not recognize interest income on non-accrual loans for the three months ended March 31, 2023 and March 31, 2022.

Accrued interest of $ 1.5 million and $ 4,000 was reversed during the three months ended March 31, 2023 and March 31, 2022, respectively.

Modifications to Borrowers Experiencing Financial Difficulty

The Company adopted Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) effective January 1, 2023.

The amendments in ASU 2022-02 eliminated the recognition and measure of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty.

The table below details the amortized cost of gross loans held for investment made to borrowers experiencing financial difficulty that were modified during the three months ended March 31, 2023:

(in thousands) Payment

Deferral Term

Extension Payment

Extension Interest Rate

Extension Total Percentage of

Commercial $ 31,431 $ 1,800 $ — $ 14,933 $ 48,164 0.24 %

Energy — — 3,477 — 3,477 0.02 %

Total $ 31,431 $ 1,800 $ 3,477 $ 14,933 $ 51,641 0.26 %

We did not have any loans that were restructured during the nine months ended September 30, 2021.

The restructuring of the loans did not have a significant impact on our allowance for credit losses at September 30, 2022.

As of September 30, 2022 and 2021, we did not have any loans that were restructured within the last 12 months that subsequently defaulted.

The following table summarizes the financial impacts of loan modifications made to borrowers experiencing financial difficulty during the three months ended March 31, 2023:

Interest Rate

Reduction Term Extension

(in months) Total Payment

(in thousands)

Commercial 0.70 % 6 to 18

Energy — 36 1,200

As of March 31, 2023, the Company did not have any loans made to borrowers experiencing financial difficulty that were modified during the first quarter of 2023 that subsequently defaulted.

Payment default is defined as movement to nonperforming status, foreclosure or charge-off, whichever occurs first.

The table below provides an age analysis of gross loans held for investment made to borrowers experiencing financial difficulty that were modified on or after January 1, 2023, the date we adopted ASU 2022-02:

(in thousands) 30-89 Days

Past Due 90+ Days

Past Due Non-Accrual Current Total

March 31, 2023

Commercial $ 161 $ — $ 924 $ 47,079 $ 48,164

Energy — — 3,477 — 3,477

Total $ 161 $ — $ 4,401 $ 47,079 $ 51,641

Troubled Debt Restructuring Disclosures Prior to the Adoption of ASU 2022-02

The Company did not have any loans that were restructured during the three months ended March 31, 2022.

As of December 31, 2022 and March 31, 2022, 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 March 31, 2022, $ 531,000 and $ 18.0 million, respectively, met the criteria for restructured.

These loans had no unfunded commitments at their respective balance sheet dates.

(5) Short-Term Borrowings and Long-Term Debt

The table below presents a summary of short-term borrowings:

(in thousands) September 30, 2022 December 31, 2021

(in thousands) March 31, 2023 December 31, 2022

Customer repurchase agreements $ — $ 1,142

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The table below presents a summary of long-term debt:

(in thousands) September 30, 2022 December 31, 2021

(in thousands) March 31, 2023 December 31, 2022

Bank-issued floating rate senior unsecured credit-linked notes due 2024 $ 272,994 $ 272,492

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(6) Financial Instruments with Off-Balance Sheet Risk

The table below presents our financial instruments with off-balance sheet risk as well as the activity in the allowance for off-balance sheet credit losses related to those financial instruments.

This allowance is recorded in other liabilities on the consolidated balance sheets.

Three months ended September 30, Nine months ended September 30,

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:

Three Months Ended March 31,

(in thousands) 2023 2022

Beginning balance of allowance for off-balance sheet credit losses $ 21,793 $ 17,265

$ 17,981 $ 16,747 $ 17,265 $ 17,434

Provision for off-balance sheet credit losses 631 ( 773 )

3,667 1,464 4,383 777

Ending balance of allowance for off-balance sheet credit losses $ 22,424 $ 16,492

$ 21,648 $ 18,211 $ 21,648 $ 18,211

(in thousands) September 30, 2022 December 31, 2021

(in thousands) March 31, 2023 December 31, 2022

Commitments to extend credit - period end balance $ 10,231,682 $ 9,673,082

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The Basel III regulatory capital framework (the “Basel III Capital Rules”) adopted by U.S.

federal regulatory authorities, among other things, (i) establishes the capital measure called “Common Equity Tier 1” (“CET1”), (ii) specifies that Tier 1

capital consist of CET1 and “Additional Tier 1 Capital” instruments meeting stated requirements, (iii) requires that most deductions/adjustments to regulatory capital measures be made to CET1 and not to other components of capital and (iv) defines the scope of the deductions/adjustments to the capital measures.

Additionally, the Basel III Capital Rules require that we maintain a 2.5 % capital conservation buffer with respect to each of CET1, Tier 1 and total capital to risk-weighted assets, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements.

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 our common stock during the nine months ended September 30, 2022 or during the year ended December 31, 2021.

On April 19, 2022, our board of directors authorized a share repurchase program under which we may repurchase up to $ 150.0 million in shares of our outstanding common stock.

During the nine months ended September 30, 2022, the Company repurchased 941,879 shares of its common stock for an aggregate price of $ 50.0 million, at a weighted average price of $ 53.11 per share.

No dividends were declared or paid on the Company’s common stock during the three months ended March 31, 2023 or 2022.

In January 2023, the Company completed the full $ 150.0 million of repurchases authorized by the Company’s board of directors on April 19, 2022.

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.

During the three months ended March 31, 2023, the Company repurchased 1,011,909 shares of its common stock for an aggregate price of $ 59.7 million, at a weighted average price of $ 58.98 per share.

The aggregate purchase price and weighted average price per share does not include the effect of excise tax incurred on net stock repurchases.

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.

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In March 2020, the federal bank regulatory agencies issued an interim final rule that maintains the three-year transition option of the 2019 CECL Rule and also provides banking organizations that were required under GAAP to implement CECL before the end of 2020 the option to delay for two years an estimate of the effect of CECL on regulatory capital, relative to the incurred loss methodology's effect on regulatory capital, followed by a three-year transition period (five-year transition option).

We adopted CECL on January 1, 2020 and have elected to utilize the five-year transition option.

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 September 30, 2022, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

Management believes, as of March 31, 2023, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

Financial institutions are categorized as well capitalized based on total risk-based, Tier 1 risk-based, CET1 and Tier 1 leverage ratios.

As shown in the table below, the Company’s and the Bank’s capital ratios exceeded the regulatory definition of well capitalized as of September 30, 2022 and December 31, 2021.

The regulatory authorities can apply changes in classification of assets and such changes may retroactively subject the Company and the Bank to changes in capital ratios.

Any such change could reduce one or more capital ratios below well capitalized status.

In addition, a change may result in imposition of additional assessments by the FDIC or could result in regulatory actions that could have a material effect on our financial condition and results of operations.

Because our Bank had less than $ 15.0 billion in total consolidated assets as of December 31, 2009, we are allowed to continue to classify our trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1 capital.

The table below summarizes our actual and required capital ratios under the Basel III Capital Rules.

The ratios presented below include the effects of our election to utilize the five-year CECL transition described above.

As shown in the table below, the Company’s and Bank’s capital ratios exceeded the regulatory definition of well capitalized as of March 31, 2023 and December 31, 2022.

The regulatory authorities can apply changes in the 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 Federal Deposit Insurance Corporation (“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 2023, the amount of the notes that qualify as Tier 2 capital has been reduced by 60%.

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

September 30, 2022

March 31, 2023

Company $ 3,157,937 12.42 % $ 1,779,755 7.00 % N/A N/A

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however, the Federal Reserve Board and the FDIC may require the Company and the Bank, respectively, to maintain a Tier 1 capital ratio (to average assets) above the required minimum.

(2) Percentages represent the minimum capital ratios plus the fully phased-in 2.5% CET1 capital buffer under the Basel III Capital Rules.

(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 March 31, 2023 and December 31, 2022.

(8) Stock-Based Compensation

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Grants are subject to vesting requirements and may include, among other things, nonqualified stock options, stock appreciation rights, restricted stock units (“RSUs”), restricted stock and performance units, or any combination thereof.

On April 19, 2022, the Company’s stockholders approved the Texas Capital Bancshares, Inc.

2022 Long-Term Incentive Plan, which provides for the issuance of 1,124,880 shares of common stock for compensation to the Company’s key employees and non-employee directors.

The table below summarizes our stock-based compensation expense:

Three months ended September 30, Nine months ended September 30,

Three Months Ended March 31,

(in thousands) 2023 2022

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RSUs $ 8,438 $ 5,407

Restricted stock — — — 1

Cash-settled units — 181

Total $ 8,438 $ 5,588

(in thousands except period data) September 30, 2022

(in thousands except period data) March 31, 2023

Unrecognized compensation expense related to unvested stock-settled awards $ 46,870

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(9) Fair Value Disclosures

We determine the fair market values of our assets and liabilities measured at fair value on a recurring and nonrecurring basis using the fair value hierarchy as prescribed in the Accounting Standards Codification (“ASC”) 820, Fair Value Measurement .

See Note 1 - Operations and Summary of Significant Accounting Policies in our 2021 Form 10-K for information regarding the fair value hierarchy and a description of the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial instruments.

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 in our 2022 Form 10-K for information regarding the fair value hierarchy and a description of the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial statements.

Assets and liabilities measured at fair value are as follows:

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(in thousands) Level 1 Level 2 Level 3

September 30, 2022

March 31, 2023

Available-for-sale debt securities:(1)

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Equity securities(1)(2) 21,548 11,166 —

Mortgage loans held for sale(3) — — 4,387

Loans held for investment(3) — — 35,458

Derivative assets(4) — 19,401 —

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Available-for-sale debt securities:(1)

Treasury securities $ 670,582 $ — $ —

government agency securities — 102,154 —

Residential mortgage-backed securities — 1,831,047 —

Tax-exempt asset-backed securities — — 180,033

CRT securities — — 11,861

Equity securities(1)(2) 22,879 11,077 —

Mortgage loans held for sale(3) — 465 7,658

Derivative assets(4) — 13,504 —

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Non-qualified deferred compensation plan liabilities(4) 21,177 — —

(1) Investment securities are measured at fair value on a recurring basis, generally monthly, except for tax-exempt asset-backed securities and CRT securities, which are measured quarterly.

(2) Equity securities consist of investments that qualify for consideration under the regulations implementing the Community Reinvestment Act and investments related to our non-qualified deferred compensation plan.

(3) Mortgage loans held for sale are measured at fair value on a recurring basis, generally monthly.

(1) Investment securities are measured at fair value on a recurring basis, generally monthly.

(2) Equity securities consist of investments that qualify for consideration under the regulations implementing the Community Reinvestment Act and investments related to non-qualified deferred compensation plan.

(3) Includes certain collateral-dependent loans held for investment for which a specific allocation of the allowance for credit losses is based upon the fair value of the loan’s underlying collateral.

These loans held for investment are measured on a nonrecurring basis, generally annually or more often as warranted by market and economic conditions.

(4) Derivative assets and liabilities are measured at fair value on a recurring basis, generally quarterly.

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Level 3 Valuations

The following table summarizes the changes in Level 3 assets measured at fair value on a recurring basis:

The following table presents a reconciliation of the level 3 fair value category measured at fair value on a recurring basis:

Net Gains/(Losses)

(in thousands) Balance at Beginning of Period Purchases / Additions Sales / Reductions Realized Unrealized Balance at End of Period

Three months ended September 30, 2022

Available-for-sale debt securities:(1)

CRT securities $ 11,670 $ — $ — $ — $ 32 $ 11,702

Loans held for sale(2) 4,266 571 ( 450 ) — — 4,387

Three months ended September 30, 2021

Available-for-sale debt securities:(1)

Tax-exempt asset-backed securities $ 185,954 $ — $ ( 2,270 ) $ — $ 1,136 $ 184,820

CRT securities 11,713 — — — 91 11,804

Loans held for sale(2) 8,227 440 ( 870 ) — ( 96 ) 7,701

Nine months ended September 30, 2022

Three Months Ended March 31, 2023

Available-for-sale debt securities:(1)

Tax-exempt asset-backed securities $ 180,033 $ — $ ( 170,626 ) $ — $ ( 9,407 ) $ —

CRT securities $ 11,861 $ — $ — $ — $ 67 $ 11,928

Loans held for sale(2) 7,658 1,898 ( 5,050 ) — ( 119 ) 4,387

Nine months ended September 30, 2021

Three Months Ended March 31, 2022

Available-for-sale debt securities:(1)

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Realized gains/(losses) are recorded in other non-interest income on the consolidated statements of income and other comprehensive income/(loss).

(2) Realized and unrealized gains/(losses) on loans held for sale are recorded in net gain/(loss) on sale of loans held for sale on the consolidated statements of income and other comprehensive income/(loss).

Tax-exempt asset-backed securities

The fair value of tax-exempt asset-backed securities is based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs, the most significant of which were a discount rate and a weighted-average life.

The securities were redeemed in full prior to September 30, 2022.

At December 31, 2021, the combined weighted-average discount rate and weighted-average life utilized were 2.60 % and 4.61 years, respectively.

(2) Realized and unrealized gains/(losses) on loans held for sale are recorded in other non-interest income on the consolidated statements of income and other comprehensive income/(loss).

CRT securities

The fair value of CRT securities is based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs, the most significant of which were a discount rate and a weighted-average life.

At September 30, 2022, the discount rates utilized ranged from 6.97 % to 11.52 % and the weighted-average life ranged from 5.23 years to 8.93 years.

On a combined amortized cost weighted-average basis, a discount rate of 8.49 % and a weighted-average life of 6.46 years were utilized to determine the fair value of these securities at September 30, 2022.

At December 31, 2021, the combined weighted-average discount rate and combined weighted-average life utilized were 4.97 % and 6.35 years, respectively.

Mortgage loans held for sale

The fair value of mortgage loans held for sale using Level 3 inputs include loans that cannot be sold through normal sale channels and thus require significant management judgment or estimation when determining the fair value.

The fair value of such loans is generally based upon quoted prices of comparable loans with a liquidity discount applied.

At September 30, 2022, the fair value of these loans was calculated using a weighted-average discounted price of 90.4 %, compared to 97.8 % at December 31, 2021.

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 March 31, 2023, the discount rates utilized ranged from 5.43 % to 11.37 % and the weighted-average life ranged from 4.84 years to 8.42 years.

On a combined amortized cost weighted-average basis a discount rate of 7.44 % and a weighted-average life of 6.05 years were utilized to determine the fair value of these securities at March 31, 2023.

At December 31, 2022, the combined weighted-average discount rate and weighted-average life utilized were 8.24 % and 6.26 years, respectively.

Loans held for investment

Certain collateral-dependent loans held for investment are reported at fair value when, based upon an individual evaluation, the specific allocation of the allowance for credit losses that is deducted from the loan's amortized cost is based upon the fair value of the loan's underlying collateral.

The $ 35.5 million fair value of loans held for investment at March 31, 2023 reported above includes impaired loans with a carrying value of $ 39.8 million that were reduced by specific allowance allocations totaling $ 4.3 million based on collateral valuations utilizing Level 3 inputs.

There were no collateral-dependent loans held for investment reported at fair value at December 31, 2022.

Fair Value of Financial Instruments

A summary of the carrying amounts and estimated fair values of financial instruments is as follows:

Estimated Fair Value

(in thousands) Carrying

Amount Total Level 1 Level 2 Level 3

September 30, 2022

Amount Estimated Fair Value

(in thousands) Total Level 1 Level 2 Level 3

March 31, 2023

Financial assets:

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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 —

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The notional amounts and estimated fair values of derivative positions outstanding are presented in the following table.

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Estimated Fair Value Estimated Fair Value

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Customer-initiated and other derivatives:

Foreign currency forward contracts 2,682 13 — — — —

Interest rate contracts:

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Net derivatives included on the consolidated balance sheets $ 19,401 $ 70,220 $ 13,504 $ 91,758

Our credit exposure on derivative instruments is limited to the net favorable value and interest payments by each counterparty.

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.

Our credit exposure associated with these instruments, net of any collateral pledged, was approximately $ 24.1 million at September 30, 2022, and approximately $ 37.8 million at December 31, 2021.

The Company’s credit exposure associated with these instruments, net of any collateral pledged, was approximately $ 19.4 million at March 31, 2023 and approximately $ 13.5 million at December 31, 2022.

Collateral levels are monitored and adjusted on a regular basis for changes in the value of derivative instruments.

At September 30, 2022, we had $ 73.0 million in cash collateral pledged to counterparties included in interest-bearing cash and cash equivalents on the consolidated balance sheet and $ 74.0 million in cash collateral received from counterparties included in interest bearing deposits on the consolidated balance sheet.

The comparative amounts at December 31, 2021, were $ 40.3 million in cash collateral pledged to counterparties and no cash collateral received from counterparties.

We also enter into credit risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are either a participant or a lead bank.

The risk participation agreements entered into by us as a participant bank provide credit protection to the financial institution counterparty should the borrower fail to perform on its interest rate derivative contract with that financial institution.

We are party to 18 risk participation agreements where we are a participant bank with a notional amount of $ 343.3 million at September 30, 2022, compared to seven risk participation agreements with a notional amount of $ 79.2 million at December 31, 2021.

The maximum estimated exposure to these agreements, assuming 100% default by all obligors, was approximately $ 10.4 million at September 30, 2022 and $ 2.3 million at December 31, 2021.

The fair value of these exposures was insignificant to the consolidated financial statements at both September 30, 2022 and December 31, 2021.

Risk participation agreements entered into by us as the lead bank provide credit protection to us should the borrower fail to perform on its interest rate derivative contract with us.

We are party to 17 risk participation agreements where we are the lead bank with a notional amount of $ 201.1 million at September 30, 2022, compared to 15 agreements with a notional amount of $ 156.1 million at December 31, 2021.

At March 31, 2023, the Company had $ 135.6 million in cash collateral pledged to counterparties included in interest bearing cash and cash equivalents on the consolidated balance sheet and $ 57.0 million in cash collateral received from counterparties included in interest bearing deposits on the consolidated balance sheet.

The comparative amounts at December 31, 2022, were $ 89.2 million in cash collateral pledged to counterparties and $ 72.5 million cash collateral received from counterparties.

The Company also enters into credit risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which the Company is either a participant or a lead bank.

The risk participation agreements entered into by the Company as a participant bank provide credit protection to the financial institution counterparty should the borrower fail to perform on its interest rate derivative contract with that financial institution.

The Company is party to 18 risk participation agreements where it acts as a participant bank with a notional amount of $ 336.9 million at March 31, 2023, compared to 19 risk participation agreements with a notional amount of $ 291.2 million at December 31, 2022.

The maximum estimated exposure to these agreements, assuming 100% default by all obligors, was approximately $ 6.6 million at March 31, 2023 and $ 8.9 million at December 31, 2022.

The fair value of these exposures was insignificant to the consolidated financial statements at both March 31, 2023 and December 31, 2022.

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 9 risk participation agreements where the Company acts as the lead bank having a notional amount of $ 124.7 million at March 31, 2023, compared to 18 agreements having a notional amount of $ 222.0 million at December 31, 2022.

Derivatives Designated as Cash Flow Hedges

During the nine months ended September 30, 2022, we entered into interest rate derivative contracts that were designated as qualifying cash flow hedges to hedge the exposure to variability in expected future cash flows attributable to changes in a contractually specified interest rate.

To qualify for hedge accounting, a formal assessment is prepared to determine whether the hedging relationship, both at inception and on an ongoing basis, is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the hedge if a cash flow hedge.

At inception a statistical regression analysis is prepared to determine hedge effectiveness.

At each reporting period thereafter, a statistical regression or qualitative analysis is performed.

If it is determined that hedge effectiveness has not been or will not continue to be highly effective, then hedge accounting ceases and any gain or loss in AOCI is recognized in earnings immediately.

The cash flow hedges are recorded at fair value in other assets and other liabilities on the consolidated balance sheets with changes in fair value recorded in AOCI, net of tax.

Amounts recorded to AOCI are reclassified into earnings in the same period in which the hedged asset or

liability affects earnings and are presented in the same income statement line item as the earnings effect of the hedged asset or liability.

During the three and nine months ended September 30, 2022, we recorded $ 78.2 million and $ 77.9 million, respectively, in unrealized losses to adjust our cash flow hedges to fair value, which was recorded net of tax to AOCI, and reclassified $ 1.8 million and $ 2.5 million, respectively, from AOCI into interest income on loans.

Based on current market conditions, we estimate that during the next 12 months, an additional $ 31.7 million will be reclassified from AOCI as a decrease to interest income.

As of September 30, 2022, the maximum length of time over which forecasted transactions are hedged is 4.00 years.

The Company enters into interest rate derivative contracts that are designated as qualifying cash flow hedges to hedge the exposure to variability in expected future cash flows attributable to changes in a contractually specified interest rate.

During the three months ended March 31, 2023, the Company recorded $ 13.5 million in unrealized losses to adjust its cash flow hedges to fair value, which was recorded net of tax to AOCI, and reclassified $ 11.1 million from AOCI into interest income on loans.

Based on current market conditions, the Company estimates that during the next 12 months, an additional $ 50.3 million will be reclassified from AOCI as a decrease to interest income.

As of March 31, 2023, the maximum length of time over which forecasted transactions are hedged is 3.50 years.

(11) Accumulated Other Comprehensive Income

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(in thousands) Cash Flow Hedges Available-for-Sale Securities Held-to-Maturity Securities Total

Three months ended September 30, 2022

Beginning balance $ ( 316 ) $ ( 220,090 ) $ ( 51,802 ) $ ( 272,208 )

Change in unrealized gain/(loss) ( 78,177 ) ( 129,027 ) — ( 207,204 )

Amounts reclassified into net income ( 1,760 ) — 2,369 609

Total other comprehensive income/(loss) ( 79,937 ) ( 129,027 ) 2,369 ( 206,595 )

Income tax expense/(benefit) ( 16,786 ) ( 27,095 ) 497 ( 43,384 )

Total other comprehensive income/(loss), net of tax ( 63,151 ) ( 101,932 ) 1,872 ( 163,211 )

Ending balance $ ( 63,467 ) $ ( 322,022 ) $ ( 49,930 ) $ ( 435,419 )

Three months ended September 30, 2021

Beginning balance $ — $ ( 26,389 ) $ — $ ( 26,389 )

Change in unrealized gain/(loss) — ( 18,131 ) — ( 18,131 )

Amounts reclassified into net income — — — —

Total other comprehensive income/(loss) — ( 18,131 ) — ( 18,131 )

Income tax expense/(benefit) — ( 3,808 ) — ( 3,808 )

Total other comprehensive income/(loss), net of tax — ( 14,323 ) — ( 14,323 )

Ending balance $ — $ ( 40,712 ) $ — $ ( 40,712 )

Nine months ended September 30, 2022

Three Months Ended March 31, 2023

Beginning balance $ ( 66,394 ) $ ( 304,309 ) $ ( 48,240 ) $ ( 418,943 )

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Ending balance $ ( 46,916 ) $ ( 281,063 ) $ ( 46,783 ) $ ( 374,762 )

Nine months ended September 30, 2021

Three Months Ended March 31, 2022

Beginning balance $ — $ ( 47,715 ) $ — $ ( 47,715 )

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(12) New Accounting Standards

ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326)” (“ASU 2022-02”) eliminates the guidance on troubled debt restructurings and requires entities to evaluate all loan modifications to determine if they result in a new loan or a continuation of the existing loan.

ASU 2022-02 also requires that entities disclose current-period gross charge-offs by year of origination for loans and leases.

ASU 2022-02 is effective January 1, 2023 and will have an impact on our financial statement disclosures.

Accounting Standard Update 2022-04, “Liabilities - Supplier Finance Programs (Subtopic 405-50)” (“ASU 2022-04”) enhances the transparency of supplier finance programs and the related financial statement disclosures.

The amendments require that a buyer in a supplier finance program disclose information about the key terms of the program, outstanding confirmed amounts as of the end of the period, a rollforward of such amounts during each annual period and a description of where in the financial statements outstanding amounts are presented.

ASU 2022-04 is effective January 1, 2023, except for the disclosure of rollforward information, which is effective January 1, 2024, and is not expected to have an impact on our consolidated financial statements.

ASU 2023-01, “Leases (Topic 842) - Common Control Arrangements” (“ASU 2023-01”) requires entities to determine whether a related party arrangement between entities under common control is a lease.

If the arrangement is determined to be a lease, an entity must classify and account for the lease on the same basis as an arrangement with a related party (on the basis of legally enforceable terms and conditions).

ASU 2023-01 is effective January 1, 2024 and is not expected to have an impact on our financial statements.

ASU 2023-02 “Investments - Equity Method and Join Ventures (Topic 323) - Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method” (“ASU 2023-02”) permits reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met.

ASU 2023-02 is effective January 1, 2024 and is not expected to have an impact on our financial statements.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the Company’s financial condition and results of operations for the three months ended March 31, 2023 and 2022 should be read in conjunction with its audited consolidated financial statements and the related notes to the consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”).

Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results for the year ending December 31, 2023 or any future period.

Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of and pursuant to the Private Securities Litigation Reform Act of 1995 regarding, among other things, the Company’s financial condition, results of operations, business plans, strategies, future performance and business and industry outlook.

These statements are not historical in nature and may often be identified by the use of words such as “believes,” “projects,” “expects,” “may,” “estimates,” “should,” “plans,” “targets,” “intends” “could,” “would,” “anticipates,” “potential,” “confident,” “optimistic” or the negative thereof, or other variations thereon, or comparable terminology, or by discussions of strategy, objectives, estimates, trends, guidance, expectations and future plans.

Because forward-looking statements relate to future results and occurrences, they are subject to inherent and various uncertainties, risks, and changes in circumstances that are difficult to predict, may change over time, are based on management’s expectations and assumptions at the time the statements are made and are not guarantees of future results.

Numerous risks and other factors, many of which are beyond management’s control, could cause actual results to differ materially from future results expressed or implied by such forward-looking statements.

While there can be no assurance that any list of risks is complete, important risk and other factors that could cause actual results to differ materially from those contemplated by forward-looking statements include, but are not limited to, credit quality and risk, the unpredictability of economic and business conditions that may impact the Company or its customers, recent adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, liquidity and regulatory responses to these developments, the Company’s ability to effective manage its liquidity risk and any growth plans and the availability of capital and funding, the Company’s ability to effectively manage information technology systems, cyber incidents or other failures, disruptions or security breaches, interest rates, including the impact of rising rates on the Company’s securities portfolio and funding costs, commercial and residential real estate values, adverse or unexpected economic conditions, including inflation, recession, the threat of recession, and market conditions in Texas, the United States or globally, including governmental and consumer responses to those economic and market conditions, fund availability, accounting estimates and risk management processes, the transition away from the London Interbank Offered Rate (LIBOR), legislative and regulatory changes, enforcement actions and regulatory examinations and investigations, ratings or interpretations, business strategy execution, the failure to identify, attract and retain key personnel and other employees, increased or expanded competition from banks and other financial service providers in the Company’s markets, the failure to maintain adequate regulatory capital, environmental liability associated with properties related to the Company’s lending activities, and severe weather, natural disasters, acts of war, terrorism, global conflict, a material worsening of the COVID-19 pandemic or other health emergencies or other external events, climate change and related legislative and regulatory initiatives as well as the risks more fully described in the 2022 10-K, including the “Risk Factors” section in Part I, Item 1A of the 2022 10-K, Quarterly Reports on Form 10-Q, including the “Risk Factors” section in Part II, Item 1A of this report, and in its other documents and filings with the SEC.

The information contained in this report speaks only as of its date.

Except to the extent required by applicable law or regulation, we disclaim any obligation to update such factors or to publicly announce the results of any revisions to any of the forward-looking statements included herein to reflect future events or developments.

Recent Industry Developments

During the first quarter of 2023, the banking industry experienced significant volatility with multiple high-profile bank failures and industry wide concerns related to liquidity, deposit outflows, unrealized securities losses and eroding consumer confidence in the banking system.

Despite these negative industry developments, the Company’s liquidity position and balance sheet remains robust.

The Company’s total deposits decreased by 3% as compared to December 31, 2022, to $22.2 billion at March 31, 2023 as we experienced minimal deposit outflow in the first quarter.

The Company also took a number of preemptive actions, which included pro-active outreach to clients and actions to maximize its funding sources in response to these recent developments.

Furthermore, the Company’s capital remains at historically high levels with CET1 and Total Capital ratios of 12.4% and 16.9%, respectively, as of March 31, 2023.

Results of Operations

Selected income statement data and key performance indicators are presented in the table below:

Three Months Ended March 31,

(dollars in thousands except per share data) 2023 2022

Net interest income $ 235,345 $ 183,546

Provision for credit losses 28,000 (2,000)

Non-interest income 37,403 20,283

Non-interest expense 194,027 153,092

Income before income taxes 50,721 52,737

Income tax expense 12,060 13,087

Net income 38,661 39,650

Preferred stock dividends 4,313 4,313

Net income available to common stockholders $ 34,348 $ 35,337

Basic earnings per common share $ 0.71 $ 0.70

Diluted earnings per common share $ 0.70 $ 0.69

Net interest margin 3.33 % 2.23 %

Return on average assets (“ROA”) 0.53 % 0.47 %

Return on average common equity (“ROE”) 5.06 % 4.97 %

Non-interest income to average earning assets 0.54 % 0.25 %

Efficiency ratio(1) 71.1 % 75.1 %

Non-interest expense to average earning assets 2.78 % 1.86 %

(1) Non-interest expense divided by the sum of net interest income and non-interest income.

Three months ended March 31, 2023 compared to three months ended March 31, 2022

The Company reported net income of $38.7 million and net income available to common stockholders of $34.3 million for the three months ended March 31, 2023, compared to net income of $39.7 million and net income available to common stockholders of $35.3 million for the same period in 2022.

On a fully diluted basis, earnings per common share were $0.70 for the three months ended March 31, 2023, compared to $0.69 for the same period in 2022.

ROE was 5.06% and ROA was 0.53% for the three months ended March 31, 2023, compared to 4.97% and 0.47%, respectively, for the same period in 2022.

The decrease in net income for the three months ended March 31, 2023 compared to the same period in 2022 resulted primarily from increases in provision for credit losses and non-interest expense, partially offset by increases in net interest income and non-interest income.

Details of the changes in the various components of net income are discussed below.

Taxable Equivalent Net Interest Income Analysis(1)

Three Months Ended March 31, 2023 Three Months Ended March 31, 2022

(dollars in thousands) Average

Balance Revenue /

Expense Yield /

Balance Revenue /

Expense Yield /

Investment securities(2) $ 4,060,456 $ 25,292 2.31 % $ 3,669,257 $ 17,743 1.91 %

Interest bearing cash and cash equivalents 5,541,341 62,436 4.57 % 8,552,300 3,571 0.17 %

Loans held for sale 43,472 938 8.75 % 7,633 113 6.01 %

Loans held for investment, mortgage finance

3,286,804 28,528 3.52 % 5,732,901 43,466 3.07 %

Loans held for investment(3) 15,598,854 268,131 6.97 % 15,686,319 144,133 3.73 %

Allowance for credit losses on loans 252,727 — — 212,612 — —

Loans held for investment, net

18,632,931 296,659 6.46 % 21,206,608 187,599 3.59 %

Total earning assets 28,278,200 385,325 5.45 % 33,435,798 209,026 2.54 %

Cash and other assets 1,041,745 819,486

Total assets $ 29,319,945 $ 34,255,284

Liabilities and Stockholders’ Equity

Transaction deposits $ 776,500 $ 3,853 2.01 % $ 2,432,687 $ 3,962 0.66 %

Savings deposits 11,195,402 105,707 3.83 % 10,420,545 8,583 0.33 %

Time deposits 1,430,657 10,534 2.99 % 1,038,722 1,085 0.42 %

Total interest bearing deposits 13,402,559 120,094 3.63 % 13,891,954 13,630 0.40 %

Short-term borrowings 1,242,881 14,744 4.81 % 1,770,781 758 0.17 %

Long-term debt 931,796 14,983 6.52 % 929,005 10,595 4.63 %

Total interest bearing liabilities 15,577,236 149,821 3.90 % 16,591,740 24,983 0.61 %

Non-interest bearing deposits 10,253,731 14,235,749

Other liabilities 436,621 243,141

Stockholders’ equity 3,052,357 3,184,654

Total liabilities and stockholders’ equity $ 29,319,945 $ 34,255,284

Net interest income $ 235,504 $ 184,043

Net interest margin 3.33 % 2.23 %

Net interest spread 1.55 % 1.93 %

(1) Taxable equivalent rates used where applicable.

(2) Yields on investment securities are calculated using available-for-sale securities at amortized cost.

(3) Average balances include non-accrual loans.

Volume/Rate Analysis

The following table presents the changes in taxable equivalent net interest income and identifies the changes due to differences in the average volume of earning assets and interest bearing liabilities and the changes due to differences in the average interest rate on those assets and liabilities.

Three Months Ended March 31, 2023/2022

Change Change Due To(1)

(in thousands) Volume Yield/Rate(2)

Interest income

Investment securities $ 7,549 $ 1,842 $ 5,707

Interest bearing cash and cash equivalents 58,865 (1,262) 60,127

Loans held for sale 825 531 294

Loans held for investment, mortgage finance (14,938) (18,517) 3,579

Loans held for investment 123,998 (803) 124,801

Total interest income 176,299 (18,209) 194,508

Interest expense

Transaction deposits (109) (2,695) 2,586

Savings deposits 97,124 631 96,493

Time deposits 9,449 406 9,043

Short-term borrowings 13,986 (221) 14,207

Long-term debt 4,388 32 4,356

Total interest expense 124,838 (1,847) 126,685

Net interest income $ 51,461 $ (16,362) $ 67,823

(1) Yield/rate and volume variances are allocated to yield/rate.

(2) Taxable equivalent rates used where applicable assuming a 21% tax rate.

Net Interest Income

Net interest income was $235.3 million for the three months ended March 31, 2023, compared to $183.5 million for the same period in 2022.

The increase was primarily due to an increase in yields on average earnings assets, partially offset by rising funding costs and a decrease in total average earning assets.

Average earning assets decreased $5.2 billion for the three months ended March 31, 2023, compared to the same period in 2022, which included decreases of $3.0 billion in average interest-bearing cash and cash equivalents and $2.5 million in loans held for investment, mortgage finance.

Average interest-bearing liabilities decreased $1.0 billion for the three months ended March 31, 2023, compared to the same period in 2022, primarily due to decreases of $489.4 million in average interest-bearing deposits and $527.9 million in average short-term borrowings.

Average demand deposits for the three months ended March 31, 2023 decreased to $10.3 billion from $14.2 billion for the same period in 2022.

Net interest margin for the three months ended March 31, 2023 was 3.33%, compared to 2.23% for the same period of 2022.

The increase was primarily due to the effect of rising interest rates on earning asset yields and a shift in earning asset composition, partially offset by higher funding costs, also as a result of rising interest rates, compared to the same period in 2022.

The yield on total loans held for investment increased to 6.46% for the three months ended March 31, 2023, compared to 3.59% for the same period in 2022, and the yield on earning assets increased to 5.45% for the three months ended March 31, 2023, compared to 2.54% for the same period in 2022.

Total cost of deposits increased to 2.06% for the three months ended March 31, 2023 from 0.20% for the same period in 2022 and total funding costs, including all deposits, long-term debt and stockholders' equity, increased to 2.10% for the three months ended March 31, 2023, compared to 0.30% for the same period in 2022.

Non-interest Income

Three Months Ended March 31,

(in thousands) 2023 2022

Service charges on deposit accounts $ 5,022 $ 6,115

Wealth management and trust fee income 3,429 3,912

Brokered loan fees 1,895 3,970

Investment banking and trading income 18,768 4,179

Other 8,289 2,107

Total non-interest income $ 37,403 $ 20,283

Non-interest income increased by $17.1 million during the three months ended March 31, 2023 to $37.4 million, compared to $20.3 million for the same period in 2022.

The increase was primarily due to increases in investment banking and trading income and other non-interest income, partially offset by a decrease in brokered loans fees.

Non-interest Expense

Three Months Ended March 31,

(in thousands) 2023 2022

Salaries and benefits $ 128,670 $ 99,859

Occupancy expense 9,619 8,885

Marketing 9,044 4,977

Legal and professional 14,514 10,302

Communications and technology 17,523 14,700

Federal Deposit Insurance Corporation insurance assessment 2,170 3,981

Other 12,487 10,388

Total non-interest expense $ 194,027 $ 153,092

Non-interest expense for the three months ended March 31, 2023 increased $40.9 million compared to the same period in 2022, primarily due to an increase in salaries and benefits expense, resulting from an increase in headcount, as well as increases in marketing, legal and professional, and communications and technology expenses.

Analysis of Financial Condition

Loans Held for Investment

The following table summarizes the Company’s loans held for investment on a gross basis by portfolio segment.

See Note 1 - Operations and Summary of Significant Accounting Policies included in the 2022 Form 10-K for details of these portfolio segments.

(in thousands) March 31, 2023 December 31, 2022

Commercial $ 9,514,781 $ 8,902,948

Energy 1,294,671 1,159,296

Mortgage finance 4,060,570 4,090,033

Real estate 5,272,443 5,198,643

Gross loans held for investment $ 20,142,465 $ 19,350,920

Gross loans held for investment were $20.1 billion at March 31, 2023, an increase of $791.5 million from December 31, 2022.

The Company experienced broad-based loan growth across all loan categories, except for mortgage finance loans, as it has continued to execute on its long-term strategy.

Mortgage finance loans relate to the mortgage warehouse lending operations in which the Company purchases mortgage loan ownership interests that are typically sold within 10 to 20 days and represent 20% of total loans held for investment at March 31, 2023 compared to 21% at December 31, 2022.

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 tend to peak at the end of each month.

Mortgage finance loan balances have declined as compared to December 31, 2022 as interest rates have continued to rise during 2023.

The Company originates a substantial majority of all loans held for investment.

The Company also participates in syndicated loan relationships, both as a participant and as an agent.

As of March 31, 2023, the Company had $4.3 billion in syndicated loans, $1.2 billion of which the Company administered as agent.

All syndicated loans, whether the Company acts as agent or participant, are underwritten to the same standards as all other loans the Company originates.

As of March 31, 2023, $3.2 million of syndicated loans were on non-accrual.

Portfolio Concentrations

Although more than 50% of the Company’s total loan exposure is outside of Texas and more than 50% of deposits are sourced outside of Texas, Texas concentration remains significant.

As of March 31, 2023, a majority of the loans held for investment, excluding mortgage finance and other national lines of business, were to businesses with headquarters or operations in Texas.

This geographic concentration subjects the Company’s loan portfolio to the general economic conditions within this state.

The risks created by this concentration have been considered by management in the determination of the appropriateness of the allowance for credit losses.

Non-performing Assets

Non-performing assets include non-accrual loans and leases and repossessed assets.

The table below summarizes non-accrual loans by type and by type of property securing the credit.

(dollars in thousands) March 31, 2023 December 31, 2022

Non-accrual loans held for investment

Business assets $ 86,020 $ 41,448

Accounts receivable and inventory 859 1,405

Total commercial 86,940 43,417

Oil and gas properties 3,477 3,658

Total energy 3,477 3,658

Business assets — —

Commercial property 3,534 1,263

Single family residences — —

Total real estate 3,534 1,263

Total non-accrual loans held for investment $ 93,951 $ 48,338

Non-accrual loans held for sale — —

Other real estate owned (“OREO”) — —

Total non-performing assets $ 93,951 $ 48,338

Non-accrual loans held for investment to total loans held for investment 0.47 % 0.25 %

Total non-performing assets to total assets 0.33 % 0.17 %

Allowance for credit losses on loans to non-accrual loans held for investment 2.8x 5.2x

Loans held for investment past due 90 days and accruing $ 3,098 $ 131

Loans held for investment past due 90 days to total loans held for investment 0.02 % — %

Loans held for sale past due 90 days and accruing $ — $ —

Summary of Credit Loss Experience

The provision for credit losses, comprised of a provision for loans and off-balance sheet credit losses, is a charge to earnings to maintain the allowance for credit losses at a level consistent with management’s assessment of expected losses at each balance sheet date.

Below is a discussion of provision for credit losses on loans.

See Note 6 - Financial Instruments with Off-Balance Sheet Risk in the accompanying notes to the consolidated financial statements included elsewhere in this report for presentation of the activity in the allowance for credit losses for off-balance asset credit losses.

The Company recorded a $27.4 million provision for credit losses on loans for the three months ended March 31, 2023 compared to a negative provision of $1.2 million for the three months ended March 31, 2022.

The $27.4 million provision for credit losses on loans resulted from updated views on the downside risks to the economic forecast and increases in net charge-offs and criticized loans.

The Company recorded $19.9 million in net charge-offs, related primarily to a single commercial loan, during the three months ended March 31, 2023 compared to $512,000 in net recoveries during the same period in 2022.

Criticized loans totaled $561.1 million at March 31, 2023, compared to $513.2 million and $476.1 million at December 31, 2022 and March 31, 2022, respectively.

The table below presents key metrics related to the Company’s credit loss experience:

March 31, 2023 March 31, 2022

Allowance for credit losses on loans to total loans held for investment 1.30 % 0.97 %

Allowance for credit losses on loans to average total loans held for investment(1) 1.38 % 0.99 %

Total allowance for credit losses to total loans held for investment 1.41 % 1.05 %

Total provision for credit losses to average total loans held for investment(1)(2) 0.60 % (0.04) %

(1) Ratios are calculated using average balance for the three months ended March 31, 2023 and 2022, respectively.

(2) Ratios are annualized utilizing provision for credit losses for the three months ended March 31, 2023 and 2022, respectively.

The table below details net charge-offs/(recoveries) as a percentage of average total loans by loan category:

Three Months Ended March 31,

Charge-offs Net Charge-offs

Commercial $ 19,916 0.88 % $ (107) — %

Energy (6) — % (755) (0.40) %

Mortgage finance — — % — — %

Real Estate — — % 350 0.03 %

Total $ 19,910 0.43 % $ (512) (0.01) %

(1) Ratios are annualized utilizing net charge-offs for the three months ended March 31, 2023 and 2022, respectively.

Liquidity and Capital Resources

In general terms, liquidity is a measurement of the Company’s ability to meet its cash needs.

The Company’s objectives in managing its liquidity are to maintain the ability to meet loan commitments, repurchase investment securities and repay deposits and other liabilities in accordance with their terms, without an adverse impact on current or future earnings.

The Company’s liquidity strategy is guided by policies, formulated and monitored by senior management and the Asset and Liability Management Committee (“ALCO”), which take into account the demonstrated marketability of the Company’s assets, the sources and stability of its funding and the level of unfunded commitments.

The Company regularly evaluates all of its various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness.

The Company’s principal source of funding is customer deposits, supplemented by short-term borrowings, primarily from federal funds purchased and FHLB borrowings, which are generally used to fund mortgage finance assets and long-term debt.

The Company also relies on the availability of the mortgage secondary market provided by Ginnie Mae and the government sponsored entities to support the liquidity of mortgage finance assets.

The following table summarizes the Company’s interest bearing cash and cash equivalents:

(dollars in thousands) March 31, 2023 December 31, 2022

Interest bearing cash and cash equivalents $ 3,385,494 $ 4,778,623

Interest bearing cash and cash equivalents as a percent of:

Total loans held for investment 16.9 % 24.8 %

Total earning assets 12.3 % 17.4 %

Total deposits 15.3 % 20.9 %

Liquidity to support growth in loans held for investment has been fulfilled primarily through growth in customer deposits.

The Company’s goal is to obtain as much of its funding for loans held for investment and other earning assets as possible from customer deposits, which are generated principally through development of long-term customer relationships, with a significant focus on treasury management products.

As of March 31, 2023, estimated uninsured deposits represented 45% of total deposits.

In addition, the Company also has access to deposits through brokered channels.

The following table summarizes period-end total deposits:

(dollars in thousands) March 31, 2023 December 31, 2022

Balance % of Total Balance % of Total

Customer deposits $ 20,795,335 93.8 % $ 21,247,999 93.0 %

Brokered deposits 1,384,362 6.2 % 1,608,881 7.0 %

Total deposits $ 22,179,697 100.0 % $ 22,856,880 100.0 %

The Company has short-term borrowing sources available to supplement deposits and meet its funding needs.

Such borrowings are generally used to fund mortgage finance loans, due to their liquidity, short duration and interest spreads available.

These borrowing sources include federal funds purchased from downstream correspondent bank relationships (which consist of banks that are smaller than the Bank) and from upstream correspondent bank relationships (which consist of banks that are larger than the Bank), customer repurchase agreements and advances from the FHLB and the Federal Reserve.

The following table summarizes short-term borrowings, all of which mature within one year:

(in thousands) March 31, 2023 December 31, 2022

Repurchase agreements $ — $ 1,142

FHLB borrowings 2,100,000 1,200,000

Total short-term and other borrowings $ 2,100,000 $ 1,201,142

The following table summarizes the Company’s short-term borrowing capacities net of balances outstanding:

(in thousands) March 31, 2023 December 31, 2022

FHLB borrowing capacity relating to loans and pledged securities $ 3,175,863 $ 2,621,218

FHLB borrowing capacity relating to unencumbered securities 2,635,859 3,539,297

Total FHLB borrowing capacity(1) $ 5,811,722 $ 6,160,515

Unused federal funds lines available from commercial banks $ 1,471,000 $ 1,479,000

Unused Federal Reserve borrowings capacity $ 3,858,755 $ 3,574,762

Unused revolving line of credit(2) $ 100,000 $ 75,000

(1) FHLB borrowings are collateralized by a blanket floating lien on certain real estate secured loans, mortgage finance assets and certain pledged securities.

(2) Unsecured revolving, non-amortizing line of credit with maturity date of February 8, 2024.

Proceeds may be used for general corporate purposes, including funding regulatory capital infusions into the Bank.

The loan agreement contains customary financial covenants and restrictions.

No borrowings were made against this line of credit during the three months ended March 31, 2023.

The Company has long-term debt outstanding of $932.1 million as of March 31, 2023, comprised of trust preferred securities, subordinated notes and senior unsecured credit linked notes with maturity dates ranging from September 2024 to December 2036.

See Note 5 - Short-Term Borrowings and Long-Term Debt in the accompanying notes to the consolidated financial statements included elsewhere in this report for additional information.

The Company may consider raising additional capital, if needed, in public or private offerings of debt or equity securities to supplement deposits and meet its long-term funding needs.

As the Company is a holding company and is a separate operating entity from the Bank, the Company’s primary sources of liquidity are dividends received from the Bank and borrowings from outside sources.

Banking regulations may limit the amount of dividends that may be paid by the Bank.

See Note 7 - Regulatory Ratios and Capital in the accompanying notes to the consolidated financial statements included elsewhere in this report for additional information regarding dividend restrictions and “Liquidity Risks” included in Part I, Item 1A of the 2022 Form 10-K.

Periodically, based on market conditions and other factors, and subject to compliance with applicable laws and regulations and the terms of its existing indebtedness, the Company may repay, repurchase, exchange or redeem outstanding indebtedness, or otherwise enter into transactions regarding debt or capital structure.

For example, the Company periodically evaluates and may engage in liability management transactions, including repurchases or redemptions of outstanding subordinated notes, which may be funded by the issuance of, or exchanges of, newly issued unsecured borrowings to actively manage the debt maturity profile and interest cost.

Capital Resources

The Company’s equity capital averaged $3.1 billion for the three months ended March 31, 2023 compared to $3.2 billion for the same period in 2022.

The decrease relates to the shares of Company stock that have been repurchased during the previous 12 months.

The Company has not paid any cash dividends on common stock since operations commenced and has no plans to do so in the foreseeable future.

In January 2023, the Company completed the full $150,0 million of repurchases authorized by the Company’s board of directors on April 19, 2022.

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 outstanding common stock.

Any repurchases under the repurchase program have been made in accordance with applicable securities laws in open market or private transactions.

The extent to which the Company repurchases shares, and the timing of such repurchases, will be at management’s discretion and will depend upon a variety of factors, including market conditions, capital position and amount of retained earnings, regulatory requirements and other considerations.

No time limit was set for the completion of the share repurchase program, and the program may be suspended or discontinued at any time.

During the three months ended March 31, 2023, the Company repurchased 1,011,909 shares of its common stock for an aggregate purchase price of $59.7 million, at a weighted average price

of $58.98 per share.

The aggregate purchase price and weighted average price per share does not include the effect of excise tax expense incurred on net stock repurchases.

For additional information on the Company’s capital and stockholders’ equity, see Note 7 - Regulatory Ratios and Capital in the accompanying notes to the consolidated financial statements included elsewhere in this report.

Critical Accounting Estimates

SEC guidance requires disclosure of “critical accounting estimates.” The SEC defines “critical accounting estimates” as those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant.

The Company follows financial accounting and reporting policies that are in accordance with accounting principles generally accepted in the United States.

The more significant of these policies are summarized in Note 1 - Operations and Summary of Significant Accounting Policies in the notes to the consolidated financial statements included elsewhere in this report.

Not all significant accounting policies require management to make difficult, subjective or complex judgments.

However, the policy noted below could be deemed to meet the SEC’s definition of a critical accounting policy.

Allowance for Credit Losses

Management considers the policies related to the allowance for credit losses as the most critical to the financial statement presentation.

The total allowance for credit losses includes activity related to allowances calculated in accordance with Accounting Standards Codification 326, Credit Losses .

The allowance for credit losses is established through a provision for credit losses charged to current earnings.

The amount maintained in the allowance reflects management’s continuing evaluation of the credit losses expected to be recognized over the life of the loans in the Company’s portfolio.

The allowance for credit losses on loans is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans.

For purposes of determining the allowance for credit losses, the loan portfolio is segregated by product types in order to recognize differing risk profiles among categories, and then further segregated by credit grades.

Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation.

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.

Adjustments to historical loss information are made to incorporate the 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”).

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.

A reserve is recorded upon origination or purchase of a loan.

See “Summary of Credit Loss Experience” above and Note 4 - Loans and Allowance for Credit Losses on Loans in the accompanying notes to the consolidated financial statements included elsewhere in this report for further discussion of the risk factors considered by management in establishing the allowance for credit losses.

Management considers a range of macroeconomic scenarios in connection with the allowance estimation process.

Within the various economic scenarios considered as of March 31, 2023, the quantitative estimate of the allowance for credit loss would increase by approximately $143.0 million under sole consideration of the most severe downside scenario.

The quoted sensitivity calculation reflects the sensitivity of the modeled allowance estimate to macroeconomic forecast data, but is absent of qualitative overlays and other qualitative adjustments that are part of the quarterly reserving process and does not necessarily reflect the nature and extent of future changes in the allowance for reasons including increases or decreases in qualitative adjustments, changes in the risk profile and size of the portfolio, changes in the severity of the macroeconomic scenario and the range of scenarios under management consideration.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements