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Item 1. Financial Statements

2023-07-20 compared with 2023-04-20 · 247 added, 437 removed, 559 unchanged (55% of the section changed)

2 unchanged sentences

CONSOLIDATED BALANCE SHEETS - UNAUDITED

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

(in thousands except share data) June 30, 2023 December 31, 2022

Cash and due from banks $ 260,314 $ 233,637

25 unchanged sentences

Authorized shares - 10,000,000

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

Issued shares - 300,000 at June 30, 2023 and December 31, 2022

300,000 300,000

1 unchanged sentence

Authorized shares - 100,000,000

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

Issued shares - 51,087,965 and 50,867,298 at June 30, 2023 and December 31, 2022, respectively

Additional paid-in capital 1,035,063 1,025,593

Retained earnings 2,362,189 2,263,502

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

Treasury stock - 3,095,444 and 2,083,535 shares at cost at June 30, 2023 and December 31, 2022, respectively

( 175,528 ) ( 115,310 )

6 unchanged sentences

COMPREHENSIVE INCOME/(LOSS) - UNAUDITED

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

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

48 unchanged sentences

(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

Comprehensive income/(loss):

Net income — — — — — 34,159 — — — 34,159

Change in other comprehensive income/(loss), net of taxes — — — — — — — — ( 66,783 ) ( 66,783 )

Total comprehensive loss ( 32,624 )

Stock-based compensation expense recognized in earnings — — — — 5,022 — — — — 5,022

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

Issuance of stock related to stock-based awards — — 109,479 1 ( 1,270 ) — — — — ( 1,269 )

Repurchase of common stock — — — — — — ( 941,879 ) ( 50,023 ) — ( 50,023 )

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

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

Comprehensive income/(loss):

Net income — — — — — 68,651 — — — 68,651

Change in other comprehensive income/(loss), net of taxes — — — — — — — — ( 65,546 ) ( 65,546 )

Total comprehensive income 3,105

Stock-based compensation expense recognized in earnings — — — — 5,069 — — — — 5,069

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

Issuance of stock related to stock-based awards — — 140,659 2 ( 1,911 ) — — — — ( 1,909 )

Balance at June 30, 2023 300,000 $ 300,000 51,087,965 $ 511 $ 1,035,063 $ 2,362,189 ( 3,095,444 ) $ ( 175,528 ) $ ( 440,308 ) $ 3,081,927

See accompanying notes to consolidated financial statements.

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED

Preferred Stock Common Stock Additional Treasury Stock Accumulated Other

Paid-in Retained Comprehensive

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

Balance at December 31, 2021 (audited)

9 unchanged sentences

— — 201,426 2 ( 3,883 ) — — — — ( 3,881 )

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

Repurchase of common stock — — — — — — ( 941,879 ) ( 50,023 ) — ( 50,023 )

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

Balance at December 31, 2022 (audited)

10 unchanged sentences

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

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

Balance at June 30, 2023 300,000 $ 300,000 51,087,965 $ 511 $ 1,035,063 $ 2,362,189 ( 3,095,444 ) $ ( 175,528 ) $ ( 440,308 ) $ 3,081,927

See accompanying notes to consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

Three Months Ended March 31,

Six Months Ended June 30,

(in thousands) 2023 2022

6 unchanged sentences

Stock-based compensation expense 13,507 10,612

Purchases and originations of loans held for sale — ( 1,072 )

Proceeds from sales and repayments of loans held for sale 7,260 4,600

13 unchanged sentences

Purchase of premises and equipment, net ( 4,878 ) ( 9,201 )

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

Net cash used in investing activities ( 2,717,816 ) ( 1,534,670 )

Financing activities

Net decrease in deposits ( 677,183 ) ( 2,731,427 )

Net increase/(decrease) in deposits 461,360 ( 2,669,344 )

Issuance of stock related to stock-based awards ( 4,035 ) ( 3,881 )

2 unchanged sentences

Net increase (decrease) in short-term borrowings 148,858 448,704

Redemption of long-term debt ( 75,000 ) —

Net cash provided by/(used in) financing activities 462,340 ( 2,283,169 )

18 unchanged sentences

The consolidated interim financial statements are unaudited, and certain information and disclosures in the notes to consolidated unaudited financial statements that are presented in accordance with GAAP have been condensed or omitted.

In the opinion of management, the interim financial statements include all normal and recurring adjustments and the disclosures made present a fair presentation of our financial position and results of operations.

In the opinion of management, the interim financial statements include all normal and recurring adjustments and the disclosures made present a fair presentation of the Company’s financial position and results of operations.

The consolidated financial statements have been prepared in accordance with GAAP for interim financial information and the instructions to Form 10-Q adopted by the U.S.

Securities and Exchange Commission (“SEC”).

Accordingly, the financial statements and the notes to the consolidated unaudited financial statements required by GAAP for complete annual financial statements do not include all of the information and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2022, included in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”).

Accordingly, the financial statements and the notes to the consolidated unaudited financial statements required by GAAP for complete annual financial statements do not include all of the information and should be read in conjunction with the consolidated financial statements, and notes thereto, for the year ended December 31, 2022, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”).

Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

3 unchanged sentences

The allowance for credit losses, the fair value of financial instruments and the status of contingencies are particularly susceptible to significant change.

In the second quarter of 2023, changes were made to certain estimates used in the Company’s current expected credit loss model, the most significant of which are more granular estimates of historical loss rates to incorporate probability of default and loss severities and allocations of expected losses to outstanding loan balances and off-balance sheet financial instruments.

As a result of these changes, corresponding adjustments were also made to the Company’s portfolio segments to appropriately pool loans with similar risk characteristics and to the speed at which the Company reverts to historical loss rates for periods beyond which management is able to develop reasonable and supportable forecasts.

The below accounting policy from the Company’s 2022 Form 10-K has been updated to incorporate these changes.

Allowance for Credit Losses

The Company’s allowance for credit losses is determined using a current expected credit loss (“CECL”) model.

The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities.

It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor.

The following is a discussion of the allowance for credit losses on loans held for investment and off-balance sheet credit exposures.

See Note 1 - Operations and Summary of Significant Accounting Policies - Investment Securities - Debt Securities in the Company’s 2022 Form 10-K for discussion of the allowance for credit losses on available-for-sale and held-to-maturity debt securities.

The CECL methodology recognizes lifetime expected credit losses immediately when a financial asset is originated or purchased.

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

Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible.

Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

The allowance for credit losses on off-balance sheet financial instruments is recorded in other liabilities on the consolidated balance sheets,

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

Historical credit loss experience provides the basis for the estimation of expected credit losses.

Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, credit quality, or term, as well as for changes in macroeconomic conditions, such as changes in unemployment rates, gross domestic product, property values, or other relevant factors.

The allowance for credit losses is comprised of reserves measured on a collective (pool) basis when similar risk characteristics exist.

Loans that do not share risk characteristics are assigned a reserve based on an individual evaluation and are not included in the collective (pool) evaluation.

For purposes of determining the collective (pool) allowance for credit losses, the loan portfolio is segregated into pools first by portfolio segment and then by past due status or credit grade.

Each pool is assigned a loss estimate, reflecting historical loss rates that incorporate probability of default and severity of losses over the estimated remaining life of the loans.

These loss estimates are then modified to incorporate a reasonable and supportable forecast of future losses at the pool level, as well as any necessary qualitative adjustments using a Portfolio Level Qualitative Factor (“PLQF”) and/or a Portfolio Segment Level Qualitative Factor (“SLQF”).

A similar process is employed to calculate a reserve assigned to off-balance financial instruments, specifically unfunded loan commitments and letters of credit.

Modified loss estimates are assigned based on the balance of the commitments estimated to be outstanding at the time of default.

The PLQF and SLQF are utilized to address factors that are not present in historical loss rates and are otherwise unaccounted for in the quantitative process.

The PLQF is used to apply a qualitative adjustment across the entire portfolio of loans, while the SLQF is designed to apply a qualitative adjustment across a single portfolio segment.

Even though portions of the allowance may be allocated to specific loans, the entire allowance is available for any credit that, in management’s judgment, should be charged off.

The Company generally uses a two-year forecast period, based on a single forecast scenario or a blend of multiple forecast scenarios, using variables management believes are most relevant to each portfolio segment.

For periods beyond which management is able to develop reasonable and supportable forecasts, the Company reverts to the average historical loss rate, reflecting historical default probabilities and loss severities, using a reversion speed that approximates 1 to 2 years.

The forecast period and scenario(s) used are reviewed on a quarterly basis and may be adjusted based on management's view of the current economic conditions and level of predictability the forecast can provide.

Portfolio segments are used to pool loans with similar risk characteristics and align with the Company’s methodology for measuring expected credit losses.

A summary of the primary portfolio segments is as follows:

The commercial loan portfolio is comprised of lines of credit for working capital, term loans, reserve-based loans to energy exploration and production companies, and leases to finance equipment and other business assets across a variety of industries.

These loans are used for general corporate purposes including financing working capital, internal growth, and acquisitions and are generally secured by accounts receivable, inventory, oil and gas reserves, equipment and other assets of clients’ businesses.

Mortgage Finance.

Mortgage finance loans relate to mortgage warehouse lending operations in which the Company purchases mortgage loan ownership interests from unaffiliated mortgage originators that are generally held for a period of less than 30 days and more typically 10-20 days before they are sold to an approved investor.

Volumes fluctuate based on the level of market demand for the product and the number of days between purchase and sale of the loans, which can be affected by changes in overall market interest rates and housing demand and tend to peak at the end of each month.

Mortgage finance loans are consistently underwritten based on standards established by the approved investors.

Market conditions or events of default by an investor or originator could require that the Company repurchases the remaining interests in the mortgage loans and hold them beyond the expected 10-20 days.

Commercial Real Estate (“CRE”).

The CRE portfolio is comprised of construction/development financing and limited term financing provided to professional real estate developers, owners/managers of commercial real estate projects and properties, and residential builders/developers.

Collateral properties include office buildings, warehouse/distribution buildings, shopping centers, hotels/motels, senior living, apartment buildings, residential and commercial tract developments, and raw land or lots to be developed into single-family homes.

The primary source of repayment on these loans is expected to come from the sale, permanent financing or lease of the real property collateral.

The performance of these loans is impacted by fluctuations in collateral values, the ability of the borrower to obtain permanent financing, and, in the case of loans to residential builder/developers, volatility in consumer demand.

This category of loans is comprised of loans made to consumers for personal expenditures, first and second lien mortgages made for the purpose of purchasing or constructing 1-4 family residential dwellings and home equity revolving lines of credit.

The Company has several pass credit grades that are assigned to loans based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to watch credits which have all the characteristics of an acceptable credit risk but warrant more than the normal level of monitoring.

Within the criticized/classified credit grades are special mention, substandard and doubtful.

Special mention loans are those that are currently protected by the sound worth and paying capacity of the borrower, but that are potentially weak and constitute an additional credit risk.

These loans have the potential to deteriorate to a substandard grade due to the existence of financial or administrative deficiencies.

Substandard loans have a well-defined weakness or weaknesses that

jeopardizes the liquidation of the debt.

They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Some substandard loans are inadequately protected by the sound worth and paying capacity of the borrower and of the collateral pledged and may be considered impaired.

Substandard loans can be accruing or can be on non-accrual depending on the circumstances of the individual loans.

Loans classified as doubtful have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection in full highly questionable and improbable.

The possibility of loss is extremely high.

All doubtful loans are on non-accrual.

The methodology used in the estimation of the allowance, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and forecasted economic conditions.

Changes are reflected in the pool-basis allowance and in reserves assigned on an individual basis as the collectability of classified loans is evaluated with new information.

As the Company’s portfolio has matured, historical loss ratios have been closely monitored.

The review of the appropriateness of the allowance is performed by executive management and presented to the audit and risk committees of the board of directors for their review.

The committees report to the board as part of the board's quarterly review of the Company’s consolidated financial statements.

When management determines that foreclosure is probable, and for certain collateral-dependent loans where foreclosure is not considered probable, expected credit losses are based on the estimated fair value of the collateral adjusted for selling costs, when appropriate.

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

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate.

The contractual term excludes expected extensions, renewals and modifications unless either of the following applies:

management has a reasonable expectation that a loan will be restructured or the extension or renewal options are included in the borrower contract and are not unconditionally cancellable.

The Company does not measure an allowance for credit losses on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when loans are placed on non-accrual status as discussed above.

(2) Earnings Per Share

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

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

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

2 unchanged sentences

Net income available to common stockholders $ 64,339 $ 29,847 $ 98,687 $ 65,184

Denominator for basic earnings per common share—weighted average common shares 48,264,121 50,667,090

Basic earnings per common share—weighted average common shares 47,906,624 50,258,681 48,166,977 50,462,735

Effect of dilutive outstanding stock-settled awards 514,652 542,947 569,405 607,034

Denominator for dilutive earnings per common share—weighted average diluted common shares 48,880,725 51,324,027

Dilutive earnings per common share—weighted average diluted common shares 48,421,276 50,801,628 48,736,382 51,069,769

Basic earnings per common share $ 1.34 $ 0.59 $ 2.05 $ 1.29

6 unchanged sentences

Losses Estimated

March 31, 2023

June 30, 2023

Available-for-sale debt securities:

21 unchanged sentences

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

(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.

(1) Excludes accrued interest receivable of $ 9.5 million and $ 6.6 million at June 30, 2023 and December 31, 2022, respectively, related to available-for-sale debt securities and $ 1.5 million and $ 1.5 million at June 30, 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.

2 unchanged sentences

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.

The amortized cost and estimated fair value as of June 30, 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.

9 unchanged sentences

(in thousands) Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss

March 31, 2023

June 30, 2023

Treasury securities $ 259,155 $ ( 9,662 ) $ 361,173 $ ( 16,821 ) $ 620,328 $ ( 26,483 )

9 unchanged sentences

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

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

At June 30, 2023, the Company had 112 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.

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.

At June 30, 2023 and December 31, 2022, no allowance for credit losses was established for available-for-sale or held-to-maturity debt securities.

At June 30, 2023, debt securities with carrying values of approximately $ 1.6 million were pledged to secure certain customer deposits at June 30, 2023.

At December 31, 2022, debt securities with carrying values of approximately $ 16.1 million and $ 1.4 million were pledged to secure certain customer repurchase agreements and deposits, respectively.

Equity Securities

1 unchanged sentence

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:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(in thousands) 2023 2022 2023 2022

3 unchanged sentences

(4) Loans and Allowance for Credit Losses on Loans

As discussed in Note 1 - Operations and Summary of Significant Accounting Policies, in the second quarter of 2023, changes were made to certain estimates used in the Company’s current expected credit loss model which resulted in adjustments being made to the Company’s portfolio segments.

As a result, certain prior period balances below have been reclassified to conform to the current period presentation of portfolio segments.

Loans are summarized by portfolio segment as follows:

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

(in thousands) June 30, 2023 December 31, 2022

Loans held for investment(1):

Commercial $ 10,459,640 $ 9,832,676

Energy 1,294,671 1,159,296

Mortgage finance 5,098,812 4,090,033

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

Commercial real estate 5,308,997 4,875,363

Consumer 531,635 552,848

Gross loans held for investment 21,399,084 19,350,920

6 unchanged sentences

Total loans held for sale $ 29,097 $ 36,357

(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.

(1) Excludes accrued interest receivable of $ 105.7 million and $ 100.4 million at June 30, 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

March 31, 2023

(in thousands) 2023 2022 2021 2020 2019 2018

and prior Revolving lines of credit Revolving lines of credit converted to term loans Total

June 30, 2023

(1-7) Pass $ 1,046,010 $ 1,914,964 $ 414,088 $ 173,152 $ 214,029 $ 365,905 $ 5,904,419 $ 18,637 $ 10,051,204

3 unchanged sentences

Total commercial $ 1,061,321 $ 2,095,226 $ 474,793 $ 175,936 $ 238,121 $ 399,354 $ 5,992,408 $ 22,481 $ 10,459,640

(1-7) Pass $ 55,167 $ 114,845 $ — $ — $ — $ — $ 1,114,145 $ — $ 1,284,157

(8) Special mention — — — — — — — — —

(9) Substandard - accruing — — — — — — 7,037 — 7,037

(9+) Non-accrual — — — — — — — 3,477 3,477

Total energy $ 55,167 $ 114,845 $ — $ — $ — $ — $ 1,121,182 $ 3,477 $ 1,294,671

Mortgage finance

4 unchanged sentences

Total mortgage finance $ 115,533 $ 54,104 $ 686,673 $ 341,626 $ 358,533 $ 3,542,343 $ — $ — $ 5,098,812

(1-7) Pass $ 156,825 $ 1,199,143 $ 807,286 $ 492,723 $ 369,393 $ 450,333 $ 97,541 $ 10,924 $ 3,584,168

(8) Special mention — 2,650 5,847 29,802 — 24,926 — — 63,225

(9) Substandard - accruing — — 17,850 — — 29,860 — — 47,710

(9+) Non-accrual — — — — — 179 — — 179

(1-7) Pass 17,975 88,017 52,541 10,180 1,636 4,966 281,514 — 456,829

(8) Special mention — 8,352 — — — — — — 8,352

(9) Substandard - accruing — — — — — — — — —

(9+) Non-accrual — — — — — — — — —

Commercial real estate

(1-7) Pass $ 398,476 $ 1,533,734 $ 1,056,719 $ 625,786 $ 418,687 $ 634,714 $ 408,959 $ 23,700 $ 5,100,775

2 unchanged sentences

(9+) Non-accrual — — — — — 175 — — 175

Secured by 1-4 family

Total commercial real estate $ 399,524 $ 1,589,409 $ 1,096,898 $ 649,833 $ 430,703 $ 704,557 $ 408,959 $ 29,114 $ 5,308,997

(1-7) Pass $ 19,368 $ 58,901 $ 89,294 $ 55,186 $ 14,480 $ 110,951 $ 180,651 $ 107 $ 528,938

2 unchanged sentences

(9+) Non-accrual — — — — — 1,000 — — 1,000

Total real estate $ 191,322 $ 1,545,820 $ 1,118,551 $ 687,243 $ 450,729 $ 819,414 $ 422,975 $ 36,389 $ 5,272,443

Total consumer $ 19,368 $ 58,901 $ 89,294 $ 55,186 $ 14,480 $ 113,327 $ 180,651 $ 428 $ 531,635

Total $ 1,595,746 $ 3,797,640 $ 2,347,658 $ 1,222,581 $ 1,041,837 $ 4,759,581 $ 6,582,018 $ 52,023 $ 21,399,084

Gross charge-offs $ — $ 90 $ 19,828 $ — $ 8,243 $ 552 $ — $ 871 $ 29,584

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

(in thousands) 2022 2021 2020 2019 2018 2017

and prior Revolving lines of credit Revolving lines of credit converted to term loans Total

December 31, 2022

4 unchanged sentences

Total commercial $ 2,051,137 $ 757,872 $ 245,404 $ 324,837 $ 355,256 $ 241,653 $ 5,833,334 $ 23,183 $ 9,832,676

(1-7) Pass $ 124,691 $ 12,517 $ — $ — $ — $ 3,317 $ 1,007,776 $ — $ 1,148,301

(8) Special mention — — — — — — — — —

(9) Substandard - accruing — — — — — — 7,337 — 7,337

(9+) Non-accrual — — — — — — 3,658 — 3,658

Total energy $ 124,691 $ 12,517 $ — $ — $ — $ 3,317 $ 1,018,771 $ — $ 1,159,296

Mortgage finance

4 unchanged sentences

Total mortgage finance $ 30,485 $ 482,477 $ 197,045 $ 267,758 $ 464,753 $ 2,647,515 $ — $ — $ 4,090,033

(1-7) Pass $ 1,085,254 $ 756,180 $ 563,341 $ 447,346 $ 183,634 $ 284,698 $ 97,337 $ 11,944 $ 3,429,734

(8) Special mention 2,765 6,524 37,791 5,295 19,350 3,652 — — 75,377

(9) Substandard - accruing — 17,850 — — 11,458 17,698 — — 47,006

(9+) Non-accrual — — — — — 182 — — 182

(1-7) Pass 94,066 70,951 12,161 6,106 2,655 — 326,164 — 512,103

(8) Special mention — — — — — — — — —

(9) Substandard - accruing 7,840 — — — — — — — 7,840

(9+) Non-accrual — — — — — — — — —

Commercial real estate

(1-7) Pass $ 1,362,160 $ 958,669 $ 670,113 $ 520,970 $ 263,240 $ 448,536 $ 465,834 $ 43,237 $ 4,732,759

2 unchanged sentences

(9+) Non-accrual — — 1,081 — — 182 — — 1,263

Secured by 1-4 family

Total commercial real estate $ 1,373,494 $ 983,043 $ 717,706 $ 526,512 $ 294,048 $ 471,489 $ 465,834 $ 43,237 $ 4,875,363

(1-7) Pass $ 69,320 $ 95,470 $ 57,060 $ 24,773 $ 20,055 $ 89,919 $ 196,088 $ 130 $ 552,815

2 unchanged sentences

(9+) Non-accrual — — — 33 — — — — 33

Total real estate $ 1,437,544 $ 1,073,010 $ 770,709 $ 550,826 $ 311,001 $ 541,571 $ 470,745 $ 43,237 $ 5,198,643

Total Consumer $ 69,320 $ 95,470 $ 57,060 $ 24,806 $ 20,055 $ 89,919 $ 196,088 $ 130 $ 552,848

Total $ 3,524,436 $ 2,318,862 $ 1,217,215 $ 1,143,913 $ 1,134,112 $ 3,450,576 $ 6,495,256 $ 66,550 $ 19,350,920

The following table details activity in the allowance for credit losses on loans.

Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

(in thousands) Commercial Energy Mortgage

Three Months Ended March 31, 2023

The changes made to the Company’s current expected credit loss model, as discussed above and in Note 1 - Operations and Summary of Significant Accounting Policies, resulted in a reallocation of the allowance for credit losses between loan portfolio segments and allowance balances allocated to off-balance sheet financial instruments, the results of which are included in the table below.

The changes made result in a higher allocation of losses to off-balance sheet financial instruments.

See Note 6 - Financial Instruments with Off-Balance Sheet Risk for information regarding the allowance for credit losses on off-balance sheet financial instruments.

Allocation of a portion of the allowance to one category does not preclude its availability to absorb losses in other categories.

(in thousands) Commercial Mortgage

Finance Commercial Real Estate Consumer Total

Six Months Ended June 30, 2023

Beginning balance $ 185,303 $ 10,745 $ 54,268 $ 3,153 $ 253,469

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Ending balance $ 175,347 $ 7,085 $ 52,538 $ 2,373 $ 237,343

Three Months Ended March 31, 2022

Six Months Ended June 30, 2022

Beginning balance $ 154,360 $ 6,083 $ 48,247 $ 3,176 $ 211,866

4 unchanged sentences

Ending balance $ 142,426 $ 19,058 $ 64,717 $ 2,812 $ 229,013

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.

The Company recorded a $ 12.0 million provision for credit losses on loans for the six months ended June 30, 2023, compared to a $ 19.3 million provision for the same period of 2022.

The $ 12.0 million provision for credit losses on loans resulted primarily from an increase in non-accrual loans and growth in loans held for investment during the six months ended June 30, 2023.

Net charge-offs of $ 28.1 million were recorded during the six months ended June 30, 2023, compared to net charge-offs of $ 2.1 million during the same period of 2022.

Criticized loans totaled $ 619.4 million at June 30, 2023, $ 513.2 million at December 31, 2022 and $ 603.5 million at June 30, 2022.

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.

At June 30, 2023, the Company had $ 40.4 million in collateral-dependent commercial loans, collateralized by business assets.

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

3 unchanged sentences

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

March 31, 2023

June 30, 2023

Commercial $ 2,273 $ 686 $ 64 $ 3,023 $ 79,864 $ 10,376,753 $ 10,459,640 $ 23,385

Energy — — — — 3,477 1,291,194 1,294,671 3,477

Mortgage finance — — — — — 5,098,812 5,098,812 —

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 —

Commercial real estate 524 — — 524 175 5,308,298 5,308,997 —

Consumer 11 — — 11 1,000 530,624 531,635 1,000

Total $ 2,808 $ 686 $ 64 $ 3,558 $ 81,039 $ 21,314,487 $ 21,399,084 $ 24,385

(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.

(1) As of June 30, 2023, $ 1.4 million of non-accrual loans were earning interest income on a cash basis compared to $ 2.2 million as of December 31, 2022.

Additionally, $ 37,000 of interest income was recognized on non-accrual loans for the six months ended June 30, 2023 compared to none for the same period in 2022.

Accrued interest of $ 1.6 million and $ 4,000 was reversed during the six months ended June 30, 2023 and June 30, 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:

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

The table below details gross loans held for investment as of June 30, 2023 made to borrowers experiencing financial difficulty that were modified during the three and six months ended June 30, 2023:

(in thousands) Payment

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Extension Total Percentage of

Three Months Ended June 30, 2023

Commercial $ — $ 261 $ 3,378 $ — $ 3,639 0.02 %

Energy — — 3,477 — 3,477 0.02 %

Total $ — $ 261 $ 3,378 $ — $ 3,639 0.02 %

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

Six Months Ended June 30, 2023

Commercial $ 31,356 $ 1,144 $ 6,562 $ 14,532 $ 53,594 0.25 %

Total $ 31,356 $ 1,144 $ 6,562 $ 14,532 $ 53,594 0.25 %

The following table summarizes the financial impacts of loan modifications made to borrowers experiencing financial difficulty during the three and six months ended June 30, 2023:

Interest Rate

2 unchanged sentences

(in thousands)

Three Months Ended June 30, 2023

Commercial — % 4 to 12

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:

Six Months Ended June 30, 2023

Commercial 0.70 % 4 to 36

As of June 30, 2023, commercial loans totaling $ 161,000 experienced a default subsequent to being granted a term extension modification in the prior twelve months.

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 as of June 30, 2023 made to borrowers experiencing financial difficulty that were modified on or after January 1, 2023, the date the Company adopted ASU 2022-02:

(in thousands) 30-89 Days

1 unchanged sentence

Past Due Non-Accrual Current Total

March 31, 2023

June 30, 2023

Commercial $ — $ — $ 6,723 $ 46,871 $ 53,594

Energy — — 3,477 — 3,477

Total $ — $ — $ 6,723 $ 46,871 $ 53,594

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.

The Company did not have any loans that were restructured during the six months ended June 30, 2022.

As of December 31, 2022 and June 30, 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 June 30, 2022, $ 531,000 and $ 17.3 million, respectively, met the criteria for restructured.

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

1 unchanged sentence

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

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

(in thousands) June 30, 2023 December 31, 2022

Customer repurchase agreements $ — $ 1,142

2 unchanged sentences

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

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

(in thousands) June 30, 2023 December 31, 2022

Bank-issued floating rate senior unsecured credit-linked notes due 2024 $ 198,496 $ 272,492

5 unchanged sentences

Total long-term debt $ 857,795 $ 931,442

In the second quarter of 2023, the Company partially paid down $ 75.0 million of the senior unsecured credit-linked notes in accordance with the term of the notes.

(6) Financial Instruments with Off-Balance Sheet Risk

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

Three Months Ended March 31,

(in thousands) 2023 2022

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

The changes made to the Company’s current expected credit loss model, as discussed in Note 1 - Operations and Summary of Significant Accounting Policies, resulted in a reallocation of the allowance for credit losses between loan portfolio segments and allowance balances allocated to off-balance sheet financial instruments, the results of which are included in the table below.

The changes made result in a higher allocation of losses to off-balance sheet financial instruments.

See Note 4 - Loans and Allowance for Credit Losses on Loans for information regarding the allowance for credit losses on loans.

(in thousands) Commercial Mortgage

Finance Commercial

Real Estate Consumer Total

Six Months Ended June 30, 2023

Beginning balance $ 16,550 $ — $ 5,222 $ 21 $ 21,793

Provision for off-balance sheet credit losses 17,187 — 5,693 97 22,977

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

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

Ending balance $ 33,737 $ — $ 10,915 $ 118 $ 44,770

Six Months Ended June 30, 2022

Beginning balance $ 15,107 $ — $ 2,136 $ 22 $ 17,265

Provision for off-balance sheet credit losses ( 1,656 ) — 2,376 ( 4 ) 716

Ending balance $ 13,451 $ — $ 4,512 $ 18 $ 17,981

(in thousands) June 30, 2023 December 31, 2022

Commitments to extend credit - period end balance $ 9,973,209 $ 9,673,082

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A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers.

No dividends were declared or paid on the Company’s common stock during 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.

No dividends were declared or paid on the Company’s common stock during the six months ended June 30, 2023 or 2022.

In January 2023, the Company completed the full $ 150.0 million of share 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.

During the six months ended June 30, 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.

4 unchanged sentences

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of CET1, Tier 1 and total capital to risk-weighted assets, and of Tier 1 capital to average assets, each as defined in the regulations.

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

Management believes, as of June 30, 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 Bank’s capital ratios exceeded the regulatory definition of well capitalized as of March 31, 2023 and December 31, 2022.

As shown in the table below, the Company’s and Bank’s capital ratios exceeded the regulatory definition of well capitalized as of June 30, 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.

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.

6 unchanged sentences

(dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio

March 31, 2023

June 30, 2023

Company $ 3,225,555 12.18 % $ 1,854,443 7.00 % N/A N/A

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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.

however, the Federal Reserve reduced the reserve requirement ratio to zero effective March 26, 2020, therefore the total requirement was zero at both June 30, 2023 and December 31, 2022.

(8) Stock-Based Compensation

We have long-term incentive plans under which stock-based compensation awards are granted to employees and directors by the Company’s board of directors or its designated committee.

The Company has long-term incentive plans under which stock-based compensation awards are granted to employees and directors by the Company’s board of directors or its designated committee.

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

The table below summarizes our stock-based compensation expense:

Three Months Ended March 31,

The table below summarizes the Company’s stock-based compensation expense:

Three Months Ended June 30, Six Months Ended June 30,

(in thousands) 2023 2022 2023 2022

3 unchanged sentences

Total $ 5,069 $ 5,024 $ 13,507 $ 10,612

(in thousands except period data) March 31, 2023

(in thousands except period data) June 30, 2023

Unrecognized compensation expense related to unvested stock-settled awards $ 40,155

2 unchanged sentences

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.

See Note 1 - Operations and Summary of Significant Accounting Policies in the Company’s 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:

1 unchanged sentence

(in thousands) Level 1 Level 2 Level 3

March 31, 2023

June 30, 2023

Available-for-sale debt securities:(1)

28 unchanged sentences

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

Three Months Ended March 31, 2023

Three Months Ended June 30, 2023

Available-for-sale debt securities:(1)

CRT securities $ 11,928 $ — $ — $ — $ ( 172 ) $ 11,756

Three Months Ended March 31, 2022

Three Months Ended June 30, 2022

Available-for-sale debt securities:(1)

2 unchanged sentences

Loans held for sale(2) 8,085 — ( 4,029 ) — 210 4,266

Six Months Ended June 30, 2023

Available-for-sale debt securities:(1)

CRT securities $ 11,861 $ — $ — $ — $ ( 105 ) $ 11,756

Six Months Ended June 30, 2022

Available-for-sale debt securities:(1)

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

CRT securities 11,846 — — — ( 176 ) 11,670

Loans held for sale(2) 7,658 1,327 ( 4,600 ) — ( 119 ) 4,266

(1) Unrealized gains/(losses) on available-for-sale debt securities are recorded in AOCI .

3 unchanged sentences

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 June 30, 2023, the discount rates utilized ranged from 6.25 % to 11.37 % and the weighted-average life ranged from 4.83 years to 8.17 years.

On a combined amortized cost weighted-average basis a discount rate of 8.01 % and a weighted-average life of 5.98 years were utilized to determine the fair value of these securities at June 30, 2023.

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

1 unchanged sentence

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.

The $ 26.0 million fair value of loans held for investment at June 30, 2023 reported above includes impaired loans with a carrying value of $ 40.4 million that were reduced by specific allowance allocations totaling $ 14.3 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.

3 unchanged sentences

(in thousands) Total Level 1 Level 2 Level 3

March 31, 2023

June 30, 2023

Financial assets:

27 unchanged sentences

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

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Estimated Fair Value Estimated Fair Value

20 unchanged sentences

In some cases, collateral may be required from the counterparties involved if the net value of the derivative instruments exceeds a nominal amount.

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

The Company’s credit exposure associated with these instruments, net of any collateral pledged, was approximately $ 10.8 million at June 30, 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 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.

At June 30, 2023, the Company had $ 156.9 million in cash collateral pledged to counterparties included in interest bearing cash and cash equivalents on the consolidated balance sheet and $ 74.5 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.

1 unchanged sentence

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.

The Company is party to 17 risk participation agreements where it acts as a participant bank with a notional amount of $ 328.2 million at June 30, 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 $ 9.0 million at June 30, 2023 and $ 8.9 million at December 31, 2022.

The fair value of these exposures was insignificant to the consolidated financial statements at both June 30, 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.

The Company is party to 12 risk participation agreements where the Company acts as the lead bank having a notional amount of $ 166.5 million at June 30, 2023, compared to 18 agreements having a notional amount of $ 222.0 million at December 31, 2022.

Derivatives Designated as Cash Flow Hedges

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

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.

During the six months ended June 30, 2023, the Company recorded $ 45.5 million in unrealized losses to adjust its cash flow hedges to fair value, which was recorded net of tax to AOCI, and reclassified $ 26.0 million from AOCI into interest income on loans.

Based on current market conditions, the Company estimates that during the next 12 months, an additional $ 68.9 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.

As of June 30, 2023, the maximum length of time over which forecasted transactions are hedged is 3.25 years.

(11) Accumulated Other Comprehensive Income

1 unchanged sentence

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

Three Months Ended March 31, 2023

Three Months Ended June 30, 2023

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

5 unchanged sentences

Ending balance $ ( 81,785 ) $ ( 313,196 ) $ ( 45,327 ) $ ( 440,308 )

Three Months Ended March 31, 2022

Three Months Ended June 30, 2022

Beginning balance $ — $ ( 151,564 ) $ ( 53,861 ) $ ( 205,425 )

5 unchanged sentences

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

Six Months Ended June 30, 2023

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

Change in unrealized gain/(loss) ( 45,529 ) ( 11,249 ) — ( 56,778 )

Amounts reclassified into net income 26,048 — 3,687 29,735

Total other comprehensive income/(loss) ( 19,481 ) ( 11,249 ) 3,687 ( 27,043 )

Income tax expense/(benefit) ( 4,090 ) ( 2,362 ) 774 ( 5,678 )

Total other comprehensive income/(loss), net of tax ( 15,391 ) ( 8,887 ) 2,913 ( 21,365 )

Ending balance $ ( 81,785 ) $ ( 313,196 ) $ ( 45,327 ) $ ( 440,308 )

Six Months Ended June 30, 2022

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

Change in unrealized gain/(loss) 304 ( 218,196 ) ( 69,165 ) ( 287,057 )

Amounts reclassified into net income ( 704 ) — 3,593 2,889

Total other comprehensive income/(loss) ( 400 ) ( 218,196 ) ( 65,572 ) ( 284,168 )

Income tax expense/(benefit) ( 84 ) ( 45,821 ) ( 13,770 ) ( 59,675 )

Total other comprehensive income/(loss), net of tax ( 316 ) ( 172,375 ) ( 51,802 ) ( 224,493 )

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

(12) New Accounting Standards

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.

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.

There were no accounting standards or updates issued during the second quarter of 2023.

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