TCBI 10-Q Quarterly Report March 31, 2022

TEXAS CAPITAL BANCSHARES INC/TX

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tcbi-20220331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


☒			Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended March 31, 2022


☐			Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from to

Commission file number 001-34657

TEXAS CAPITAL BANCSHARES, INC.

(Exact name of registrant as specified in its charter)


Delaware						75-2679109
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)

2000 McKinney Avenue

Suite 700

Dallas

USA

75201

(Address of principal executive offices)

(Zip Code)

(214) 932-6600

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

________________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

TCBI

Nasdaq Stock Market

5.75% Non-Cumulative Perpetual Preferred Stock Series B, par value $0.01 per share

TCBIO

Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

Accelerated Filer

☐

Non-Accelerated Filer

☐

Smaller Reporting Company

☐

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý

On April 20, 2022, the number of shares set forth below was outstanding with respect to each of the issuer's classes of common stock:

Common Stock, par value $0.01 per share 50,723,232

Texas Capital Bancshares, Inc.

Form 10-Q

Quarter Ended March 31, 2022

Index


Part I.—Financial Information
	Item 1.	Financial Statements - Unaudited	3
		Consolidated Balance Sheets	3
		Consolidated Statements of Income and Other Comprehensive Income/(Loss)	4
		Consolidated Statements of Stockholders' Equity	5
		Consolidated Statements of Cash Flows	6
		Notes to Consolidated Financial Statements	7
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
	Item 4.	Controls and Procedures	33

Part II.—Other Information
	Item 1.	Legal Proceedings	33
	Item 1A.	Risk Factors	33
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
	Item 6.	Exhibits	34

Signatures			35

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS - UNAUDITED


(in thousands except share data)	March 31, 2022		December 31, 2021
	(Unaudited)
Assets
Cash and due from banks	$	234,853	$	180,663
Interest-bearing cash and cash equivalents	5,136,680		7,765,996

Available-for-sale debt securities	2,591,218		3,538,201
Held-to-maturity debt securities	1,009,972		—
Equity securities	40,825		45,607
Investment securities	3,642,015		3,583,808
Loans held for sale	8,085		8,123

Loans held for investment, mortgage finance	5,827,965		7,475,497
Loans held for investment	15,849,434		15,331,457
Less: Allowance for credit losses on loans	211,151		211,866
Loans held for investment, net	21,466,248		22,595,088


Premises and equipment, net	24,181		20,901
Accrued interest receivable and other assets	556,154		559,897
Goodwill and intangible assets, net	17,161		17,262
Total assets	$	31,085,377	$	34,731,738

Liabilities and Stockholders’ Equity
Liabilities:
Non-interest bearing	$	13,434,723	$	13,390,370
Interest bearing	11,943,215		14,718,995

Total deposits	25,377,938		28,109,365
Accrued interest payable	8,560		7,699

Other liabilities	252,394		273,488
Short-term borrowings	1,427,033		2,202,832
Long-term debt	929,414		928,738


Total liabilities	27,995,339		31,522,122

Stockholders’ equity:
Preferred stock, $0.01 par value, $1,000 liquidation value:
Authorized shares - 10,000,000
Issued shares - 300,000 at March 31, 2022 and December 31, 2021	300,000		300,000
Common stock, $0.01 par value:
Authorized shares - 100,000,000
Issued shares - 50,710,858 and 50,618,911 at March 31, 2022 and December 31, 2021, respectively	507		506
Additional paid-in capital	1,011,353		1,008,559
Retained earnings	1,983,611		1,948,274
Treasury stock - 417 shares at cost at March 31, 2022 and December 31, 2021	(8)		(8)
Accumulated other comprehensive income/(loss), net of taxes	(205,425)		(47,715)
Total stockholders’ equity	3,090,038		3,209,616
Total liabilities and stockholders’ equity	$	31,085,377	$	34,731,738

See accompanying notes to consolidated financial statements.

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND OTHER

COMPREHENSIVE INCOME/(LOSS) - UNAUDITED


	Three months ended March 31,
(in thousands except per share data)		2022		2021
Interest income
Interest and fees on loans		$	187,657	$	210,331
Investment securities		17,302		9,887

Interest-bearing cash and cash equivalents		3,571		2,933
Total interest income		208,530		223,151
Interest expense
Deposits		13,630		20,004


Short-term borrowings		758		2,592
Long-term debt		10,595		5,743


Total interest expense		24,983		28,339
Net interest income		183,547		194,812
Provision for credit losses		(2,000)		(6,000)
Net interest income after provision for credit losses		185,547		200,812
Non-interest income
Service charges on deposit accounts		6,022		4,716
Wealth management and trust fee income		3,912		2,855

Brokered loan fees		3,970		9,311
Servicing income		237		9,009
Investment banking and trading income		4,179		5,787
Net gain/(loss) on sale of loans held for sale		—		5,572
Other		1,962		7,103
Total non-interest income		20,282		44,353
Non-interest expense
Salaries and benefits		100,098		87,522
Occupancy expense		8,885		8,274
Marketing		4,977		1,697
Legal and professional		10,302		8,277
Communications and technology		14,700		15,969
Federal Deposit Insurance Corporation (“FDIC”) insurance assessment		3,981		6,613
Servicing-related expenses		—		12,989


Other		10,149		8,975
Total non-interest expense		153,092		150,316
Income before income taxes		52,737		94,849
Income tax expense		13,087		22,911
Net income		39,650		71,938
Preferred stock dividends		4,313		3,779
Net income available to common stockholders		$	35,337	$	68,159
Other comprehensive income/(loss):
Change in unrealized gain/(loss) on available-for-sale debt securities, before tax		$	(199,633)	$	(91,407)
Income tax benefit		(41,923)		(19,196)
Other comprehensive loss, net of tax		(157,710)		(72,211)
Comprehensive loss		$	(118,060)	$	(273)
Basic earnings per common share		$	0.70	$	1.35
Diluted earnings per common share		$	0.69	$	1.33

See accompanying notes to consolidated financial statements.

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED


	Preferred Stock			Common Stock			Additional				Treasury Stock			Accumulated Other
							Paid-in		Retained					Comprehensive
(in thousands except share data)	Shares	Amount		Shares	Amount		Capital		Earnings		Shares	Amount		Income/(Loss)		Total
Balance at December 31, 2020 (audited)	6,000,000	$	150,000	50,470,867	$	504	$	991,898	$	1,713,056	(417)	$	(8)	$	15,774	$	2,871,224

Comprehensive income/(loss):
Net income	—	—		—	—		—		71,938		—	—		—		71,938
Change in unrealized gain/(loss) on available-for-sale debt securities, net of taxes	—	—		—	—		—		—		—	—		(72,211)		(72,211)
Total comprehensive loss																(273)

Stock-based compensation expense recognized in earnings	—	—		—	—		5,461		—		—	—		—		5,461
Issuance of preferred stock	300,000	300,000		—	—		(10,277)		—		—	—		—		289,723
Preferred stock dividend	—	—		—	—		—		(3,779)		—	—		—		(3,779)
Issuance of stock related to stock-based awards	—	—		87,317	1		(2,875)		—		—	—		—		(2,874)


Balance at March 31, 2021	6,300,000	$	450,000	50,558,184	$	505	$	984,207	$	1,781,215	(417)	$	(8)	$	(56,437)	$	3,159,482

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

Comprehensive income/(loss):
Net income	—	—		—	—		—		39,650		—	—		—		39,650
Change in unrealized gain/(loss) on available-for-sale debt securities, net of taxes	—	—		—	—		—		—		—	—		(157,710)		(157,710)
Total comprehensive loss																(118,060)

Stock-based compensation expense recognized in earnings	—	—		—	—		5,407		—		—	—		—		5,407

Preferred stock dividend	—	—		—	—		—		(4,313)		—	—		—		(4,313)
Issuance of stock related to stock-based awards	—	—		91,947	1		(2,613)		—		—	—		—		(2,612)



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

See accompanying notes to consolidated financial statements.

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED


	Three months ended March 31,
(in thousands)	2022		2021
Operating activities
Net income	$	39,650	$	71,938
Adjustments to reconcile net income to net cash provided by operating activities:
Provision/(benefit) for credit losses	(2,000)		(6,000)

Depreciation and amortization expense	10,604		26,067
Net (gain)/loss on sale of loans held for sale	—		(5,572)
Decrease in valuation allowance on mortgage servicing rights	—		(16,448)


Stock-based compensation expense	5,588		6,368

Purchases and originations of loans held for sale	—		(1,133,239)
Proceeds from sales and repayments of loans held for sale	571		1,233,725



Changes in operating assets and liabilities:
Accrued interest receivable and other assets	43,200		48,927
Accrued interest payable and other liabilities	(24,691)		(27,335)
Net cash provided by operating activities	72,922		198,431
Investing activities
Purchases of available-for-sale debt securities	(376,415)		(460,793)
Proceeds from maturities, redemptions and pay-downs of available-for-sale debt securities	104,338		118,316

Proceeds from maturities, redemptions and pay-downs of held-to-maturity debt securities	9,882		—
Sales/(purchases) of equity securities, net	940		(588)
Originations of loans held for investment, mortgage finance	(26,902,960)		(48,097,222)
Proceeds from pay-offs of loans held for investment, mortgage finance	28,550,492		48,167,550

Net (increase)/decrease in loans held for investment, excluding mortgage finance	(517,465)		(54,141)
Purchases of premises and equipment, net	(2,709)		(924)



Net cash provided by/(used in) investing activities	866,103		(327,802)
Financing activities
Net increase/(decrease) in deposits	(2,731,427)		2,395,381
Issuance of stock related to stock-based awards	(2,612)		(2,874)

Net proceeds from issuance of preferred stock	—		289,723

Preferred stock dividends paid	(4,313)		(3,779)
Net decrease in short-term borrowings	(775,799)		(596,164)


Net proceeds from issuance of long-term debt	—		268,815


Net cash provided by/(used in) financing activities	(3,514,151)		2,351,102
Net increase/(decrease) in cash and cash equivalents	(2,575,126)		2,221,731
Cash and cash equivalents at beginning of period	7,946,659		9,206,380
Cash and cash equivalents at end of period	$	5,371,533	$	11,428,111
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	24,122	$	33,860
Cash paid during the period for income taxes	302		440
Transfers of debt securities from available-for-sale to held-to-maturity	1,019,365		—

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

(1) Operations and Summary of Significant Accounting Policies

Organization and Nature of Business

Texas Capital Bancshares, Inc. (“we,” “us”, “TCBI” or the “Company”), a Delaware corporation, was incorporated in November 1996 and commenced banking operations in December 1998. The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiary, Texas Capital Bank (the “Bank”).

We serve the needs of commercial businesses and professionals and entrepreneurs located in Texas as well as operate several lines of business serving a regional or national clientele of commercial borrowers. We are primarily a secured lender, with the majority of our loans held for investment, excluding mortgage finance loans and other national lines of business, being made to businesses headquartered or with operations in Texas. Our national lines of business provide specialized lending products to businesses throughout the United States.

Basis of Presentation

Our accounting and reporting policies conform to accounting principles generally accepted in the United States (“GAAP”) and to generally accepted practices within the banking industry. Certain prior period balances have been reclassified to conform to the current period presentation.

The consolidated interim financial statements are unaudited and certain information and disclosures in the notes to consolidated unaudited financial statements that are presented in accordance with GAAP have been condensed or omitted. In the opinion of management, the interim financial statements include all normal and recurring adjustments and the disclosures made are adequate to make the interim financial information not misleading. The consolidated financial statements have been prepared in accordance with GAAP for interim financial information and the instructions to Form 10-Q adopted by the U.S. Securities and Exchange Commission (“SEC”). Accordingly, the financial statements do not include all of the information and notes to the consolidated unaudited financial statements required by GAAP for complete annual financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2021, included in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for credit losses, the fair value of financial instruments and the status of contingencies are particularly susceptible to significant change.

(2) Earnings Per Share

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


	Three months ended March 31,
(in thousands except share and per share data)		2022		2021
Numerator:
Net income		$	39,650	$	71,938
Preferred stock dividends		4,313		3,779
Net income available to common stockholders		$	35,337	$	68,159
Denominator:
Denominator for basic earnings per common share—weighted average common shares		50,667,090		50,513,277
Effect of dilutive outstanding stock-settled awards		656,937		556,234

Denominator for dilutive earnings per common share—weighted average diluted common shares		51,324,027		51,069,511

Basic earnings per common share		$	0.70	$	1.35
Diluted earnings per common share		$	0.69	$	1.33

Anti-dilutive outstanding stock-settled awards		229,488		80,263

(3) Investment Securities

The following is a summary of our investment securities:


(in thousands)	Amortized Cost(1)		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
March 31, 2022
Available-for-sale debt securities:
U.S. Treasury securities	$	376,569	$	—	$	(8,715)	$	367,854
U.S. government agency securities	125,000		—		(11,484)		113,516
Residential mortgage-backed securities	2,099,900		46		(167,844)		1,932,102

Tax-exempt asset-backed securities	166,889		926		(1,970)		165,845
Credit risk transfer (“CRT”) securities	14,713		—		(2,812)		11,901
Total available-for-sale debt securities	2,783,071		972		(192,825)		2,591,218
Held-to-maturity debt securities:
Residential mortgage-backed securities	1,009,972		—		(36,381)		973,591
Total held-to-maturity debt securities	1,009,972		—		(36,381)		973,591
Equity securities							40,825
Total investment securities(2)							$	3,642,015

December 31, 2021
Available-for-sale debt securities:
U.S. government agency securities	$	125,000	$	—	$	(4,056)	$	120,944
Residential mortgage-backed securities	3,288,261		156		(63,039)		3,225,378
Tax-exempt asset-backed securities	170,626		9,407		—		180,033
CRT securities	14,713		—		(2,867)		11,846
Total available-for-sale debt securities	3,598,600		9,563		(69,962)		3,538,201
Equity securities							45,607
Total investment securities(2)							$	3,583,808

(1)Excludes accrued interest receivable of $5.5 million and $6.6 million at March 31, 2022 and December 31, 2021, respectively, related to available-for-sale debt securities, and $1.6 million at March 31, 2022 related to held-to-maturity debt securities that is recorded in accrued interest receivable and other assets on the consolidated balance sheets.

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

Debt Securities

In the first quarter of 2022, we transferred $1.0 billion of available-for-sale debt securities to held-to-maturity at fair value. The transfer was the result of deliberate actions taken to execute on our asset-liability management strategies in response to rising interest rates. Management determined that it has both the positive intent and ability to hold these securities to maturity. On the date of transfer, the difference between the carrying value and fair value of these securities, which was recorded, net of tax, as a loss in accumulated other comprehensive income/(loss) (“AOCI”), resulted in the securities transferring at a discount of $69.2 million. The discount and unrealized loss, net of tax, in AOCI will be amortized to interest income over the remaining life of the securities using the interest method. There were no gains or losses recognized as a result of this transfer.

The amortized cost and estimated fair value as of March 31, 2022, excluding accrued interest receivable, of available-for-sale and held-to-maturity debt securities are presented below by contractual maturity. Actual maturities may differ from contractual maturities of mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.


	Available-for-sale				Held-to-maturity
(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due within one year	$	95	$	101	$	—	$	—
Due after one year through five years	376,612		367,899		—		—
Due after five years through ten years	156,492		140,462		—		—
Due after ten years	2,249,872		2,082,756		1,009,972		973,591
Total	$	2,783,071	$	2,591,218	$	1,009,972	$	973,591

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


	Less Than 12 Months				12 Months or Longer				Total
(in thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
March 31, 2022
U.S. treasury securities	$	367,854	$	(8,715)	$	—	$	—	$	367,854	$	(8,715)
U.S. government agency securities	—		—		113,516		(11,484)		113,516		(11,484)
Residential mortgage-backed securities	962,312		(77,250)		967,491		(90,594)		1,929,803		(167,844)
Tax-exempt asset-backed securities	70,464		(1,970)		—		—		70,464		(1,970)
CRT securities	—		—		11,901		(2,812)		11,901		(2,812)
Total	$	1,400,630	$	(87,935)	$	1,092,908	$	(104,890)	$	2,493,538	$	(192,825)
December 31, 2021
U.S. government agency securities	$	24,085	$	(915)	$	96,859	$	(3,141)	$	120,944	$	(4,056)
Residential mortgage-backed securities	2,871,052		(50,721)		303,491		(12,318)		3,174,543		(63,039)
CRT securities	—		—		11,846		(2,867)		11,846		(2,867)
Total	$	2,895,137	$	(51,636)	$	412,196	$	(18,326)	$	3,307,333	$	(69,962)

At March 31, 2022, we had 81 available-for-sale debt securities in an unrealized loss position, comprised of five U.S. treasury securities, five U.S. government agency securities, 68 residential mortgage-backed securities, one tax-exempt asset-backed security and two CRT securities. The unrealized losses on the available-for-sale debt securities were the result of changes in market interest rates compared to the date the securities were acquired rather than the credit quality of the issuers or underlying loans. We do not intend to sell and it is not more likely than not that we will be required to sell before recovery of the amortized cost of the available-for-sale debt securities in an unrealized loss position and have recorded the unrealized losses related to this portfolio in AOCI. Held-to-maturity debt securities consist of government guaranteed securities for which no loss is expected. At March 31, 2022 and December 31, 2021, no allowance for credit losses was established for available-for-sale or held-to-maturity debt securities.

Debt securities with carrying values of approximately $19.5 million and $1.9 million were pledged to secure certain customer repurchase agreements and deposits, respectively, at March 31, 2022. The comparative amounts at December 31, 2021 were $22.0 million and $2.0 million, respectively.

Equity Securities

Equity securities consist of investments that qualify for consideration under the regulations implementing the Community Reinvestment Act and investments related to our non-qualified deferred compensation plan. The following is a summary of unrealized and realized gains/(losses) recognized on equity securities included in other non-interest income on the consolidated statements of income and other comprehensive income/(loss):


	Three months ended March 31,
(in thousands)		2022		2021
Net gains/(losses) recognized during the period		$	(3,640)	$	378
Less: Realized net gains/(losses) recognized on securities sold		202		398
Unrealized net gains/(losses) recognized on securities held		$	(3,842)	$	(20)

(4) Loans and Allowance for Credit Losses on Loans

Loans are summarized by portfolio segment as follows:


(in thousands)	March 31, 2022		December 31, 2021
Loans held for investment:
Commercial	$	10,175,668	$	9,897,561
Energy	797,191		721,373
Mortgage finance	5,827,965		7,475,497
Real estate	4,943,195		4,777,530
Gross loans held for investment(1)	21,744,019		22,871,961
Unearned income (net of direct origination costs)	(66,620)		(65,007)
Total loans held for investment(1)	21,677,399		22,806,954
Allowance for credit losses on loans	(211,151)		(211,866)
Total loans held for investment, net(1)	$	21,466,248	$	22,595,088

Loans held for sale:
Mortgage loans, at fair value	$	8,085	$	8,123

Total loans held for sale	$	8,085	$	8,123

(1) Excludes accrued interest receivable of $49.7 million and $50.3 million at March 31, 2022 and December 31, 2021, respectively, that is recorded in accrued interest receivable and other assets on the consolidated balance sheets.

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


(in thousands)	2022		2021		2020		2019		2018		2017 and prior		Revolving lines of credit		Revolving lines of credit converted to term loans		Total
March 31, 2022
Commercial
(1-7) Pass	$	234,841	$	3,863,274	$	330,939	$	453,566	$	305,767	$	430,483	$	4,264,331	$	34,280	$	9,917,481
(8) Special mention	3,118		26,848		4,077		26,776		—		5,043		28,622		3,907		98,391
(9) Substandard - accruing	—		666		3,410		77,915		24,366		16,847		9,458		1,664		134,326
(9+) Non-accrual	—		2,003		—		44		12,898		6,918		3,607		—		25,470
Total commercial	$	237,959	$	3,892,791	$	338,426	$	558,301	$	343,031	$	459,291	$	4,306,018	$	39,851	$	10,175,668
Energy
(1-7) Pass	$	34,710	$	61,000	$	—	$	—	$	—	$	1,581	$	673,649	$	—	$	770,940
(8) Special mention	—		—		—		—		—		—		—		—		—
(9) Substandard - accruing	—		—		—		—		—		7,984		—		—		7,984
(9+) Non-accrual	—		8,584		—		—		—		—		9,683		—		18,267
Total energy	$	34,710	$	69,584	$	—	$	—	$	—	$	9,565	$	683,332	$	—	$	797,191
Mortgage finance
(1-7) Pass	$	—	$	385,449	$	599,899	$	512,708	$	550,246	$	3,779,663	$	—	$	—	$	5,827,965
(8) Special mention	—		—		—		—		—		—		—		—		—
(9) Substandard - accruing	—		—		—		—		—		—		—		—		—
(9+) Non-accrual	—		—		—		—		—		—		—		—		—
Total mortgage finance	$	—	$	385,449	$	599,899	$	512,708	$	550,246	$	3,779,663	$	—	$	—	$	5,827,965
Real estate
CRE
(1-7) Pass	$	152,474	$	548,881	$	640,761	$	602,864	$	277,042	$	552,259	$	100,734	$	25,101	$	2,900,116
(8) Special mention	—		—		—		—		—		39,697		—		451		40,148
(9) Substandard - accruing	—		17,850		—		—		40,658		40,292		—		411		99,211
(9+) Non-accrual	—		—		—		—		—		194		—		—		194
RBF
(1-7) Pass	23,129		138,381		27,533		13,382		10,434		9,080		471,488		—		693,427
(8) Special mention	—		—		—		—		—		—		—		—		—
(9) Substandard - accruing	—		—		—		—		—		—		—		—		—
(9+) Non-accrual	—		—		—		—		—		—		—		—		—
Other
(1-7) Pass	61,121		167,638		146,058		112,818		89,998		197,678		37,600		29,107		842,018
(8) Special mention	—		—		6,698		—		—		16,217		—		—		22,915
(9) Substandard - accruing	—		—		6,373		—		—		4,816		—		—		11,189
(9+) Non-accrual	—		—		—		—		—		2,544		—		12,666		15,210
Secured by 1-4 family
(1-7) Pass	21,493		95,823		58,845		29,654		21,551		84,616		4,035		—		316,017
(8) Special mention	—		1,084		—		—		—		289		—		—		1,373
(9) Substandard - accruing	—		—		—		—		—		1,191		—		—		1,191
(9+) Non-accrual	—		—		—		—		—		186		—		—		186
Total real estate	$	258,217	$	969,657	$	886,268	$	758,718	$	439,683	$	949,059	$	613,857	$	67,736	$	4,943,195
Total	$	530,886	$	5,317,481	$	1,824,593	$	1,829,727	$	1,332,960	$	5,197,578	$	5,603,207	$	107,587	$	21,744,019


(in thousands)	2021		2020		2019		2018		2017		2016 and prior		Revolving lines of credit		Revolving lines of credit converted to term loans		Total
December 31, 2021
Commercial
(1-7) Pass	$	1,133,013	$	3,157,150	$	546,520	$	319,246	$	200,478	$	289,795	$	3,960,706	$	41,377	$	9,648,285
(8) Special mention	2,650		5,277		23,129		8,697		39		5,322		5,120		7,883		58,117
(9) Substandard - accruing	—		7,705		102,619		25,010		6,202		6,962		14,742		2,007		165,247
(9+) Non-accrual	736		1,191		49		12,955		1,166		6,196		3,619		—		25,912
Total commercial	$	1,136,399	$	3,171,323	$	672,317	$	365,908	$	207,885	$	308,275	$	3,984,187	$	51,267	$	9,897,561
Energy
(1-7) Pass	$	71,750	$	—	$	—	$	3	$	—	$	7,188	$	577,988	$	—	$	656,929
(8) Special mention	—		—		—		—		—		—		27,421		—		27,421
(9) Substandard - accruing	—		—		—		—		—		8,643		—		—		8,643
(9+) Non-accrual	—		—		—		—		—		—		28,380		—		28,380
Total energy	$	71,750	$	—	$	—	$	3	$	—	$	15,831	$	633,789	$	—	$	721,373
Mortgage finance
(1-7) Pass	$	289,042	$	590,616	$	656,445	$	754,507	$	332,001	$	4,852,886	$	—	$	—	$	7,475,497
(8) Special mention	—		—		—		—		—		—		—		—		—
(9) Substandard - accruing	—		—		—		—		—		—		—		—		—
(9+) Non-accrual	—		—		—		—		—		—		—		—		—
Total mortgage finance	$	289,042	$	590,616	$	656,445	$	754,507	$	332,001	$	4,852,886	$	—	$	—	$	7,475,497
Real estate
CRE
(1-7) Pass	$	497,462	$	576,344	$	600,005	$	294,005	$	155,252	$	451,042	$	73,988	$	25,970	$	2,674,068
(8) Special mention	—		—		291		8,827		20,089		26,344		—		—		55,551
(9) Substandard - accruing	17,850		—		—		40,900		37,393		38,188		—		2,308		136,639
(9+) Non-accrual	—		—		—		—		—		198		—		—		198
RBF
(1-7) Pass	155,595		44,362		9,693		8,565		—		12,732		460,888		—		691,835
(8) Special mention	—		—		—		—		—		—		—		—		—
(9) Substandard - accruing	—		—		—		—		—		—		—		—		—
(9+) Non-accrual	—		—		—		—		—		—		—		—		—
Other
(1-7) Pass	166,202		148,811		119,017		106,343		61,723		139,723		47,653		29,595		819,067
(8) Special mention	—		7,365		—		—		845		4,982		—		—		13,192
(9) Substandard - accruing	—		6,424		—		—		16,922		20,184		—		—		43,530
(9+) Non-accrual	—		—		—		—		2,641		1,450		—		13,741		17,832
Secured by 1-4 family
(1-7) Pass	96,899		60,659		40,586		22,976		31,826		65,910		4,535		—		323,391
(8) Special mention	—		553		—		—		—		291		—		—		844
(9) Substandard - accruing	—		—		—		—		—		1,203		—		—		1,203
(9+) Non-accrual	—		—		—		—		—		180		—		—		180
Total real estate	$	934,008	$	844,518	$	769,592	$	481,616	$	326,691	$	762,427	$	587,064	$	71,614	$	4,777,530
Total	$	2,431,199	$	4,606,457	$	2,098,354	$	1,602,034	$	866,577	$	5,939,419	$	5,205,040	$	122,881	$	22,871,961

The following table details activity in the allowance for credit losses on loans. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.


(in thousands)	Commercial		Energy		Mortgage Finance		Real Estate		Total
Three months ended March 31, 2022
Beginning balance	$	102,202	$	52,568	$	6,083	$	51,013	$	211,866

Provision for credit losses on loans	5,437		(24,522)		4,159		13,699		(1,227)
Charge-offs	110		—		—		350		460
Recoveries	217		755		—		—		972
Net charge-offs (recoveries)	(107)		(755)		—		350		(512)
Ending balance	$	107,746	$	28,801	$	10,242	$	64,362	$	211,151








Three months ended March 31, 2021
Beginning balance	$	73,061	$	84,064	$	4,699	$	92,791	$	254,615

Provision for credit losses on loans	(1,001)		(5,852)		211		929		(5,713)
Charge-offs	2,451		5,732		—		—		8,183
Recoveries	1,050		715		—		—		1,765
Net charge-offs (recoveries)	1,401		5,017		—		—		6,418
Ending balance	$	70,659	$	73,195	$	4,910	$	93,720	$	242,484

We recorded a negative $2.0 million provision for credit losses for the three months ended March 31, 2022, compared to a negative provision of $6.0 million for the same period in 2021, resulting from a decline in criticized loans, partially offset by an increase in loans held for investment, excluding mortgage finance. We recorded $512,000 in net recoveries during the three months ended March 31, 2022, compared to net charge-offs of $6.4 million during the same period in 2021. Criticized loans totaled $476.1 million at March 31, 2022, compared to $945.1 million at March 31, 2021.

A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. At March 31, 2021, we had $12.7 million in collateral-dependent real estate loans, collateralized by real estate property.

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


(in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due(1)		Total Past Due		Non-Accrual Loans(2)		Current		Total		Non-Accrual With No Allowance
March 31, 2022
Commercial	$	13,349	$	2,142	$	3,808	$	19,299	$	25,470	$	10,130,899	$	10,175,668	$	4,277


Energy	—		—		—		—		18,267		778,924		797,191		8,584
Mortgage finance	—		—		—		—		—		5,827,965		5,827,965		—




Real estate:
CRE	187		194		1,986		2,367		194		3,037,108		3,039,669		—
RBF	—		—		—		—		—		693,427		693,427		—
Other	—		—		—		—		15,210		876,122		891,332		15,210


Secured by 1-4 family	—		—		237		237		186		318,344		318,767		—


Total	$	13,536	$	2,336	$	6,031	$	21,903	$	59,327	$	21,662,789	$	21,744,019	$	28,071

(1)Loans past due 90 days and still accruing includes premium finance loans of $3.2 million. These loans are generally secured by obligations of insurance carriers to refund premiums on canceled insurance policies. The receipt of the refund of premiums from the insurance carriers can take 180 days or longer from the cancellation date.

(2)As of March 31, 2022 and December 31, 2021, none of our non-accrual loans were earning interest income on a cash basis. Additionally, no interest income was recognized on non-accrual loans for the three months ended March 31, 2022. Accrued interest of $4,000 was reversed during the three months ended March 31, 2022.

As of March 31, 2022 and December 31, 2021, we did not have any loans considered restructured that were not on non-accrual. Of the non-accrual loans at March 31, 2022 and December 31, 2021, $18.0 million and $19.4 million, respectively, met the criteria for restructured. These loans had no unfunded commitments at their respective balance sheet dates.

We did not have any loans that were restructured during the three months ended March 31, 2022 or 2021.

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

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


(in thousands)	March 31, 2022		December 31, 2021

Customer repurchase agreements	$	2,033	$	2,832
Federal Home Loan Bank borrowings	1,425,000		2,200,000
Total short-term borrowings	$	1,427,033	$	2,202,832

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


(in thousands)	March 31, 2022		December 31, 2021
Bank-issued floating rate senior unsecured credit-linked notes due 2024	$	270,988	$	270,487
Bank-issued 5.75% fixed rate subordinated notes due 2026	174,000		173,935
Company-issued 4.00% fixed rate subordinated notes due 2031	371,020		370,910
Trust preferred floating rate subordinated debentures due 2032 to 2036	113,406		113,406
Total long-term debt	$	929,414	$	928,738

(6) Financial Instruments with Off-Balance Sheet Risk

The table below presents our financial instruments with off-balance sheet risk, as well as the activity in the allowance for off-balance sheet credit losses related to those financial instruments. This allowance is recorded in other liabilities on the consolidated balance sheets.




	Three months ended March 31,
(in thousands)				2022				2021
Beginning balance of allowance for off-balance sheet credit losses				$	17,265			$	17,434

Provision for off-balance sheet credit losses				(773)				(287)
Ending balance of allowance for off-balance sheet credit losses				$	16,492			$	17,147

(in thousands)				March 31, 2022				December 31, 2021
Commitments to extend credit - period end balance		$	9,917,556			$	9,445,763
Standby letters of credit - period end balance		364,765				357,672

(7) Regulatory Restrictions

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The Basel III regulatory capital framework (the “Basel III Capital Rules”) adopted by U.S. federal regulatory authorities, among other things, (i) establishes the capital measure called “Common Equity Tier 1” (“CET1”), (ii) specifies that Tier 1 capital consist of CET1 and “Additional Tier 1 Capital” instruments meeting stated requirements, (iii) requires that most deductions/adjustments to regulatory capital measures be made to CET1 and not to other components of capital and (iv) defines the scope of the deductions/adjustments to the capital measures.

Additionally, the Basel III Capital Rules require that we maintain a 2.5% capital conservation buffer with respect to each of CET1, Tier 1 and total capital to risk-weighted assets, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers.

In February 2019, the federal bank regulatory agencies issued a final rule (the “2019 CECL Rule”) that revised certain capital regulations to account for changes to credit loss accounting under GAAP. The 2019 CECL Rule included a transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of adopting the new accounting standard related to the measurement of current expected credit losses on their regulatory capital ratios (three-year transition option). In March 2020, the federal bank regulatory agencies issued an interim final rule that maintains the three-year

transition option of the 2019 CECL Rule and also provides banking organizations that were required under GAAP to implement CECL before the end of 2020 the option to delay for two years an estimate of the effect of CECL on regulatory capital, relative to the incurred loss methodology's effect on regulatory capital, followed by a three-year transition period (five-year transition option). We adopted CECL on January 1, 2020 and have elected to utilize the five-year transition option.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of CET1, Tier 1 and total capital to risk-weighted assets, and of Tier 1 capital to average assets, each as defined in the regulations. Management believes, as of March 31, 2022, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

Financial institutions are categorized as well capitalized based on total risk-based, Tier 1 risk-based, CET1 and Tier 1 leverage ratios. As shown in the table below, the Company’s and the Bank’s capital ratios exceeded the regulatory definition of well capitalized as of March 31, 2022 and December 31, 2021. The regulatory authorities can apply changes in classification of assets and such changes may retroactively subject the Company and the Bank to changes in capital ratios. Any such change could reduce one or more capital ratios below well-capitalized status. In addition, a change may result in imposition of additional assessments by the FDIC or could result in regulatory actions that could have a material effect on our condition and results of operations.

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

The table below summarizes our actual and required capital ratios under the Basel III Capital Rules. The ratios presented below include the effects of our election to utilize the five-year CECL transition described above.


	Actual				Minimum Capital Required(2)					Capital Required to be Well Capitalized
(dollars in thousands)	Capital Amount		Ratio			Capital Amount		Ratio			Capital Amount	Ratio
March 31, 2022
CET1
Company	$	2,987,142	11.46	%		$	1,824,684	7.00	%		N/A	N/A
Bank	3,059,948		11.74	%		1,824,675		7.00	%		1,694,341	6.50	%
Total capital (to risk-weighted assets)
Company	4,087,685		15.68	%		2,737,026		10.50	%		2,606,691	10.00	%
Bank	3,589,472		13.77	%		2,737,013		10.50	%		2,606,679	10.00	%
Tier 1 capital (to risk-weighted assets)
Company	3,397,142		13.03	%		2,215,688		8.50	%		1,564,015	6.00	%
Bank	3,219,948		12.35	%		2,215,677		8.50	%		2,085,343	8.00	%
Tier 1 capital (to average assets)(1)
Company	3,397,142		9.89	%		1,373,788		4.00	%		N/A	N/A
Bank	3,219,948		9.38	%		1,373,632		4.00	%		1,717,040	5.00	%
December 31, 2021
CET1
Company	$	2,949,785	11.06	%		$	1,866,444	7.00	%		N/A	N/A
Bank	3,013,170		11.30	%		1,866,303		7.00	%		1,732,996	6.50	%
Total capital (to risk-weighted assets)
Company	4,085,540		15.32	%		2,799,666		10.50	%		2,666,348	10.00	%
Bank	3,578,014		13.42	%		2,799,455		10.50	%		2,666,148	10.00	%
Tier 1 capital (to risk-weighted assets)
Company	3,359,785		12.60	%		2,266,396		8.50	%		1,599,809	6.00	%
Bank	3,173,170		11.90	%		2,266,225		8.50	%		2,132,918	8.00	%
Tier 1 capital (to average assets)(1)
Company	3,359,785		9.01	%		1,490,902		4.00	%		N/A	N/A
Bank	3,173,170		8.51	%		1,490,677		4.00	%		1,863,346	5.00	%

(1) The Tier 1 capital ratio (to average assets) is not impacted by the Basel III Capital Rules; however, the Federal Reserve Board and the FDIC may require the Company and the Bank, respectively, to maintain a Tier 1 capital ratio (to average assets) above the required minimum.

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

Dividends that may be paid by banks are routinely restricted by various regulatory authorities, including federal banking law requirements concerning the payment of dividends. The Basel III Capital Rules further limit the amount of dividends that may

be paid by us or our Bank. No dividends were declared or paid on our common stock during the three months ended March 31, 2022, or during the year ended December 31, 2021.

On April 19, 2022, our board of directors authorized a new share repurchase program under which we may repurchase up to $150.0 million in shares of our outstanding common stock. Any repurchases under the repurchase program will be made in accordance with applicable securities laws from time to time in open market or private transactions. The extent to which we repurchase shares, and the timing of such repurchases, will be at management’s discretion and will depend upon a variety of factors, including market conditions, our capital position and amount of retained earnings, regulatory requirements and other considerations. No time limit was set for the completion of the share repurchase program, and the program may be suspended or discontinued at any time.

(8) Stock-based Compensation

We have long-term incentive plans under which stock-based compensation awards are granted to employees and directors by the board of directors, or its designated committee. Grants are subject to vesting requirements and may include, among other things, nonqualified stock options, stock appreciation rights (“SARs”), restricted stock units (“RSUs”), restricted stock and performance units, or any combination thereof. On April 19, 2022, the Company’s stockholders approved the Texas Capital Bancshares, Inc. 2022 Long-Term Incentive Plan, which provides for the issuance of 1,124,880 shares of common stock for compensation to the Company’s key employees and non-employee directors.

The table below summarizes our stock-based compensation expense:


	Three months ended March 31,
(in thousands)		2022		2021
Stock-settled awards:

RSUs		$	5,407	$	5,460
Restricted stock		—		1
Cash-settled units		181		907
Total		$	5,588	$	6,368


(in thousands except period data)	March 31, 2022
Unrecognized compensation expense related to unvested stock-settled awards	$	46,901
Weighted average period over which expense is expected to be recognized, in years	2.7

(9) Fair Value Disclosures

We determine the fair market values of our assets and liabilities measured at fair value on a recurring and nonrecurring basis using the fair value hierarchy as prescribed in the Accounting Standards Codification (“ASC”) 820, Fair Value Measurement. See Note 1 - Operations and Summary of Significant Accounting Policies in our 2021 Form 10-K for information regarding the fair value hierarchy and a description of the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial instruments.

Assets and liabilities measured at fair value are as follows:


	Fair Value Measurements Using
(in thousands)	Level 1		Level 2		Level 3
March 31, 2022
Available-for-sale debt securities:(1)
U.S. Treasury securities	$	367,854	$	—	$	—
U.S. government agency securities	—		113,516		—
Residential mortgage-backed securities	—		1,932,102		—

Tax-exempt asset-backed securities	—		—		165,845
CRT securities	—		—		11,901
Equity securities(1)(2)	29,154		11,671		—
Loans held for sale(3)	—		—		8,085


Derivative assets(4)	—		30,238		—
Derivative liabilities(4)	—		30,238		—
Non-qualified deferred compensation plan liabilities(5)	26,474		—		—

December 31, 2021
Available-for-sale debt securities:(1)
U.S. government agency securities	$	—	$	120,944	$	—
Residential mortgage-backed securities	—		3,225,378		—
Tax-exempt asset-backed securities	—		—		180,033
CRT securities	—		—		11,846
Equity securities(1)(2)	33,589		12,018		—
Loans held for sale(3)	—		465		7,658


Derivative assets(4)	—		37,788		—
Derivative liabilities(4)	—		37,788		—
Non-qualified deferred compensation plan liabilities(5)	29,695		—		—

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

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

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

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

(5)Non-qualified deferred compensation plan liabilities represent the fair value of the obligation to the employee, which generally corresponds to the fair value of the invested assets, and are measured at fair value on a recurring basis, generally monthly.

Level 3 Valuations

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


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











Three months ended March 31, 2022
Available-for-sale debt securities:(1)
Tax-exempt asset-backed securities	$	180,033	$	—	$	(3,736)	$	—	$	(10,452)	$	165,845
CRT securities	11,846		—		—		—		55		11,901
Loans held for sale(2)	7,658		933		(41)		—		(465)		8,085
Three months ended March 31, 2021
Available-for-sale debt securities:(1)
Tax-exempt asset-backed securities	$	199,176	$	—	$	(11,371)	$	—	$	(6,239)	$	181,566
CRT securities	11,417		—		—		—		48		11,465
Loans held for sale(2)	6,933		537		(279)		5		79		7,275

(1)Unrealized gains/(losses) on available-for-sale debt securities are recorded in AOCI and relate to assets that remain outstanding at period end. Realized gains/(losses) are recorded in other non-interest income on the consolidated statements of income and other comprehensive income/(loss).

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

Tax-exempt asset-backed securities

The fair value of tax-exempt asset-backed securities is based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs, the most significant of which were a discount rate and a weighted-average life. At March 31, 2022, the discount rates utilized ranged from 4.09% to 4.16% and the weighted-average life ranged from 4.33 years to 4.40 years. On a combined amortized cost weighted-average basis a discount rate of 4.12% and weighted-average life of 4.36 years were utilized to determine the fair value of these securities at March 31, 2022. At December 31, 2021, the combined weighted-average discount rate and weighted-average life utilized were 2.60% and 4.61 years, respectively.

CRT securities

The fair value of CRT securities is based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs, the most significant of which were a discount rate and a weighted-average life. At March 31, 2022, the discount rates utilized ranged from 4.57% to 9.54% and the weighted-average life ranged from 4.84 years to 9.38 years. On a combined amortized cost weighted-average basis a discount rate of 6.23% and a weighted-average life of 6.35 years were utilized to determine the fair value of these securities at March 31, 2022. At December 31, 2021, the combined weighted-average discount rate and combined weighted-average life utilized were 4.97% and 6.35 years, respectively.

Loans held for sale

The fair value of loans held for sale using Level 3 inputs include loans that cannot be sold through normal sale channels and thus require significant management judgment or estimation when determining the fair value. The fair value of such loans is generally based upon quoted prices of comparable loans with a liquidity discount applied. At March 31, 2022, the fair value of these loans was calculated using a weighted-average discounted price of 92.3% compared to 97.8% at December 31, 2021.

Fair Value of Financial Instruments

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


			Estimated Fair Value
(in thousands)	Carrying Amount		Total		Level 1		Level 2		Level 3
March 31, 2022
Financial assets:
Cash and cash equivalents	$	5,371,533	$	5,371,533	$	5,371,533	$	—	$	—
Available-for-sale debt securities	2,591,218		2,591,218		367,854		2,045,618		177,746
Held-to-maturity debt securities	1,009,972		973,591		—		973,591		—
Equity securities	40,825		40,825		29,154		11,671		—
Loans held for sale	8,085		8,085		—		—		8,085

Loans held for investment, net	21,466,248		21,436,263		—		—		21,436,263
Derivative assets	30,238		30,238		—		30,238		—
Financial liabilities:
Total deposits	25,377,938		25,378,165		—		—		25,378,165
Short-term borrowings	1,427,033		1,427,033		—		1,427,033		—
Long-term debt	929,414		913,678		—		913,678		—
Derivative liabilities	30,238		30,238		—		30,238		—

December 31, 2021
Financial assets:
Cash and cash equivalents	$	7,946,659	$	7,946,659	$	7,946,659	$	—	$	—
Available-for-sale debt securities	3,538,201		3,538,201		—		3,346,322		191,879

Equity securities	45,607		45,607		33,589		12,018		—
Loans held for sale	8,123		8,123		—		465		7,658

Loans held for investment, net	22,595,088		22,631,252		—		—		22,631,252
Derivative assets	37,788		37,788		—		37,788		—
Financial liabilities:
Total deposits	28,109,365		28,109,762		—		—		28,109,762
Short-term borrowings	2,202,832		2,202,832		—		2,202,832		—
Long-term debt	928,738		952,404		—		952,404		—
Derivative liabilities	37,788		37,788		—		37,788		—

(10) Derivative Financial Instruments

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


	March 31, 2022						December 31, 2021
			Estimated Fair Value						Estimated Fair Value
(in thousands)	Notional Amount		Asset Derivative		Liability Derivative		Notional Amount		Asset Derivative		Liability Derivative
Non-hedging derivatives:
Financial institution counterparties:
Commercial loan/lease interest rate swaps	$	1,529,665	$	29,161	$	8,072	$	1,768,045	$	3,228	$	37,694
Commercial loan/lease interest rate caps	168,701		713		—		191,291		94		—

Customer counterparties:
Commercial loan/lease interest rate swaps	1,529,665		8,072		29,161		1,768,045		37,694		3,228
Commercial loan/lease interest rate caps	168,701		—		713		191,291		—		94








Gross derivatives			37,946		37,946				41,016		41,016
Offsetting derivative assets/liabilities			(7,708)		(7,708)				(3,228)		(3,228)
Net derivatives included on the consolidated balance sheets			$	30,238	$	30,238			$	37,788	$	37,788

The weighted-average received and paid interest rates for interest rate swaps outstanding were as follows:


	March 31, 2022				December 31, 2021
	Received		Paid		Received		Paid
Non-hedging interest rate swaps - financial institution counterparties	1.58	%	2.83	%	1.15	%	2.65	%
Non-hedging interest rate swaps - customer counterparties	2.83	%	1.58	%	2.65	%	1.15	%

The weighted-average strike rate for outstanding interest rate caps was 2.47% at March 31, 2022 and 2.54% at December 31, 2021.

Our credit exposure on derivative instruments is limited to the net favorable value and interest payments by each counterparty. In some cases collateral may be required from the counterparties involved if the net value of the derivative instruments exceeds a nominal amount. Our credit exposure associated with these instruments, net of any collateral pledged, was approximately $30.2 million at March 31, 2022, and approximately $37.8 million at December 31, 2021. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap and cap values, as well as for changes in the value of forward sale commitments. We had $14.3 million and $40.3 million in cash collateral pledged for these derivatives at March 31, 2022 and December 31, 2021, respectively, included in interest-bearing cash and cash equivalents on the consolidated balance sheets.

We also enter into credit risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are either a participant or a lead bank. The risk participation agreements entered into by us as a participant bank provide credit protection to the financial institution counterparty should the borrower fail to perform on its interest rate derivative contract with that financial institution. We are party to 12 risk participation agreements where we are a participant bank with a notional amount of $126.8 million at March 31, 2022, compared to seven risk participation agreements having a notional amount of $79.2 million at December 31, 2021. The maximum estimated exposure to these agreements, assuming 100% default by all obligors, was approximately $750,000 at March 31, 2022 and $2.3 million at December 31, 2021. The fair value of these exposures was insignificant to the consolidated financial statements at both March 31, 2022 and December 31, 2021. Risk participation agreements entered into by us as the lead bank provide credit protection to us should the borrower fail to perform on its interest rate derivative contract with us. We are party to 17 risk participation agreements where we are the lead bank having a notional amount of $197.8 million at March 31, 2022, compared to 15 agreements having a notional amount of $156.1 million at December 31, 2021.

(11) New Accounting Standards

Accounting Standard Update (“ASU”) ASU 2022-01, “Derivatives and Hedging (Topic 815)” (“ASU 2022-01”) clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios and financial assets. Among other things, the amended guidance established the “last-of-layer” method for making the fair value hedge accounting for these portfolios more accessible and renamed that method the “portfolio layer” method. ASU 2022-01 is effective January 1, 2023 and is not expected to have a significant impact on our consolidated financial statements.

ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326)” (“ASU 2022-02”) eliminates the guidance on troubled debt restructurings and requires entities to evaluate all loan modifications to determine if they result in a new loan or a continuation of the existing loan. ASU 2022-02 also requires that entities disclose current-period gross charge-offs by year of origination for loans and leases. ASU 2022-02 is effective January 1, 2023 and will have an impact on our financial statement disclosures.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations for the three months ended March 31, 2022 and 2021 should be read in conjunction with our audited consolidated financial statements and the related notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”). Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results for the year ending December 31, 2022 or any future period.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our beliefs, assumptions and expectations of our future performance taking into account all information available to us at the time such statements are made. Forward-looking statements may often be identified by the use of words such as “expects,” “estimates,” “anticipates,” “plans,” “goals,” “objectives,” “intends,” “seeks,” “likely,” “should,” “may” “could” and other similar expressions. These forward-looking statements are based of the historical performance of the Company or on the Company’s current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the Company that the future plans, estimates or expectations so contemplated will be achieved, and should not be the primary basis upon which investors evaluate an investment in our securities. Certain risks, uncertainties and other factors, including those set forth under “Risk Factors” in Part I, Item 1A of the 2021 Form 10-K and any subsequent Quarterly Report on Form 10-Q or Current Report on Form 8-K may cause actual results to differ materially from the results discussed in the forward-looking statements appearing in this discussion and analysis and may include factors such as, but not limited to, credit quality and risk, the COVID-19 pandemic, industry and technological changes, cyber incidents or other failures, disruptions or security breaches, interest rates, commercial and residential real estate values, economic and market conditions in Texas, the United States or internationally, fund availability, accounting estimates and risk management processes, the transition away from the London Interbank Offered Rate (LIBOR), legislative and regulatory changes, business strategy execution, key personnel, competition, mortgage markets, fraud, environmental liability and severe weather, natural disasters, acts of war or terrorism or other external events. The Company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

Results of Operations

Three months ended March 31, 2022 compared to three months ended March 31, 2021

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


	For the Three Months Ended
(dollars in thousands except per share data)	March 31, 2022			March 31, 2021
Net interest income	$	183,547		$	194,812
Provision for credit losses	(2,000)			(6,000)
Non-interest income	20,282			44,353
Non-interest expense	153,092			150,316
Income before income taxes	52,737			94,849
Income tax expense	13,087			22,911
Net income	39,650			71,938
Preferred stock dividends	4,313			3,779
Net income available to common stockholders	$	35,337		$	68,159
Earnings per common share - basic	$	0.70		$	1.35
Earnings per common share - diluted	$	0.69		$	1.33
Net interest margin	2.23		%	2.04		%
Return on average assets	0.47		%	0.73		%
Return on average common equity	4.97		%	10.08		%
Non-interest income to average earning assets	0.25		%	0.46		%
Efficiency ratio(1)	75.1		%	62.9		%
Non-interest expense to average earning assets	1.86		%	1.57		%

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

We reported net income of $39.7 million and net income available to common stockholders of $35.3 million for the first quarter of 2022 compared to net income of $71.9 million and net income available to common stockholders of $68.2 million for the first quarter of 2021. On a fully diluted basis, earnings per common share were $0.69 for the first quarter of 2022, compared to $1.33 for the first quarter of 2021. Return on average common equity (“ROE”) was 4.97% and return on average assets (“ROA”) was 0.47% for the first quarter of 2022, compared to 10.08% and 0.73%, respectively, for the first quarter of 2021. The decrease in net income for the first quarter of 2022 compared to the first quarter of 2021 resulted primarily from decreases 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


	Three months ended March 31, 2022						Three months ended March 31, 2021
(in thousands except percentages)	Average Balance		Income/ Expense		Yield/ Rate			Average Balance		Income/ Expense		Yield/ Rate
Assets
Investment securities(1)	$	3,669,257	$	17,743	1.96	%		$	3,422,571	$	10,359	1.23	%
Interest bearing cash and cash equivalents	8,552,300		3,571		0.17	%		11,845,547		2,933		0.10	%
Loans held for sale	7,633		113		6.01	%		243,326		1,595		2.66	%
Loans held for investment, mortgage finance	5,732,901		43,466		3.07	%		8,177,759		64,942		3.22	%
Loans held for investment(1)(2)	15,686,319		144,134		3.73	%		15,457,888		143,935		3.78	%
Less: Allowance for credit losses on loans	212,612		—		—			254,697		—		—
Loans held for investment, net	21,206,608		187,600		3.59	%		23,380,950		208,877		3.62	%
Total earning assets	33,435,798		209,027		2.54	%		38,892,394		223,764		2.33	%
Cash and other assets	819,486							1,064,679
Total assets	$	34,255,284						$	39,957,073
Liabilities and Stockholders’ Equity
Transaction deposits	$	2,432,687	$	3,962	0.66	%		$	3,991,966	$	5,861	0.60	%
Savings deposits	10,420,545		8,583		0.33	%		12,889,974		10,788		0.34	%
Time deposits	1,038,722		1,085		0.42	%		2,204,242		3,355		0.62	%
Total interest bearing deposits	13,891,954		13,630		0.40	%		19,086,182		20,004		0.43	%
Short-term borrowings	1,770,781		758		0.17	%		2,686,398		2,592		0.39	%
Long-term debt	929,005		10,595		4.63	%		464,731		5,743		5.01	%


Total interest bearing liabilities	16,591,740		24,983		0.61	%		22,237,311		28,339		0.52	%
Non-interest bearing deposits	14,235,749							14,421,505
Other liabilities	243,141							309,644
Stockholders’ equity	3,184,654							2,988,613
Total liabilities and stockholders’ equity	$	34,255,284						$	39,957,073
Net interest income(1)			$	184,044						$	195,425
Net interest margin					2.23	%						2.04	%
Net interest spread					1.93	%						1.81	%

(1)Taxable equivalent rates used where applicable.

(2)Average balances include non-accrual loans which are stated net of unearned income.

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, 2022/2021
	Net Change		Change due to(1)
(in thousands)			Volume		Yield/Rate(2)
Interest income:
Investment securities	$	7,384	$	748	$	6,636
Interest bearing cash and cash equivalents	638		(812)		1,450
Loans held for sale	(1,482)		(1,546)		64
Loans held for investment, mortgage finance loans	(21,476)		(19,412)		(2,064)
Loans held for investment	199		2,129		(1,930)

Total	(22,759)		(18,829)		(3,930)
Interest expense:
Transaction deposits	(1,899)		(2,307)		408
Savings deposits	(2,205)		(2,070)		(135)
Time deposits	(2,270)		(1,782)		(488)
Short-term borrowings	(1,834)		(880)		(954)
Long-term debt	4,852		5,735		(883)
Total	(3,356)		(1,304)		(2,052)
Net interest income	$	(19,403)	$	(17,525)	$	(1,878)

(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 $183.5 million for the three months ended March 31, 2022, compared to $194.8 million for the same period in 2021. The decrease was primarily due to a decrease in average loans held for investment, mortgage finance, partially offset by an increase in investment securities yields.

Average earning assets for the three months ended March 31, 2022 decreased $5.5 billion compared to the same period in 2021, and included a $3.3 billion decrease in average interest-bearing cash and cash equivalents and a $2.4 billion decrease in average loans held for investment, mortgage finance. The decrease in average interest bearing cash and cash equivalents resulted primarily from our proactive exit of certain high-cost indexed deposit products in the second half of 2021. The decrease in average loans held for investment, mortgage finance, was primarily due to reduced volumes as a result of the rising interest rate environment. Average interest-bearing liabilities for the three months ended March 31, 2022 decreased $5.6 billion compared to the same period in 2021, primarily due to a $5.2 billion decrease in average interest-bearing deposits. Average demand deposits for the three months ended March 31, 2022 decreased $185.8 million compared to the same period in 2021.

Net interest margin for the three months ended March 31, 2022 was 2.23% compared to 2.04% for the same period in 2021, primarily due to a shift in the composition of earning assets, primarily declines in interest-bearing cash and cash equivalents and LHI, mortgage finance.

The yield on total loans held for investment decreased to 3.59% for the three months ended March 31, 2022 compared to 3.62% for the same period in 2021, and the yield on earning assets increased to 2.54% for the three months ended March 31, 2022 compared to 2.33% for the same period in 2021. The average cost of total deposits decreased to 0.20% for the three months ended March 31, 2022 from 0.24% for the same period in 2021, and total funding costs, including all deposits, long-term debt and stockholders' equity, increased to 0.30% for the three months ended March 31, 2022 compared to 0.29% for the same period in 2021.

Non-interest Income


	Three months ended March 31,
(in thousands)	2022		2021
Service charges on deposit accounts	$	6,022	$	4,716
Wealth management and trust fee income	3,912		2,855
Brokered loan fees	3,970		9,311
Servicing income	237		9,009
Investment banking and trading income	4,179		5,787
Net gain/(loss) on sale of loans held for sale	—		5,572
Other	1,962		7,103
Total non-interest income	$	20,282	$	44,353

Non-interest income decreased $24.1 million during the three months ended March 31, 2022 compared to the same period in 2021. The decrease was primarily due to decreases in brokered loan fees, servicing fee income and net gain/(loss) on sale of loans held for sale all as a result of the sale of our mortgage servicing rights portfolio and transition of the mortgage correspondent aggregation program in 2021.

Non-interest Expense


	Three months ended March 31,
(in thousands)	2022		2021
Salaries and benefits	$	100,098	$	87,522
Occupancy expense	8,885		8,274
Marketing	4,977		1,697
Legal and professional	10,302		8,277
Communications and technology	14,700		15,969
FDIC insurance assessment	3,981		6,613
Servicing-related expenses	—		12,989
Other	10,149		8,975
Total non-interest expense	$	153,092	$	150,316

Non-interest expense for the three months ended March 31, 2022 increased $2.8 million compared to the same period in 2021. The increase was primarily due to increases in salaries and benefits, partially offset by a decrease in servicing-related expenses. The increase in salaries and benefits expense was primarily due to an increase in headcount, while the decrease in service-related expenses resulted primarily from the sale of our mortgage servicing rights portfolio in 2021.

Analysis of Financial Condition

Loans Held for Investment

The following table summarizes our loans held for investment by portfolio segment:


	March 31, 2022		December 31, 2021
(in thousands)
Commercial	$	10,175,668	$	9,897,561
Energy	797,191		721,373
Mortgage finance	5,827,965		7,475,497

Real estate	4,943,195		4,777,530


Gross loans held for investment	$	21,744,019	$	22,871,961
Deferred income (net of direct origination costs)	(66,620)		(65,007)
Total loans held for investment	21,677,399		22,806,954
Allowance for credit losses on loans	(211,151)		(211,866)
Total loans held for investment, net	$	21,466,248	$	22,595,088

Total loans held for investment were $21.7 billion at March 31, 2022, a decline of $1.1 billion from December 31, 2021. The decline in total loans held for investment was primarily due to a decline in mortgage finance loans, partially offset by increases in commercial and real estate loans. Mortgage finance loans relate to our mortgage warehouse lending operations in which we purchase mortgage loan ownership interests that are typically sold within 10 to 20 days and represent 27% of total loans held for investment at March 31, 2022 compared to 33% at December 31, 2021. Volumes fluctuate based on the level of market

demand for the product and the number of days between purchase and sale of the loans, which can be affected by changes in overall market interest rates, and tend to peak at the end of each month. The balances of mortgage finance loans have continued to decline in the first quarter of 2022 as interest rates have continued to rise.

We originate a substantial majority of all loans held for investment. We also participate in syndicated loan relationships, both as a participant and as an agent. As of March 31, 2022, we had $2.7 billion in syndicated loans, $649.5 million of which we administer as agent. All syndicated loans, whether we act as agent or participant, are underwritten to the same standards as all other loans we originate. As of March 31, 2022, none of our syndicated loans were on non-accrual.

Portfolio Concentrations

Although more than 50% of our total loan exposure is outside of Texas and more than 50% of our deposits are sourced outside of Texas, our Texas concentration remains significant. As of March 31, 2022, a majority of our loans held for investment, excluding mortgage finance loans and other national lines of business, were to businesses with headquarters or operations in Texas. This geographic concentration subjects the 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 our non-performing assets by type and by type of property securing the credit.



(in thousands)	March 31, 2022			December 31, 2021
Non-accrual loans held for investment(1):
Commercial:

Assets of the borrowers	$	17,927		$	18,366
Accounts receivable and inventory	5,450			5,501

Other	2,093			2,045
Total commercial	25,470			25,912




Energy:
Oil and gas properties	18,267			28,380
Total energy	18,267			28,380
Real estate:
Assets of the borrowers	12,666			13,741
Commercial property	2,738			2,840

Single family residences	186			1,629



Total real estate	15,590			18,210


Total non-accrual loans held for investment	59,327			72,502
Non-accrual loans held for sale	—			—
Other real estate owned	—			—
Total non-performing assets	$	59,327		$	72,502

Non-accrual loans held for investment to total loans held for investment	0.27		%	0.32		%
Allowance for credit losses on loans to non-accrual loans held for investment	3.6x			2.9x

Loans held for investment past due 90 days and still accruing(2)	$	6,031		$	3,467
Loans held for investment past due 90 days to total loans held for investment	0.03		%	0.02		%
Loans held for sale past due 90 days and still accruing(3)	$	3,865		$	3,986

(1)As of March 31, 2022 and December 31, 2021, non-accrual loans included $18.0 million and 19.4 million, respectively, in loans that met the criteria for restructured.

(2)At March 31, 2022 and December 31, 2021, loans past due 90 days and still accruing includes premium finance loans of $3.2 million and $3.3 million, respectively.

(3)Includes loans guaranteed by U.S. government agencies that were repurchased out of Ginnie Mae securities. Loans are recorded as loans held for sale and carried at fair value on the balance sheet. Interest on these past due loans accrues at the debenture rate guaranteed by the U.S. government.

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.

We recorded a $2.0 million negative provision for credit losses for the three months ended March 31, 2022, compared to a negative provision of $6.0 million for the three months ended March 31, 2021. The $2.0 million negative provision for credit losses resulted from a decline in criticized loans, partially offset by an increase in loans held for investment, excluding mortgage finance. We recorded $512,000 in net recoveries during the three months ended March 31, 2022, compared to net charge-offs of $6.4 million during the three months ended March 31, 2021. Criticized loans totaled $476.1 million at March 31, 2022, compared to $945.1 million at March 31, 2021.

The table below presents key metrics related to our credit loss experience:


	March 31, 2022		March 31, 2021
Allowance for credit losses on loans to total loans held for investment	0.97	%	0.99	%
Allowance for credit losses on loans to total average loans held for investment	0.99	%	1.03	%
Total provision for credit losses to average total loans held for investment(1)	(0.04)	%	(0.10)	%
Total allowance for credit losses to total loans held for investment	1.05	%	1.06	%

(1) Interim period ratios are annualized.

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


	Three months ended March 31,
	2022				2021
			Net Charge-offs				Net Charge-offs
	Net Charge-offs		to Average Loans(1)		Net Charge-offs		to Average Loans(1)
Commercial	$	(107)	—	%	$	1,401	0.06	%
Energy	(755)		(0.40)	%	5,017		2.94	%
Mortgage finance	—		—	%	—		—	%
Real estate	350		0.03	%	—		—	%
Total	$	(512)	(0.01)	%	$	6,418	0.11	%

(1) Interim period ratios are annualized.

Liquidity and Capital Resources

Liquidity

In general terms, liquidity is a measurement of our ability to meet our cash needs. Our objectives in managing our liquidity are to maintain our ability to meet loan commitments, repurchase investment securities and repay deposits and other liabilities in accordance with their terms, without an adverse impact on our current or future earnings. Our liquidity strategy is guided by policies, formulated and monitored by our senior management and our Asset and Liability Management Committee (“ALCO”), which take into account the demonstrated marketability of our assets, the sources and stability of our funding and the level of unfunded commitments. We regularly evaluate all of our various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness. Our principal source of funding is customer deposits, supplemented by short-term borrowings, primarily federal funds purchased and FHLB borrowings, which are generally used to fund mortgage finance assets, as well as long-term debt. We also rely on the availability of the mortgage secondary market provided by Ginnie Mae and the government-sponsored enterprises to support the liquidity of our mortgage finance assets.

During 2020 and into the first half of 2021, we significantly increased our interest-bearing cash and cash equivalents to ensure that we had the balance sheet strength to serve our clients during the COVID-19 pandemic. In the second half of 2021 and continuing into the first three months of 2022, these balances have run off as we have purchased investment securities and proactively exited certain high-cost indexed deposit products. The following table summarizes these balances:



(in thousands except percentage data)	March 31, 2022			December 31, 2021			March 31, 2021


Interest-bearing cash and cash equivalents	$	5,136,680		$	7,765,996		$	11,212,276
Interest-bearing cash and cash equivalents as a percent of:
Total loans held for investment	23.7		%	34.1		%	45.9		%
Total earning assets	17.0		%	22.9		%	28.8		%
Total deposits	20.2		%	27.6		%	33.6		%

Our liquidity needs to support growth in loans held for investment have been fulfilled primarily through growth in our core customer deposits. Our goal is to obtain as much of our funding for loans held for investment and other earning assets as possible from deposits of these core customers. These deposits are generated principally through development of long-term customer relationships, with a significant focus on treasury management products. In addition to deposits from our core customers, we also have access to deposits through brokered customer relationships.

We also have access to incremental deposits through brokered retail certificates of deposit, or CDs. These traditional brokered deposits are generally of short maturities and are used to fund temporary differences in the growth in loan balances as compared to customer deposits. The following table summarizes our period-end and average core customer deposits, relationship brokered deposits and traditional brokered deposits:



(in thousands)	March 31, 2022			December 31, 2021			March 31, 2021
Deposits from core customers	$	24,020,695		$	25,409,180		$	30,102,156
Deposits from core customers as a percent of total deposits	94.7		%	90.4		%	90.1		%
Relationship brokered deposits	$	812,108		$	1,855,892		$	1,933,376
Relationship brokered deposits as a percent of average total deposits	3.2		%	6.6		%	5.8		%
Traditional brokered deposits	$	545,135		$	844,293		$	1,356,438
Traditional brokered deposits as a percent of total deposits	2.1		%	3.0		%	4.1		%
Average deposits from core customers(1)	$	25,906,368		$	28,734,460		$	29,980,945
Average deposits from core customers as a percent of average total deposits	92.1		%	91.1		%	89.5		%
Average relationship brokered deposits(1)	$	1,517,430		$	1,608,587		$	1,912,099
Average relationship brokered deposits as a percent of average total deposits	5.4		%	5.1		%	5.7		%
Average traditional brokered deposits(1)	$	703,905		$	1,188,544		$	1,614,643
Average traditional brokered deposits as a percent of average total deposits	2.5		%	3.8		%	4.8		%

(1) Annual averages presented for December 31, 2021.

We have access to sources of traditional brokered deposits that we estimate to be $7.5 billion. Based on our internal guidelines, we have currently chosen to limit our use of these sources to a lesser amount.

We have short-term borrowing sources available to supplement deposits and meet our funding needs. Such borrowings are generally used to fund our mortgage finance loans, due to their liquidity, short duration and interest spreads available. These borrowing sources include federal funds purchased from our downstream correspondent bank relationships (which consist of banks that are smaller than our Bank) and from our upstream correspondent bank relationships (which consist of banks that are larger than our Bank), customer repurchase agreements and advances from the FHLB and the Federal Reserve. The following table summarizes the outstanding balance of our short-term borrowings, all of which mature within one year:



(in thousands)	March 31, 2022		December 31, 2021

Repurchase agreements	$	2,033	2,832
FHLB borrowings	1,425,000		2,200,000

Total short-term borrowings	$	1,427,033	2,202,832

The following table summarizes our short-term borrowing capacities net of balances outstanding.



(in thousands)	March 31, 2022		December 31, 2021
FHLB borrowing capacity relating to loans	$	4,200,346	$	5,190,703
FHLB borrowing capacity relating to securities	3,378,391		3,352,111
Total FHLB borrowing capacity(1)	$	7,578,737	$	8,542,814
Unused federal funds lines available from commercial banks	$	1,096,000	$	892,000
Unused Federal Reserve borrowings capacity	$	2,806,914	$	2,414,702
Unused revolving line of credit(2)	$	75,000	$	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, 2023. 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, 2022.

We also have long-term debt outstanding of $929.4 million as of March 31, 2022, comprised of trust preferred securities, subordinated notes and senior unsecured credit linked notes with maturity dates ranging from September 2024 to December 2036. The Company may consider raising additional capital, if needed, in public or private offerings of debt or equity securities to supplement deposits and meet our long-term funding needs.

For additional information regarding our borrowings see Note 5 - Borrowings in the accompanying notes to the consolidated unaudited financial statements included elsewhere in this report.

As the Company is a holding company and is a separate operating entity from our subsidiary bank, our 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 Restrictions in the accompanying notes to the consolidated unaudited financial statements included elsewhere in this report for additional information regarding dividend restrictions.

Periodically, based on market conditions and other factors, and subject to compliance with applicable laws and regulations and the terms of our existing indebtedness, we or the Bank may repay, repurchase, exchange or redeem outstanding indebtedness, or otherwise enter into transactions regarding our debt or capital structure. For example, we and the Bank periodically evaluate 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, as we seek to actively manage our debt maturity profile and interest cost.

As of March 31, 2022, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on us.

Capital Resources

Our equity capital averaged $3.2 billion for the three months ended March 31, 2022 compared to $3.0 billion for the same period in 2021. We have not paid any cash dividends on our common stock since we commenced operations and have no plans to do so in the foreseeable future.

See Note 7 - Regulatory Restrictions in the accompanying notes to the consolidated unaudited financial statements included elsewhere in this report for additional information regarding dividend restrictions.

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.

We follow financial accounting and reporting policies that are in accordance with accounting principles generally accepted in the United States. Certain significant policies are summarized in Note 1 - Operations and Summary of Significant Accounting Policies in the notes to the consolidated unaudited financial statements included elsewhere in this report and in our 2021 Form 10-K. Not all significant accounting policies require management to make difficult, subjective or complex judgments. However, the policy noted below could be deemed to be highly dependent on estimates, assumptions and judgments that meet the SEC’s definition of a critical accounting estimate.

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 ASC 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 our 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 our 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 unaudited financial statements included elsewhere in this report for further discussion of the risk factors considered by management in establishing the allowance for credit losses.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange rates, commodity prices, or equity prices. Additionally, the financial instruments subject to market risk can be classified either as held for trading purposes or held for other than trading.

We are subject to market risk primarily through the effect of changes in interest rates on our portfolio of assets held for purposes other than trading. Additionally, we have some market risk relative to commodity prices through our energy lending activities. Declines and volatility in commodity prices negatively impacted our energy clients' ability to perform on their loan obligations in recent years, and further uncertainty and volatility could have a negative impact on our customers and our loan portfolio in future periods. Foreign exchange rates, commodity prices (other than energy) and equity prices are not expected to pose significant market risk to us.

The responsibility for managing market risk rests with the Asset and Liability Management Committee (“ALCO”), which operates under policy guidelines established by our board of directors. The acceptable negative variation in net interest revenue due to a 100 basis point increase or decrease in interest rates is generally limited by these guidelines to plus or minus 10-12%. Oversight of our compliance with these guidelines is the ongoing responsibility of the ALCO, with exceptions reported to the Executive Risk Committee, and to our Board of Directors if necessary, on a quarterly basis. Additionally, the Credit Policy Committee (“CPC”) specifically manages risk relative to commodity price market risks. The CPC establishes maximum portfolio concentration levels for energy loans as well as maximum advance rates for energy collateral.

Interest Rate Risk Management

Our interest rate sensitivity is illustrated in the following table. The table reflects rate-sensitive positions as of March 31, 2022 and is not necessarily indicative of positions on other dates. The balances of interest rate sensitive assets and liabilities are presented in the periods in which they next reprice to market rates or mature and are aggregated to show the interest rate sensitivity gap. The mismatch between repricings or maturities within a time period is commonly referred to as the “gap” for that period. A positive gap (asset sensitive), where interest rate-sensitive assets exceed interest rate sensitive liabilities, generally will result in the net interest margin increasing in a rising rate environment and decreasing in a falling rate environment. A negative gap (liability sensitive) will generally have the opposite results on the net interest margin. To reflect anticipated prepayments, certain asset and liability categories are shown in the table using estimated cash flows rather than contractual cash flows. The Company employs interest rate floors in certain variable rate loans to enhance the yield on those loans at times when market interest rates are extraordinarily low. The degree of asset sensitivity, spreads on loans and net interest margin may be reduced until rates increase by an amount sufficient to eliminate the effects of floors. The adverse effect of floors as market rates increase may also be offset by the positive gap, the extent to which rates on deposits and other funding sources lag increasing market rates for loans and changes in composition of funding.

Interest Rate Sensitivity Gap Analysis

March 31, 2022


(in thousands)	0-3 month Balance		4-12 month Balance		1-3 year Balance		3+ year Balance		Total Balance
Assets:
Interest-bearing cash and cash equivalents	$	5,136,680	$	—	$	—	$	—	$	5,136,680
Investment securities(1)	53,362		1,616		262,638		3,324,399		3,642,015
Total variable loans	18,758,901		103,979		27,640		270,758		19,161,278
Total fixed loans	260,346		1,338,040		227,872		764,568		2,590,826
Total loans(2)	19,019,247		1,442,019		255,512		1,035,326		21,752,104
Total interest sensitive assets	$	24,209,289	$	1,443,635	$	518,150	$	4,359,725	$	30,530,799
Liabilities:
Interest bearing customer deposits	$	11,092,017	$	—	$	—	$	—	$	11,092,017
CDs & IRAs	54,225		233,417		17,897		524		306,063
Traditional brokered deposits	—		545,135		—		—		545,135
Total interest bearing deposits	11,146,242		778,552		17,897		524		11,943,215
Short-term borrowings	1,427,033		—		—		—		1,427,033
Long-term debt	270,988		—		—		658,426		929,414
Total interest sensitive liabilities	$	12,844,263	$	778,552	$	17,897	$	658,950	$	14,299,662
GAP	$	11,365,026	$	665,083	$	500,253	$	3,700,775	$	—
Cumulative GAP	$	11,365,026	$	12,030,109	$	12,530,362	$	16,231,137	$	16,231,137

Non-interest bearing deposits									13,434,723
Stockholders’ equity									3,090,038
Total									$	16,524,761

(1)Available-for-sale debt securities and equity securities based on fair market value.

(2)Total loans includes loans held for investments, stated at gross, and loans held for sale.

While a gap interest table is useful in analyzing interest rate sensitivity, an interest rate sensitivity simulation provides a better illustration of the sensitivity of earnings to changes in interest rates. Earnings are also affected by the effects of changing interest rates on the value of funding derived from demand deposits and stockholders’ equity. We perform a sensitivity analysis to identify interest rate risk exposure on net interest income. We quantify and measure interest rate risk exposure using a model to dynamically simulate the effect of changes in net interest income relative to changes in interest rates over the next twelve months based on three interest rate scenarios. These are a static rate scenario and two “shock test” scenarios.

These scenarios are based on interest rates as of the last day of a reporting period published by independent sources and incorporate relevant spreads of instruments that are actively traded in the open market. The Federal Reserve’s federal funds target affects short-term borrowing; the prime lending rate, LIBOR and other alternative indexes are the basis for most of our variable-rate loan pricing. The 10-year treasury rate is also monitored because of its effect on prepayment speeds for mortgage-backed securities. These are our primary interest rate exposures. We are currently not using derivatives to manage our interest rate exposure, although we may do so in the future if that appears advisable.

For modeling purposes, the “shock test” scenarios as of March 31, 2022 and 2021 assume immediate, sustained 100 and 200 basis point increases in interest rates. Although short-term rates have begun to rise, they still remained low through the first three months of 2021 and 2022, and, as such, we do not believe that analysis of an assumed decrease in interest rates would provide meaningful results. We will continue to evaluate these scenarios as interest rates change.

Our interest rate risk exposure model incorporates assumptions regarding the level of interest rate on indeterminable maturity deposits (demand deposits, interest-bearing transaction accounts and savings accounts) for a given level of market rate change. In the current environment of decreasing short-term rates, deposit pricing can vary by product and customer. These assumptions have been developed through a combination of historical analysis and projection of future expected pricing behavior. Changes in prepayment behavior of mortgage-backed securities, residential and commercial mortgage loans in each rate environment are captured using industry estimates of prepayment speeds for various coupon segments of the portfolio. The impact of these changes is factored into the simulation model. This modeling indicated interest rate sensitivity as follows:


	Anticipated Impact Over the Next Twelve Months as Compared to Most Likely Scenario
	March 31, 2022				March 31, 2021
(in thousands)	100 bps Increase		200 bps Increase		100 bps Increase		200 bps Increase
Change in net interest income	$	70,943	$	149,105	$	38,809	$	93,622

The simulations used to manage market risk are based on numerous assumptions regarding the effect of changes in interest rates on the timing and extent of repricing characteristics, future cash flows and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions, customer behavior and management strategies, among other factors.

In 2017, the U.K. Financial Conduct Authority announced that it would no longer compel banks to submit rates for the calculation of LIBOR after 2021. The administrator of LIBOR has proposed to extend publication of the most commonly used U.S. dollar LIBOR settings to June 30, 2023 and to cease publishing other LIBOR settings on December 31, 2021. The U.S. federal banking agencies issued guidance strongly encouraging banking organizations to cease using U.S. dollar LIBOR as a reference rate in new contracts as soon as practicable and in any event by December 31, 2021. We have significant exposure to financial instruments with attributes that are either directly or indirectly dependent on LIBOR to establish their interest rate and/or value, some of which mature after December 31, 2021. We have established a working group, consisting of key stakeholders from throughout the Company, to monitor developments relating to LIBOR changes and to guide the Bank’s response. This team is continuing to work to ensure that our technology systems are prepared for the transition, our loan documents that reference LIBOR-based rates have been appropriately amended to reference other methods of interest rate determinations and internal and external stakeholders are apprised of the transition. Based on our transition progress to date, we ceased originating LIBOR-based products and began originating Bloomberg Short Term Yield Index based loans in December 2021. We are also prepared with other alternative benchmarks to support the transition from LIBOR. Over the next 12 months, we will continue to transition all remaining LIBOR-based products to an alternative benchmark. We will also continue to evaluate the transition process and align our trajectory with regulatory guidelines regarding the cessation of LIBOR as well as monitor new developments for transitioning to alternative reference rates.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the supervision and participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, we have concluded that, as of the end of such period, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to the Company's management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is subject to various claims and legal actions that may arise in the ordinary course of conducting its business. Management does not expect the disposition of any of these matters to have a material adverse impact on the Company’s financial statements or results of operations.

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors previously disclosed in the 2021 Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) Exhibits





10.1			Form of 2022 Time-Based Award Agreement pursuant to the Texas Capital Bancshares, Inc. 2015 Long-Term Incentive Plan +*
10.2			Form of 2022 Performance-Based Award Agreement pursuant to the Texas Capital Bancshares, Inc. 2015 Long-Term Incentive Plan +*
31.1			Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act*
31.2			Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act*
32.1			Section 1350 Certification of Chief Executive Officer**
32.2			Section 1350 Certification of Chief Financial Officer**
101.INS			XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH			XBRL Taxonomy Extension Schema Document*
101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF			XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB			XBRL Taxonomy Extension Label Linkbase Document*
101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document*
104			Cover Page Interactive Data File (embedded within the Inline XBRL document)

* Filed herewith

** Furnished herewith

+ Management contract or compensatory plan arrangement

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

TEXAS CAPITAL BANCSHARES, INC.

Date: April 21, 2022


/s/ J. Matthew Scurlock
J. Matthew Scurlock
Chief Financial Officer
(Duly authorized officer and principal financial officer)

TABLE OF CONTENTS

Part I Financial Information Item 1. Financial Statements Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosure About Market Risk Item 4. Controls and Procedures Part II - Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 6. Exhibits, Financial Statement Schedules

Exhibits

10.1 Form of 2022 Time-Based Award Agreement pursuant to the Texas Capital Bancshares, Inc. 2015 Long-Term Incentive Plan+* 10.2 Form of 2022 Performance-Based Award Agreement pursuant to the Texas Capital Bancshares, Inc. 2015 Long-Term Incentive Plan+* 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act* 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act* 32.1 Section 1350 Certification of Chief Executive Officer** 32.2 Section 1350 Certification of Chief Financial Officer**

TCBI 10-Q Quarter ended March 31, 2022

Exhibits