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TEXAS CAPITAL BANCSHARES INC/TX - Quarter Report: 2022 September (Form 10-Q)


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 September 30, 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
DallasTXUSA75201
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareTCBINasdaq Stock Market
5.75% Non-Cumulative Perpetual Preferred Stock Series B, par value $0.01 per shareTCBIONasdaq 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 FilerxAccelerated Filer
Non-Accelerated FilerSmaller 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 October 19, 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 49,899,211



Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended September 30, 2022

Index
 
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 6.






PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(in thousands except share data)September 30, 2022December 31, 2021
Assets
Cash and due from banks$240,609 $180,663 
Interest bearing cash and cash equivalents3,399,638 7,765,996 
Available-for-sale debt securities2,380,774 3,538,201 
Held-to-maturity debt securities955,875 — 
Equity securities32,973 45,607 
Investment securities3,369,622 3,583,808 
Loans held for sale3,142,178 8,123 
Loans held for investment, mortgage finance4,908,822 7,475,497 
Loans held for investment14,878,959 15,331,457 
Less: Allowance for credit losses on loans234,613 211,866 
Loans held for investment, net19,553,168 22,595,088 
Premises and equipment, net27,180 20,901 
Accrued interest receivable and other assets648,172 559,897 
Other assets held for sale26,450 — 
Goodwill and intangible assets, net1,496 17,262 
Total assets$30,408,513 $34,731,738 
Liabilities and Stockholders’ Equity
Liabilities:
Non-interest bearing deposits$11,494,685 $13,390,370 
Interest bearing deposits13,003,878 14,718,995 
Total deposits24,498,563 28,109,365 
Accrued interest payable18,465 7,699 
Other liabilities297,900 273,488 
Other liabilities held for sale75,564 — 
Short-term borrowings1,701,480 2,202,832 
Long-term debt930,766 928,738 
Total liabilities27,522,738 31,522,122 
Stockholders’ equity:
Preferred stock, $0.01 par value, $1,000 liquidation value:
Authorized shares - 10,000,000
Issued shares - 300,000 shares issued at September 30, 2022 and December 31, 2021
300,000 300,000 
Common stock, $0.01 par value:
Authorized shares - 100,000,000
Issued shares - 50,840,022 and 50,618,911 at September 30, 2022 and December 31, 2021, respectively
509 506 
Additional paid-in capital1,020,153 1,008,559 
Retained earnings2,050,563 1,948,274 
Treasury stock - 942,296 and 417 shares at cost at September 30, 2022 and December 31, 2021, respectively
(50,031)(8)
Accumulated other comprehensive loss, net of taxes(435,419)(47,715)
Total stockholders’ equity2,885,775 3,209,616 
Total liabilities and stockholders’ equity$30,408,513 $34,731,738 
See accompanying notes to consolidated financial statements.
3


TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND OTHER
COMPREHENSIVE INCOME/(LOSS) - UNAUDITED
 Three months ended September 30,Nine months ended September 30,
(in thousands except per share data)2022202120222021
Interest income
Interest and fees on loans$282,473 $202,748 $688,420 $616,153 
Investment securities15,002 10,235 46,969 31,040 
Interest bearing cash and cash equivalents24,596 3,606 37,561 9,500 
Total interest income322,071 216,589 772,950 656,693 
Interest expense
Deposits60,317 14,719 94,513 50,994 
Short-term borrowings10,011 748 15,628 3,842 
Long-term debt12,663 10,586 34,651 27,052 
Total interest expense82,991 26,053 144,792 81,888 
Net interest income239,080 190,536 628,158 574,805 
Provision for credit losses12,000 5,000 32,000 (20,000)
Net interest income after provision for credit losses227,080 185,536 596,158 594,805 
Non-interest income
Service charges on deposit accounts5,701 4,622 17,726 13,972 
Wealth management and trust fee income3,631 3,382 11,594 9,380 
Brokered loan fees3,401 6,032 11,504 22,276 
Servicing income212 292 677 15,236 
Investment banking and trading income7,812 4,127 23,117 17,985 
Net gain/(loss) on sale of loans held for sale— (1,185)— 1,317 
Other4,576 7,509 7,239 26,605 
Total non-interest income25,333 24,779 71,857 106,771 
Non-interest expense
Salaries and benefits129,336 87,503 333,319 261,855 
Occupancy expense9,433 8,324 27,192 24,463 
Marketing8,282 2,123 21,765 5,720 
Legal and professional16,775 11,055 38,365 28,479 
Communications and technology18,470 28,374 48,819 58,695 
Federal Deposit Insurance Corporation (“FDIC”) insurance assessment3,953 4,500 11,252 16,339 
Servicing-related expenses— 2,396 — 27,740 
Other10,798 8,712 33,730 29,072 
Total non-interest expense197,047 152,987 514,442 452,363 
Income before income taxes55,366 57,328 153,573 249,213 
Income tax expense13,948 13,938 38,346 60,404 
Net income41,418 43,390 115,227 188,809 
Preferred stock dividends4,313 4,312 12,938 14,408 
Net income available to common stockholders$37,105 $39,078 $102,289 $174,401 
Other comprehensive income/(loss):
Change in unrealized gain/(loss)$(207,204)$(18,131)$(494,261)$(71,501)
Amounts reclassified into net income609 — 3,498 — 
Other comprehensive income/(loss)(206,595)(18,131)(490,763)(71,501)
Income tax expense/(benefit)(43,384)(3,808)(103,059)(15,015)
Other comprehensive income/(loss), net of tax(163,211)(14,323)(387,704)(56,486)
Comprehensive income/(loss)$(121,793)$29,067 $(272,477)$132,323 
Basic earnings per common share$0.74 $0.77 $2.03 $3.45 
Diluted earnings per common share$0.74 $0.76 $2.00 $3.41 
See accompanying notes to consolidated financial statements.
4



TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED
Preferred StockCommon StockAdditional Treasury StockAccumulated Other 
 Paid-inRetainedComprehensive 
(in thousands except share data)SharesAmountSharesAmountCapitalEarningsSharesAmountIncome/(Loss)Total
Balance at June 30, 2021300,000 $300,000 50,592,618 $506 $992,469 $1,848,379 (417)$(8)$(26,389)$3,114,957 
Comprehensive income:
Net income— — — — — 43,390 — — — 43,390 
Change in other comprehensive income/(loss), net of taxes— — — — — — — — (14,323)(14,323)
Total comprehensive income29,067 
Stock-based compensation expense recognized in earnings
— — — — 8,324 — — — — 8,324 
Preferred stock dividend — — — — — (4,312)— — — (4,312)
Issuance of stock related to stock-based awards
— — 13,425 — (284)— — — — (284)
Balance at September 30, 2021300,000 $300,000 50,606,043 $506 $1,000,509 $1,887,457 (417)$(8)$(40,712)$3,147,752 
Balance at June 30, 2022300,000 $300,000 50,820,337 $508 $1,015,105 $2,013,458 (942,296)$(50,031)$(272,208)$3,006,832 
Comprehensive income:
Net income— — — — — 41,418 — — — 41,418 
Change in other comprehensive income/(loss), net of taxes— — — — — — — — (163,211)(163,211)
Total comprehensive loss(121,793)
Stock-based compensation expense recognized in earnings
— — — — 5,376 — — — — 5,376 
Preferred stock dividend— — — — — (4,313)— — — (4,313)
Issuance of stock related to stock-based awards
— — 19,685 (328)— — — — (327)
Balance at September 30, 2022300,000 $300,000 50,840,022 $509 $1,020,153 $2,050,563 (942,296)$(50,031)$(435,419)$2,885,775 


See accompanying notes to consolidated financial statements.
5


Preferred StockCommon StockAdditional Treasury StockAccumulated Other 
 Paid-inRetainedComprehensive 
(in thousands except share data)SharesAmountSharesAmountCapitalEarningsSharesAmountIncome/(Loss)Total
Balance at December 31, 2020 (audited)6,000,000 $150,000 50,470,867 $504 $991,898 $1,713,056 (417)$(8)$15,774 $2,871,224 
Comprehensive income:
Net income— — — — — 188,809 — — — 188,809 
Change in other comprehensive income/(loss), net of taxes— — — — — — — — (56,486)(56,486)
Total comprehensive income132,323 
Stock-based compensation expense recognized in earnings
— — — — 22,100 — — — — 22,100 
Issuance of preferred stock300,000 300,000 — — (10,277)— — — — 289,723 
Preferred stock dividend — — — — — (14,408)— — — (14,408)
Issuance of stock related to stock-based awards
— — 135,176 (3,212)— — — — (3,210)
Redemption of preferred stock(6,000,000)(150,000)— — — — — — — (150,000)
Balance at September 30, 2021300,000 $300,000 50,606,043 $506 $1,000,509 $1,887,457 (417)$(8)$(40,712)$3,147,752 
Balance at December 31, 2021 (audited)300,000 $300,000 50,618,911 $506 $1,008,559 $1,948,274 (417)$(8)$(47,715)$3,209,616 
Comprehensive income:
Net income— — — — — 115,227 — — — 115,227 
Change in other comprehensive income/(loss), net of taxes— — — — — — — — (387,704)(387,704)
Total comprehensive loss(272,477)
Stock-based compensation expense recognized in earnings
— — — — 15,805 — — — — 15,805 
Preferred stock dividend— — — — — (12,938)— — — (12,938)
Issuance of stock related to stock-based awards
— — 221,111 (4,211)— — — — (4,208)
Repurchase of common stock— — — — — — (941,879)(50,023)— (50,023)
Balance at September 30, 2022300,000 $300,000 50,840,022 $509 $1,020,153 $2,050,563 (942,296)$(50,031)$(435,419)$2,885,775 
See accompanying notes to consolidated financial statements.
6


TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
 Nine months ended September 30,
(in thousands)20222021
Operating activities
Net income$115,227 $188,809 
Adjustments to reconcile net income to net cash provided by operating activities:
Provision/(benefit) for credit losses32,000 (20,000)
Depreciation and amortization expense35,360 65,943 
Net (gain)/loss on sale of loans held for sale— (1,317)
Decrease in valuation allowance on mortgage servicing rights— (16,448)
Stock-based compensation expense15,991 23,192 
Purchases and originations of loans held for sale(1,642)(1,413,899)
Proceeds from sales and repayments of loans held for sale5,050 1,675,246 
Changes in operating assets and liabilities:
Accrued interest receivable and other assets(2,152)86,707 
Accrued interest payable and other liabilities14,266 (41,920)
Net cash provided by operating activities214,100 546,313 
Investing activities
Purchases of available-for-sale debt securities(665,388)(952,982)
Proceeds from maturities, redemptions and pay-downs of available-for-sale debt securities388,223 400,429 
Proceeds from maturities, redemptions and pay-downs of held-to-maturity debt securities66,500 — 
Sales/(purchases) of equity securities, net3,421 — 
Originations of loans held for investment, mortgage finance(77,518,608)(128,503,055)
Proceeds from pay-offs of loans held for investment, mortgage finance80,085,283 129,054,151 
Proceeds from sale of mortgage servicing rights— 108,925 
Net (increase)/decrease in loans held for investment, excluding mortgage finance(2,690,164)118,166 
Purchases of premises and equipment, net(10,456)(2,619)
Net cash provided by/(used in) investing activities(341,189)223,015 
Financing activities
Net decrease in deposits(3,610,802)(1,182,921)
Issuance of stock related to stock-based awards(4,208)(3,210)
Net proceeds from issuance of preferred stock— 289,723 
Redemption of preferred stock— (150,000)
Preferred stock dividends paid(12,938)(14,408)
Repurchase of common stock(50,023)— 
Net decrease in short-term borrowings(501,352)(908,281)
Net proceeds from issuance of long-term debt— 639,440 
Redemption of long-term debt— (111,000)
Net cash used in financing activities(4,179,323)(1,440,657)
Net decrease in cash and cash equivalents(4,306,412)(671,329)
Cash and cash equivalents at beginning of period7,946,659 9,206,380 
Cash and cash equivalents at end of period$3,640,247 $8,535,051 
Supplemental disclosures of cash flow information:
Cash paid during the period for interest$134,026 $84,118 
Cash paid during the period for income taxes48,569 99,915 
Transfers of loans from held for investment to held for sale3,137,792 — 
Transfers of debt securities from available-for-sale to held-to-maturity1,019,365 — 
See accompanying notes to consolidated financial statements.
7


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(1) Operations and Summary of Significant Accounting Policies
Organization and Nature of Business
Texas Capital Bancshares, Inc. (“we,” “us”, or the “Company”), a Delaware corporation, was incorporated in November 1996 and commenced banking operations in December 1998. The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiary, Texas Capital Bank (the “Bank”).
We serve the needs of commercial businesses and professionals and entrepreneurs located in Texas as well as operate several lines of business serving a regional or national clientele of commercial borrowers. We are primarily a secured lender, with the majority of our loans held for investment, excluding mortgage finance loans and other national lines of business, being made to businesses headquartered in or with operations in Texas. Our national lines of business provide specialized lending products to businesses throughout the United States.
On September 6, 2022, we announced the sale of BankDirect Capital Finance (“BDCF” or “disposal group”), our insurance premium finance subsidiary, to AFCO Credit Corporation, an indirect wholly-owned subsidiary of Truist Financial Corp. The sale of BDCF includes its business operations and loan portfolio of approximately $3.1 billion as of September 30, 2022. The sale is an all-cash transaction for a purchase price of approximately $3.4 billion, representing an 8.5% asset premium compared to the value of the purchased loan portfolio as of September 30, 2022.
The transaction resulted in the recognition of a disposal group that is classified as held for sale but does not meet the criteria for discontinued operations reporting. As such, the loans, assets and liabilities related to the disposal group were transferred at the lower of cost or fair value to loans held for sale, other assets held for sale and other liabilities held for sale, respectively, on the consolidated balance sheet as of September 30, 2022. The pre-tax net income for the disposal group for the three months ended September 30, 2022 and 2021 was $11.9 million and $17.4 million, respectively, and was $49.5 million and $48.7 million for the nine months ended September 30, 2022 and 2021, respectively.
The sale is expected to close in the fourth quarter of 2022, subject to various customary closing conditions.
Basis of Presentation
Our accounting and reporting policies conform to accounting principles generally accepted in the United States (“GAAP”) and to generally accepted practices within the banking industry. Certain prior period balances have been reclassified to conform to the current period presentation.
The consolidated interim financial statements are unaudited, and certain information and disclosures in the notes to consolidated unaudited financial statements that are presented in accordance with GAAP have been condensed or omitted. In the opinion of management, the interim financial statements include all normal and recurring adjustments and the disclosures made present a fair presentation of our financial position and results of operations. The consolidated financial statements have been prepared in accordance with GAAP for interim financial information and the instructions to Form 10-Q adopted by the U.S. Securities and Exchange Commission (“SEC”). Accordingly, the financial statements and the notes to the consolidated unaudited financial statements required by GAAP for complete annual financial statements do not include all of the information and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2021, included in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for credit losses, the fair value of financial instruments and the status of contingencies are particularly susceptible to significant change.
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(2) Earnings Per Share
The following table presents the computation of basic and diluted earnings per share:
 Three months ended September 30,Nine months ended September 30,
(in thousands except share and per share data)2022202120222021
Numerator:
Net income$41,418 $43,390 $115,227 $188,809 
Preferred stock dividends4,313 4,312 12,938 14,408 
Net income available to common stockholders$37,105 $39,078 $102,289 $174,401 
Denominator:
Denominator for basic earnings per common share—weighted average common shares49,891,727 50,600,732 50,506,364 50,568,439 
Effect of dilutive outstanding stock-settled awards526,157 538,823 584,151 555,836 
Denominator for dilutive earnings per common share—weighted average diluted common shares50,417,884 51,139,555 51,090,515 51,124,275 
Basic earnings per common share$0.74 $0.77 $2.03 $3.45 
Diluted earnings per common share$0.74 $0.76 $2.00 $3.41 
Anti-dilutive outstanding stock-settled awards174,706 208,813 315,499 104,174 
(3) Investment Securities
The following is a summary of our investment securities: 
(in thousands)Amortized
Cost(1)
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
September 30, 2022
Available-for-sale debt securities:
U.S. Treasury securities$668,093 $— $(30,812)$637,281 
U.S. government agency securities125,000 — (23,310)101,690 
Residential mortgage-backed securities1,980,590 (350,496)1,630,101 
Credit risk transfer (“CRT”) securities14,713 — (3,011)11,702 
Total available-for-sale debt securities2,788,396 (407,629)2,380,774 
Held-to-maturity debt securities:
Residential mortgage-backed securities955,875 — (136,174)819,701 
Total held-to-maturity debt securities955,875 — (136,174)819,701 
Equity securities32,973 
Total investment securities(2)$3,369,622 
December 31, 2021
Available-for-sale debt securities:
U.S. government agency securities$125,000 $— $(4,056)$120,944 
Residential mortgage-backed securities3,288,261 156 (63,039)3,225,378 
Tax-exempt asset-backed securities170,626 9,407 — 180,033 
CRT securities14,713 — (2,867)11,846 
Total available-for-sale debt securities3,598,600 9,563 (69,962)3,538,201 
Equity securities45,607 
Total investment securities(2)$3,583,808 
(1)Excludes accrued interest receivable of $4.2 million and $6.6 million at September 30, 2022 and December 31, 2021, respectively, related to available-for-sale debt securities, and $1.5 million at September 30, 2022 related to held-to-maturity debt securities that is recorded in accrued interest receivable and other assets on the consolidated balance sheets.
(2)Includes available-for-sale debt securities and equity securities at estimated fair value and held-to-maturity debt securities at amortized cost.
Debt Securities
In the first quarter of 2022, we transferred $1.0 billion of available-for-sale debt securities to held-to-maturity at fair value. The transfer was the result of deliberate actions taken to execute on our asset-liability management strategies in response to rising
9


interest rates. Management determined that it has both the positive intent and ability to hold these securities to maturity. On the date of transfer, the difference between the carrying value and fair value of these securities, which was recorded, net of tax, as a loss in accumulated other comprehensive income/(loss) (“AOCI”), resulted in the securities transferring at a discount of $69.2 million. The discount and unrealized loss, net of tax, in AOCI will be amortized to interest income over the remaining life of the securities using the interest method. There were no gains or losses recognized as a result of this transfer.
In the second quarter of 2022, our tax-exempt asset-backed securities were redeemed at par. The outstanding certificates were cancelled and related trusts were terminated. Unrealized gains and losses previously recorded, net of tax, in AOCI were reversed and no additional gains or losses were recognized as a result of the redemption.
The amortized cost and estimated fair value as of September 30, 2022, excluding accrued interest receivable, of available-for-sale and held-to-maturity debt securities are presented below by contractual maturity. Actual maturities may differ from contractual maturities of mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
Available-for-SaleHeld-to-Maturity
(in thousands)Amortized CostFair ValueAmortized CostFair Value
Due within one year$41 $41 $— $— 
Due after one year through five years668,093 637,281 — — 
Due after five years through ten years156,587 127,368 — — 
Due after ten years1,963,675 1,616,084 955,875 819,701 
Total$2,788,396 $2,380,774 $955,875 $819,701 
The following table discloses our available-for-sale debt securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months:
Less Than 12 Months12 Months or LongerTotal
(in thousands)Fair ValueUnrealized LossFair ValueUnrealized LossFair ValueUnrealized Loss
September 30, 2022
U.S. treasury securities$637,281 $(30,812)$— $— $637,281 $(30,812)
U.S. government agency securities— — 101,690 (23,310)101,690 (23,310)
Residential mortgage-backed securities310,838 (67,167)1,318,654 (283,329)1,629,492 (350,496)
CRT securities— — 11,702 (3,011)11,702 (3,011)
Total$948,119 $(97,979)$1,432,046 $(309,650)$2,380,165 $(407,629)
December 31, 2021
U.S. government agency securities$24,085 $(915)$96,859 $(3,141)$120,944 $(4,056)
Residential mortgage-backed securities2,871,052 (50,721)303,491 (12,318)3,174,543 (63,039)
CRT securities— — 11,846 (2,867)11,846 (2,867)
Total$2,895,137 $(51,636)$412,196 $(18,326)$3,307,333 $(69,962)
At September 30, 2022, we had 98 available-for-sale debt securities in an unrealized loss position, comprised of twelve U.S. treasury securities, five U.S. government agency securities, 79 residential mortgage-backed securities, and two CRT securities. The unrealized losses on the available-for-sale debt securities were the result of changes in market interest rates compared to the date the securities were acquired rather than the credit quality of the issuers or underlying loans. We do not intend to sell and it is not more likely than not that we will be required to sell these available-for-sale debt securities before recovery of the amortized cost of such securities in an unrealized loss position and have, therefore, recorded the unrealized losses related to this portfolio in AOCI. Held-to-maturity debt securities consist of government guaranteed securities for which no loss is expected. At September 30, 2022 and December 31, 2021, no allowance for credit losses was established for available-for-sale or held-to-maturity debt securities.
Debt securities with carrying values of approximately $18.6 million and $1.4 million were pledged to secure certain customer repurchase agreements and deposits, respectively, at September 30, 2022. The comparative amounts at December 31, 2021 were $22.0 million and $2.0 million, respectively.
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Equity Securities
Equity securities consist of investments that qualify for consideration under the regulations implementing the Community Reinvestment Act and investments related to our non-qualified deferred compensation plan. The following is a summary of unrealized and realized gains/(losses) recognized on equity securities included in other non-interest income on the consolidated statements of income and other comprehensive income/(loss):
Three months ended September 30,Nine months ended September 30,
(in thousands)2022202120222021
Net gains/(losses) recognized during the period$(1,165)$850 $(9,801)$4,496 
Less: Realized net gains/(losses) recognized on securities sold(587)347 (589)1,096 
Unrealized net gains/(losses) recognized on securities held$(578)$503 $(9,212)$3,400 
(4) Loans and Allowance for Credit Losses on Loans
Loans are summarized by portfolio segment as follows:
(in thousands)September 30, 2022December 31, 2021
Loans held for investment(1):
Commercial$8,813,614 $9,897,561 
Energy1,106,097 721,373 
Mortgage finance4,908,822 7,475,497 
Real estate5,015,704 4,777,530 
Gross loans held for investment19,844,237 22,871,961 
Unearned income (net of direct origination costs)(56,456)(65,007)
Total loans held for investment19,787,781 22,806,954 
Allowance for credit losses on loans(234,613)(211,866)
Total loans held for investment, net$19,553,168 $22,595,088 
Loans held for sale:
Insurance premium finance loans, at lower of cost or fair value(2)
$3,137,791 $— 
Mortgage loans, at fair value4,387 8,123 
Total loans held for sale$3,142,178 $8,123 
(1)    Excludes accrued interest receivable of $71.8 million and $50.9 million at September 30, 2022 and December 31, 2021, respectively, that is recorded in accrued interest receivable and other assets on the consolidated balance sheets.
(2)    September 30, 2022 includes $1.3 million in non-accrual loans and $3.1 million in loans past due 90 days and still accruing that were transferred from loans held for investment to loans held for sale as of September 30, 2022.
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The following tables summarize our gross loans held for investment by year of origination and internally assigned credit grades:
(in thousands)202220212020201920182017 and priorRevolving lines of creditRevolving lines of credit converted to term loansTotal
September 30, 2022
Commercial
(1-7) Pass$1,530,588 $776,714 $252,321 $366,245 $225,307 $316,001 $5,004,072 $27,344 $8,498,592 
(8) Special mention28,302 38,477 6,398 37,809 7,526 5,769 35,967 3,820 164,068 
(9) Substandard - accruing— 42,148 315 30,647 15,133 6,365 28,378 — 122,986 
(9+) Non-accrual7,622 602 — 36 9,947 6,875 2,886 — 27,968 
Total commercial$1,566,512 $857,941 $259,034 $434,737 $257,913 $335,010 $5,071,303 $31,164 $8,813,614 
Energy
(1-7) Pass$129,764 $23,517 $— $— $20,000 $5,743 $912,936 $— $1,091,960 
(8) Special mention— — — — — — — — — 
(9) Substandard - accruing— — — — — — 7,637 — 7,637 
(9+) Non-accrual— — — — — — 6,500 — 6,500 
Total energy$129,764 $23,517 $— $— $20,000 $5,743 $927,073 $— $1,106,097 
Mortgage finance
(1-7) Pass$7,913 $457,792 $196,598 $393,675 $555,480 $3,292,412 $— $— $4,903,870 
(8) Special mention— — — — — — — — — 
(9) Substandard - accruing— — — — 1,464 3,488 — — 4,952 
(9+) Non-accrual— — — — — — — — — 
Total mortgage finance$7,913 $457,792 $196,598 $393,675 $556,944 $3,295,900 $— $— $4,908,822 
Real estate
CRE
(1-7) Pass$800,519 $611,459 $657,829 $487,368 $183,225 $366,644 $60,672 $15,969 $3,183,685 
(8) Special mention2,396 7,249 7,940 5,297 33,454 22,063 — — 78,399 
(9) Substandard - accruing— 17,850 — — 11,522 18,629 — — 48,001 
(9+) Non-accrual— — — — — 187 — — 187 
RBF
(1-7) Pass82,515 85,477 19,560 13,915 7,462 1,162 390,476 — 600,567 
(8) Special mention— — — — — — — — — 
(9) Substandard - accruing— — — — — — — — — 
(9+) Non-accrual— — — — — — — — — 
Other
(1-7) Pass129,406 137,275 103,917 79,637 79,984 170,709 39,074 27,316 767,318 
(8) Special mention— — 10,711 — — 10,099 — — 20,810 
(9) Substandard - accruing— — — — — 1,058 — — 1,058 
(9+) Non-accrual— — 1,081 — — — — — 1,081 
Secured by 1-4 family
(1-7) Pass45,887 90,434 55,261 26,854 19,439 72,329 4,056 — 314,260 
(8) Special mention— — — — — 44 — — 44 
(9) Substandard - accruing— — — — — 166 — — 166 
(9+) Non-accrual— — — — — 128 — — 128 
Total real estate$1,060,723 $949,744 $856,299 $613,071 $335,086 $663,218 $494,278 $43,285 $5,015,704 
Total$2,764,912 $2,288,994 $1,311,931 $1,441,483 $1,169,943 $4,299,871 $6,492,654 $74,449 $19,844,237 
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(in thousands)202120202019201820172016 and priorRevolving lines of creditRevolving lines of credit converted to term loansTotal
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 mention2,650 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-accrual736 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 $— $— $$— $7,188 $577,988 $— $656,929 
(8) Special mention— — — — — — 27,421 — 27,421 
(9) Substandard - accruing— — — — — 8,643 — — 8,643 
(9+) Non-accrual— — — — — — 28,380 — 28,380 
Total energy$71,750 $— $— $$— $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 - accruing17,850 — — 40,900 37,393 38,188 — 2,308 136,639 
(9+) Non-accrual— — — — — 198 — — 198 
RBF
(1-7) Pass155,595 44,362 9,693 8,565 — 12,732 460,888 — 691,835 
(8) Special mention— — — — — — — — — 
(9) Substandard - accruing— — — — — — — — — 
(9+) Non-accrual— — — — — — — — — 
Other
(1-7) Pass166,202 148,811 119,017 106,343 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) Pass96,899 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 

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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)CommercialEnergyMortgage
Finance
Real
Estate
Total
Nine months ended September 30, 2022
Beginning balance$102,202 $52,568 $6,083 $51,013 $211,866 
Provision for credit losses on loans31,257 (18,636)4,073 10,923 27,617 
Charge-offs3,210 2,903 — 350 6,463 
Recoveries549 1,044 — — 1,593 
Net charge-offs (recoveries)2,661 1,859 — 350 4,870 
Ending balance$130,798 $32,073 $10,156 $61,586 $234,613 
Nine months ended September 30, 2021
Beginning balance$73,061 $84,064 $4,699 $92,791 $254,615 
Provision for credit losses on loans26,549 (24,730)1,729 (24,325)(20,777)
Charge-offs8,211 6,418 — 1,192 15,821 
Recoveries2,462 1,366 — 112 3,940 
Net charge-offs (recoveries)5,749 5,052 — 1,080 11,881 
Ending balance$93,861 $54,282 $6,428 $67,386 $221,957 
We recorded a $32.0 million provision for credit losses for the nine months ended September 30, 2022, compared to a negative provision of $20.0 million for the same period in 2021. The $32.0 million provision for credit losses resulted primarily from updated views on the downside risks to the economic forecast, partially offset by a decline in criticized loans. We recorded $4.9 million in net charge-offs during the nine months ended September 30, 2022, compared to net charge-offs of $11.9 million during the same period in 2021. Criticized loans totaled $484.0 million at September 30, 2022, compared to $582.9 million and $728.9 million at December 31, 2021 and September 30, 2021, respectively. The decrease in criticized loans as compared to June 30, 2022 was primarily due to the resolution of one mortgage finance credit that was downgraded in the second quarter of 2022 and resolved in the third quarter of 2022 with no losses recorded.
A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. At September 30, 2022, we had no collateral-dependent loans.
The table below provides an age analysis of our gross loans held for investment:
(in thousands)30-59 Days
Past Due
60-89 Days
Past Due
90 Days or More Past DueTotal Past
Due
Non-Accrual Loans(1)CurrentTotalNon-Accrual With No Allowance
September 30, 2022
Commercial$10,405 $151 $30,602 $41,158 $27,968 $8,744,488 $8,813,614 $3,637 
Energy— — — — 6,500 1,099,597 1,106,097 — 
Mortgage finance— — — — — 4,908,822 4,908,822 — 
Real estate:
CRE
52 — — 52 187 3,310,033 3,310,272 — 
RBF
— — — — — 600,567 600,567 — 
Other
700 2,453 — 3,153 1,081 786,033 790,267 — 
Secured by 1-4 family
— — 62 62 128 314,408 314,598 — 
Total$11,157 $2,604 $30,664 $44,425 $35,864 $19,763,948 $19,844,237 $3,637 
(3)As of September 30, 2022 and December 31, 2021, $1.8 million of our non-accrual loans were earning interest income on a cash basis. Additionally, $801,000 in interest income was recognized on non-accrual loans for the nine months ended September 30, 2022. Accrued interest of $100,000 was reversed during the nine months ended September 30, 2022.
As of September 30, 2022 and December 31, 2021, we did not have any loans considered restructured that were not on non-accrual. Of the non-accrual loans at September 30, 2022 and December 31, 2021, $2.2 million and $19.4 million, respectively, met the criteria for restructured. These loans had no unfunded commitments at their respective balance sheet dates.

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The following table details the recorded investment of loans restructured during the nine months ended September 30, 2022:
Extended MaturityAdjusted Payment ScheduleTotal
(in thousands, except number of contracts)Number of ContractsBalance at Period EndNumber of ContractsBalance at Period EndNumber of ContractsBalance at Period End
Nine months ended September 30, 2022
Commercial loans— $— $604 $604 
Total— $— $604 $604 
We did not have any loans that were restructured during the nine months ended September 30, 2021.
The restructuring of the loans did not have a significant impact on our allowance for credit losses at September 30, 2022. As of September 30, 2022 and 2021, we did not have any loans that were restructured within the last 12 months that subsequently defaulted.
(5) Short-term Borrowings and Long-term Debt
The table below presents a summary of short-term borrowings:
(in thousands)September 30, 2022December 31, 2021
Customer repurchase agreements$1,480 $2,832 
Federal Home Loan Bank borrowings1,700,000 2,200,000 
Total short-term borrowings$1,701,480 $2,202,832 
The table below presents a summary of long-term debt:
(in thousands)September 30, 2022December 31, 2021
Bank-issued floating rate senior unsecured credit-linked notes due 2024$271,991 $270,487 
Bank-issued 5.25% fixed rate subordinated notes due 2026
174,131 173,935 
Company-issued 4.00% fixed rate subordinated notes due 2031
371,238 370,910 
Trust preferred floating rate subordinated debentures due 2032 to 2036113,406 113,406 
Total long-term debt$930,766 $928,738 
(6) Financial Instruments with Off-Balance Sheet Risk
The table below presents our financial instruments with off-balance sheet risk as well as the activity in the allowance for off-balance sheet credit losses related to those financial instruments. This allowance is recorded in other liabilities on the consolidated balance sheets.
Three months ended September 30,Nine months ended September 30,
(in thousands)2022202120222021
Beginning balance of allowance for off-balance sheet credit losses
$17,981 $16,747 $17,265 $17,434 
Provision for off-balance sheet credit losses
3,667 1,464 4,383 777 
Ending balance of allowance for off-balance sheet credit losses
$21,648 $18,211 $21,648 $18,211 
(in thousands)September 30, 2022December 31, 2021
Commitments to extend credit - period end balance$9,182,739 $9,445,763 
Standby letters of credit - period end balance419,828 357,672 
(7) Regulatory Ratios and Capital
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The Basel III regulatory capital framework (the “Basel III Capital Rules”) adopted by U.S. federal regulatory authorities, among other things, (i) establishes the capital measure called “Common Equity Tier 1” (“CET1”), (ii) specifies that Tier 1
15


capital consist of CET1 and “Additional Tier 1 Capital” instruments meeting stated requirements, (iii) requires that most deductions/adjustments to regulatory capital measures be made to CET1 and not to other components of capital and (iv) defines the scope of the deductions/adjustments to the capital measures.
Additionally, the Basel III Capital Rules require that we maintain a 2.5% capital conservation buffer with respect to each of CET1, Tier 1 and total capital to risk-weighted assets, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers. No dividends were declared or paid on our common stock during the nine months ended September 30, 2022 or during the year ended December 31, 2021. On April 19, 2022, our board of directors authorized a share repurchase program under which we may repurchase up to $150.0 million in shares of our outstanding common stock. During the nine months ended September 30, 2022, the Company repurchased 941,879 shares of its common stock for an aggregate price of $50.0 million, at a weighted average price of $53.11 per share.
In February 2019, the federal bank regulatory agencies issued a final rule (the “2019 CECL Rule”) that revised certain capital regulations to account for changes to credit loss accounting under GAAP. The 2019 CECL Rule included a transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of adopting the new accounting standard related to the measurement of current expected credit losses on their regulatory capital ratios (three-year transition option). In March 2020, the federal bank regulatory agencies issued an interim final rule that maintains the three-year transition option of the 2019 CECL Rule and also provides banking organizations that were required under GAAP to implement CECL before the end of 2020 the option to delay for two years an estimate of the effect of CECL on regulatory capital, relative to the incurred loss methodology's effect on regulatory capital, followed by a three-year transition period (five-year transition option). We adopted CECL on January 1, 2020 and have elected to utilize the five-year transition option.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of CET1, Tier 1 and total capital to risk-weighted assets, and of Tier 1 capital to average assets, each as defined in the regulations. Management believes, as of September 30, 2022, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
Financial institutions are categorized as well capitalized based on total risk-based, Tier 1 risk-based, CET1 and Tier 1 leverage ratios. As shown in the table below, the Company’s and the Bank’s capital ratios exceeded the regulatory definition of well capitalized as of September 30, 2022 and December 31, 2021. The regulatory authorities can apply changes in classification of assets and such changes may retroactively subject the Company and the Bank to changes in capital ratios. Any such change could reduce one or more capital ratios below well capitalized status. In addition, a change may result in imposition of additional assessments by the FDIC or could result in regulatory actions that could have a material effect on our financial condition and results of operations.
Because our Bank had less than $15.0 billion in total consolidated assets as of December 31, 2009, we are allowed to continue to classify our trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1 capital.
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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.
ActualMinimum Capital Required(2)Capital Required to be Well Capitalized
(dollars in thousands)Capital AmountRatioCapital AmountRatioCapital AmountRatio
September 30, 2022
CET1
Company$3,011,505 11.08 %$1,902,047 7.00 %N/A N/A
Bank3,175,750 11.70 %1,899,579 7.00 %1,763,895 6.50 %
Total capital (to risk-weighted assets)
Company4,143,219 15.25 %2,853,071 10.50 %2,717,210 10.00 %
Bank3,736,226 13.77 %2,849,369 10.50 %2,713,685 10.00 %
Tier 1 capital (to risk-weighted assets)
Company3,421,505 12.59 %2,309,629 8.50 %1,630,326 6.00 %
Bank3,335,750 12.29 %2,306,632 8.50 %2,170,948 8.00 %
Tier 1 capital (to average assets)(1)
Company3,421,505 10.67 %1,282,691 4.00 %N/AN/A
Bank3,335,750 10.41 %1,281,909 4.00 %1,602,386 5.00 %
December 31, 2021
CET1
Company$2,949,785 11.06 %$1,866,444 7.00 %N/AN/A
Bank3,013,170 11.30 %1,866,303 7.00 %1,732,996 6.50 %
Total capital (to risk-weighted assets)
Company4,085,540 15.32 %2,799,666 10.50 %2,666,348 10.00 %
Bank3,578,014 13.42 %2,799,455 10.50 %2,666,148 10.00 %
Tier 1 capital (to risk-weighted assets)
Company3,359,785 12.60 %2,266,396 8.50 %1,599,809 6.00 %
Bank3,173,170 11.90 %2,266,225 8.50 %2,132,918 8.00 %
Tier 1 capital (to average assets)(1)
Company3,359,785 9.01 %1,490,902 4.00 %N/AN/A
Bank3,173,170 8.51 %1,490,677 4.00 %1,863,346 5.00 %
(1)    The Tier 1 capital ratio (to average assets) is not impacted by the Basel III Capital Rules; however, the Federal Reserve Board and the FDIC may require the Company and the Bank, respectively, to maintain a Tier 1 capital ratio (to average assets) above the required minimum.
(2)    Percentages represent the minimum capital ratios plus the fully phased-in 2.5% CET1 capital buffer under the Basel III Capital Rules.

17


(8) Stock-based Compensation
We have long-term incentive plans under which stock-based compensation awards are granted to employees and directors by the Company’s board of directors or its designated committee. Grants are subject to vesting requirements and may include, among other things, nonqualified stock options, stock appreciation rights, restricted stock units (“RSUs”), restricted stock and performance units, or any combination thereof. On April 19, 2022, the Company’s stockholders approved the Texas Capital Bancshares, Inc. 2022 Long-Term Incentive Plan, which provides for the issuance of 1,124,880 shares of common stock for compensation to the Company’s key employees and non-employee directors.
The table below summarizes our stock-based compensation expense:
 Three months ended September 30,Nine months ended September 30,
(in thousands)2022202120222021
Stock-settled awards:
RSUs$5,376 $8,324 $15,805 $22,099 
Restricted stock— — — 
Cash-settled units64 186 1,092 
Total$5,379 $8,388 $15,991 $23,192 
 
(in thousands except period data)September 30, 2022
Unrecognized compensation expense related to unvested stock-settled awards$37,492 
Weighted average period over which expense is expected to be recognized, in years2.4


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(9) Fair Value Disclosures
We determine the fair market values of our assets and liabilities measured at fair value on a recurring and nonrecurring basis using the fair value hierarchy as prescribed in the Accounting Standards Codification (“ASC”) 820, Fair Value Measurement. See Note 1 - Operations and Summary of Significant Accounting Policies in our 2021 Form 10-K for information regarding the fair value hierarchy and a description of the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial instruments.
Assets and liabilities measured at fair value are as follows:
 Fair Value Measurements Using
(in thousands)Level 1Level 2Level 3
September 30, 2022
Available-for-sale debt securities:(1)
U.S. Treasury securities$637,281 $— $— 
U.S. government agency securities— 101,690 — 
Residential mortgage-backed securities— 1,630,101 — 
CRT securities— — 11,702 
Equity securities(1)(2)21,932 11,041 — 
Mortgage loans held for sale(3)— — 4,387 
Derivative assets(4)— 24,093 — 
Derivative liabilities(4)— 108,608 — 
Non-qualified deferred compensation plan liabilities(5)20,028 — — 
December 31, 2021
Available-for-sale debt securities:(1)
U.S. government agency securities$— $120,944 $— 
Residential mortgage-backed securities— 3,225,378 — 
Tax-exempt asset-backed securities— — 180,033 
CRT securities— — 11,846 
Equity securities(1)(2)33,589 12,018 — 
Mortgage loans held for sale(3)— 465 7,658 
Derivative assets(4)— 37,788 — 
Derivative liabilities(4)— 37,788 — 
Non-qualified deferred compensation plan liabilities(5)29,695 — — 
(1)Investment securities are measured at fair value on a recurring basis, generally monthly, except for tax-exempt asset-backed securities and CRT securities, which are measured quarterly.
(2)Equity securities consist of investments that qualify for consideration under the regulations implementing the Community Reinvestment Act and investments related to our non-qualified deferred compensation plan.
(3)Mortgage loans held for sale are measured at fair value on a recurring basis, generally monthly.
(4)Derivative assets and liabilities are measured at fair value on a recurring basis, generally quarterly.
(5)Non-qualified deferred compensation plan liabilities represent the fair value of the obligation to the employee, which generally corresponds to the fair value of the invested assets, and are measured at fair value on a recurring basis, generally monthly.

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Level 3 Valuations
The following table summarizes the changes in Level 3 assets measured at fair value on a recurring basis:
Net Gains (Losses)
(in thousands)Balance at Beginning of PeriodPurchases / AdditionsSales / ReductionsRealizedUnrealizedBalance at End of Period
Three months ended September 30, 2022
Available-for-sale debt securities:(1)
CRT securities$11,670 $— $— $— $32 $11,702 
Loans held for sale(2)4,266 571 (450)— — 4,387 
Three months ended September 30, 2021
Available-for-sale debt securities:(1)
Tax-exempt asset-backed securities$185,954 $— $(2,270)$— $1,136 $184,820 
CRT securities11,713 — — — 91 11,804 
Loans held for sale(2)8,227 440 (870)— (96)7,701 
Nine months ended September 30, 2022
Available-for-sale debt securities:(1)
Tax-exempt asset-backed securities$180,033 $— $(170,626)$— $(9,407)$— 
CRT securities11,846 — — — (144)11,702 
Loans held for sale(2)7,658 1,898 (5,050)— (119)4,387 
Nine months ended September 30, 2021
Available-for-sale debt securities:(1)
Tax-exempt asset-backed securities$199,176 $— $(13,783)$— $(573)$184,820 
CRT securities11,417 — — — 387 11,804 
Loans held for sale(2)6,933 2,125 (1,395)33 7,701 
(1)Unrealized gains/(losses) on available-for-sale debt securities are recorded in AOCI. Realized gains/(losses) are recorded in other non-interest income on the consolidated statements of income and other comprehensive income/(loss).
(2)Realized and unrealized gains/(losses) on loans held for sale are recorded in net gain/(loss) on sale of loans held for sale on the consolidated statements of income and other comprehensive income/(loss).
Tax-exempt asset-backed securities
The fair value of tax-exempt asset-backed securities is based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs, the most significant of which were a discount rate and a weighted-average life. The securities were redeemed in full prior to September 30, 2022. At December 31, 2021, the combined weighted-average discount rate and weighted-average life utilized were 2.60% and 4.61 years, respectively.
CRT securities
The fair value of CRT securities is based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs, the most significant of which were a discount rate and a weighted-average life. At September 30, 2022, the discount rates utilized ranged from 6.97% to 11.52% and the weighted-average life ranged from 5.23 years to 8.93 years. On a combined amortized cost weighted-average basis, a discount rate of 8.49% and a weighted-average life of 6.46 years were utilized to determine the fair value of these securities at September 30, 2022. At December 31, 2021, the combined weighted-average discount rate and combined weighted-average life utilized were 4.97% and 6.35 years, respectively.
Mortgage loans held for sale
The fair value of mortgage loans held for sale using Level 3 inputs include loans that cannot be sold through normal sale channels and thus require significant management judgment or estimation when determining the fair value. The fair value of such loans is generally based upon quoted prices of comparable loans with a liquidity discount applied. At September 30, 2022, the fair value of these loans was calculated using a weighted-average discounted price of 90.4%, compared to 97.8% at December 31, 2021.
20


Fair Value of Financial Instruments
A summary of the carrying amounts and estimated fair values of financial instruments is as follows:
Estimated Fair Value
(in thousands)Carrying
Amount
TotalLevel 1Level 2Level 3
September 30, 2022
Financial assets:
Cash and cash equivalents$3,640,247 $3,640,247 $3,640,247 $— $— 
Available-for-sale debt securities2,380,774 2,380,774 637,281 1,731,791 11,702 
Held-to-maturity debt securities955,875 819,701 — 819,701 — 
Equity securities32,973 32,973 21,932 11,041 — 
Loans held for sale3,142,178 3,113,806 — — 3,113,806 
Loans held for investment, net19,553,168 19,472,586 — — 19,472,586 
Derivative assets24,093 24,093 — 24,093 — 
Financial liabilities:
Total deposits24,498,563 24,502,640 — — 24,502,640 
Short-term borrowings1,701,480 1,701,480 — 1,701,480 — 
Long-term debt930,766 873,342 — 873,342 — 
Derivative liabilities108,608 108,608 — 108,608 — 
December 31, 2021
Financial assets:
Cash and cash equivalents$7,946,659 $7,946,659 $7,946,659 $— $— 
Available-for-sale debt securities3,538,201 3,538,201 — 3,346,322 191,879 
Equity securities45,607 45,607 33,589 12,018 — 
Loans held for sale8,123 8,123 — 465 7,658 
Loans held for investment, net22,595,088 22,631,252 — — 22,631,252 
Derivative assets37,788 37,788 — 37,788 — 
Financial liabilities:
Total deposits28,109,365 28,109,762 — — 28,109,762 
Short-term borrowings2,202,832 2,202,832 — 2,202,832 — 
Long-term debt928,738 952,404 — 952,404 — 
Derivative liabilities37,788 37,788 — 37,788 — 
21


(10) Derivative Financial Instruments
The notional amounts and estimated fair values of derivative positions outstanding are presented in the following table.
 September 30, 2022December 31, 2021
Estimated Fair ValueEstimated Fair Value
(in thousands)Notional
Amount
Asset DerivativeLiability DerivativeNotional
Amount
Asset DerivativeLiability Derivative
Derivatives designated as hedges
Cash flow hedges:
Interest rate contracts:
Swaps hedging loans$3,000,000 $357 $80,135 $— $— $— 
Non-hedging derivatives
Customer-initiated and other derivatives:
Interest rate contracts:
Swaps3,989,586 86,138 86,138 3,536,090 40,922 40,922 
Caps and floors written130,415 — 1,489 191,291 94 — 
Caps and floors purchased130,415 1,489 — 191,291 — 94 
Forward contracts1,025,581 12,536 12,429 — — — 
Gross derivatives100,520 180,191 41,016 41,016 
Netting adjustment - offsetting derivative assets/liabilities(2,476)(2,476)(3,228)(3,228)
Netting adjustment - cash collateral received/posted(73,951)(69,107)— — 
Net derivatives included on the consolidated balance sheets$24,093 $108,608 $37,788 $37,788 
Our credit exposure on derivative instruments is limited to the net favorable value and interest payments by each counterparty. In some cases collateral may be required from the counterparties involved if the net value of the derivative instruments exceeds a nominal amount. Our credit exposure associated with these instruments, net of any collateral pledged, was approximately $24.1 million at September 30, 2022, and approximately $37.8 million at December 31, 2021. Collateral levels are monitored and adjusted on a regular basis for changes in the value of derivative instruments. At September 30, 2022, we had $73.0 million in cash collateral pledged to counterparties included in interest-bearing cash and cash equivalents on the consolidated balance sheet and $74.0 million in cash collateral received from counterparties included in interest bearing deposits on the consolidated balance sheet. The comparative amounts at December 31, 2021, were $40.3 million in cash collateral pledged to counterparties and no cash collateral received from counterparties.
We also enter into credit risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are either a participant or a lead bank. The risk participation agreements entered into by us as a participant bank provide credit protection to the financial institution counterparty should the borrower fail to perform on its interest rate derivative contract with that financial institution. We are party to 18 risk participation agreements where we are a participant bank with a notional amount of $343.3 million at September 30, 2022, compared to seven risk participation agreements with a notional amount of $79.2 million at December 31, 2021. The maximum estimated exposure to these agreements, assuming 100% default by all obligors, was approximately $10.4 million at September 30, 2022 and $2.3 million at December 31, 2021. The fair value of these exposures was insignificant to the consolidated financial statements at both September 30, 2022 and December 31, 2021. Risk participation agreements entered into by us as the lead bank provide credit protection to us should the borrower fail to perform on its interest rate derivative contract with us. We are party to 17 risk participation agreements where we are the lead bank with a notional amount of $201.1 million at September 30, 2022, compared to 15 agreements with a notional amount of $156.1 million at December 31, 2021.
Derivatives Designated as Cash Flow Hedges
During the nine months ended September 30, 2022, we entered into interest rate derivative contracts that were designated as qualifying cash flow hedges to hedge the exposure to variability in expected future cash flows attributable to changes in a contractually specified interest rate. To qualify for hedge accounting, a formal assessment is prepared to determine whether the hedging relationship, both at inception and on an ongoing basis, is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the hedge if a cash flow hedge. At inception a statistical regression analysis is prepared to determine hedge effectiveness. At each reporting period thereafter, a statistical regression or qualitative analysis is performed. If it is determined that hedge effectiveness has not been or will not continue to be highly effective, then hedge accounting ceases and any gain or loss in AOCI is recognized in earnings immediately. The cash flow hedges are recorded at fair value in other assets and other liabilities on the consolidated balance sheets with changes in fair value recorded in AOCI, net of tax. Amounts recorded to AOCI are reclassified into earnings in the same period in which the hedged asset or
22


liability affects earnings and are presented in the same income statement line item as the earnings effect of the hedged asset or liability.
During the three and nine months ended September 30, 2022, we recorded $78.2 million and $77.9 million, respectively, in unrealized losses to adjust our cash flow hedges to fair value, which was recorded net of tax to AOCI, and reclassified $1.8 million and $2.5 million, respectively, from AOCI into interest income on loans. Based on current market conditions, we estimate that during the next 12 months, an additional $31.7 million will be reclassified from AOCI as a decrease to interest income. As of September 30, 2022, the maximum length of time over which forecasted transactions are hedged is 4.00 years.
(11) Accumulated Other Comprehensive Income
The following table provides the change in AOCI by component:
(in thousands)Cash Flow HedgesAvailable-for-Sale SecuritiesHeld-to-Maturity SecuritiesTotal
Three months ended September 30, 2022
Beginning balance$(316)$(220,090)$(51,802)$(272,208)
Change in unrealized gain/(loss)(78,177)(129,027)— (207,204)
Amounts reclassified into net income(1,760)— 2,369 609 
Total other comprehensive income/(loss)(79,937)(129,027)2,369 (206,595)
Income tax expense/(benefit)(16,786)(27,095)497 (43,384)
Total other comprehensive income/(loss), net of tax(63,151)(101,932)1,872 (163,211)
Ending balance$(63,467)$(322,022)$(49,930)$(435,419)
Three months ended September 30, 2021
Beginning balance$— $(26,389)$— $(26,389)
Change in unrealized gain/(loss)— (18,131)— (18,131)
Amounts reclassified into net income— — — — 
Total other comprehensive income/(loss)— (18,131)— (18,131)
Income tax expense/(benefit)— (3,808)— (3,808)
Total other comprehensive income/(loss), net of tax— (14,323)— (14,323)
Ending balance$— $(40,712)$— $(40,712)
Nine months ended September 30, 2022
Beginning balance$— $(47,715)$— $(47,715)
Change in unrealized gain/(loss)(77,873)(347,223)(69,165)(494,261)
Amounts reclassified into net income(2,464)— 5,962 3,498 
Total other comprehensive income/(loss)(80,337)(347,223)(63,203)(490,763)
Income tax expense/(benefit)(16,870)(72,916)(13,273)(103,059)
Total other comprehensive income/(loss), net of tax(63,467)(274,307)(49,930)(387,704)
Ending balance$(63,467)$(322,022)$(49,930)$(435,419)
Nine months ended September 30, 2021
Beginning balance$— $15,774 $— $15,774 
Change in unrealized gain/(loss)— (71,501)— (71,501)
Amounts reclassified into net income— — — — 
Total other comprehensive income/(loss)— (71,501)— (71,501)
Income tax expense/(benefit)— (15,015)— (15,015)
Total other comprehensive income/(loss), net of tax— (56,486)— (56,486)
Ending balance$— $(40,712)$— $(40,712)
(12) New Accounting Standards
ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326)” (“ASU 2022-02”) eliminates the guidance on troubled debt restructurings and requires entities to evaluate all loan modifications to determine if they result in a new loan or a continuation of the existing loan. ASU 2022-02 also requires that entities disclose current-period gross charge-offs by year of origination for loans and leases. ASU 2022-02 is effective January 1, 2023 and will have an impact on our financial statement disclosures.
23


Accounting Standard Update 2022-04, “Liabilities - Supplier Finance Programs (Subtopic 405-50)” (“ASU 2022-04”) enhances the transparency of supplier finance programs and the related financial statement disclosures. The amendments require that a buyer in a supplier finance program disclose information about the key terms of the program, outstanding confirmed amounts as of the end of the period, a rollforward of such amounts during each annual period and a description of where in the financial statements outstanding amounts are presented. ASU 2022-04 is effective January 1, 2023, except for the disclosure of rollforward information, which is effective January 1, 2024, and is not expected to have an impact on our consolidated financial statements.
24


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 and nine months ended September 30, 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 and nine months ended September 30, 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, uncertainties related to our sale of BankDirect Capital Finance, LLC, cyber incidents or other failures, disruptions or security breaches, interest rates, commercial and residential real estate values, economic conditions, including inflation, recession, the threat of recession, and market conditions in Texas, the United States or globally, including governmental and consumer responses to those economic and market conditions, fund availability, accounting estimates and risk management processes, the transition away from the London Interbank Offered Rate (LIBOR), legislative and regulatory changes, ratings or interpretations, business strategy execution, key personnel, competition, mortgage markets, fraud, environmental liability and severe weather, natural disasters, acts of war, terrorism, global conflict 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.
Overview of Our Business Operations
On September 6, 2022, we announced the sale of BankDirect Capital Finance (“BDCF” or “disposal group”), our insurance premium finance subsidiary, to AFCO Credit Corporation, an indirect wholly-owned subsidiary of Truist Financial Corp. The sale of BDCF includes its business operations and loan portfolio of approximately $3.1 billion as of September 30, 2022. The sale is an all-cash transaction for a purchase price of approximately $3.4 billion, representing an 8.5% asset premium compared to the value of the purchased loan portfolio as of September 30, 2022. The sale is expected to close in the fourth quarter of 2022, subject to various customary closing conditions. For additional information, see Note 1 - Operations and Summary of Significant Accounting Policies included elsewhere in this report.


25


Results of Operations
Selected income statement data and key performance indicators are presented in the table below:
Three months ended September 30,Nine months ended September 30,
(dollars in thousands except per share data)2022202120222021
Net interest income$239,080 $190,536 $628,158 $574,805 
Provision for credit losses12,000 5,000 32,000 (20,000)
Non-interest income25,333 24,779 71,857 106,771 
Non-interest expense197,047 152,987 514,442 452,363 
Income before income taxes55,366 57,328 153,573 249,213 
Income tax expense13,948 13,938 38,346 60,404 
Net income41,418 43,390 115,227 188,809 
Preferred stock dividends4,313 4,312 12,938 14,408 
Net income available to common stockholders$37,105 $39,078 $102,289 $174,401 
Basic earnings per common share$0.74 $0.77 $2.03 $3.45 
Diluted earnings per common share$0.74 $0.76 $2.00 $3.41 
Net interest margin3.05 %2.11 %2.64 %2.06 %
Return on average assets (“ROA”)0.52 %0.47 %0.47 %0.66 %
Return on average common equity (“ROE”)5.36 %5.41 %4.90 %8.35 %
Non-interest income to average earning assets0.33 %0.27 %0.30 %0.38 %
Efficiency ratio(1)74.5 %71.1 %73.5 %66.4 %
Non-interest expense to average earning assets2.53 %1.69 %2.18 %1.61 %
(1)    Non-interest expense divided by the sum of net interest income and non-interest income.
Three months ended September 30, 2022 compared to three months ended September 30, 2021
We reported net income of $41.4 million and net income available to common stockholders of $37.1 million for the third quarter of 2022, compared to net income of $43.4 million and net income available to common stockholders of $39.1 million for the third quarter of 2021. On a fully diluted basis, earnings per common share were $0.74 for the third quarter of 2022, compared to $0.76 for the third quarter of 2021. ROE was 5.36% and ROA was 0.52% for the third quarter of 2022, compared to 5.41% and 0.47%, respectively, for the third quarter of 2021. The decrease in net income for the third quarter of 2022 compared to the third quarter of 2021 resulted primarily from increases in provision for credit losses and non-interest expense, partially offset by an increase in net interest income.
Nine months ended September 30, 2022 compared to nine months ended September 30, 2021
We reported net income of $115.2 million and net income available to common stockholders of $102.3 million for the nine months ended September 30, 2022, compared to net income of $188.8 million and net income available to common stockholders of $174.4 million for the same period in 2021. On a fully diluted basis, earnings per common share were $2.00 for the nine months ended September 30, 2022, compared to $3.41 for the same period in 2021. ROE was 4.90% and ROA was 0.47% for the nine months ended September 30, 2022, compared to 8.35% and 0.66%, respectively, for the same period in 2021. The decrease in net income for the nine months ended September 30, 2022 compared to the same period in 2021 resulted primarily from a decrease in non-interest income coupled with increases in provision for credit losses and non-interest expense, partially offset by an increase in net interest income.
Details of the changes in the various components of net income are discussed below.
26


Taxable Equivalent Net Interest Income Analysis - Quarterly(1)

Three months ended September 30, 2022Three months ended September 30, 2021
(in thousands except percentages)Average
Balance
Income/
Expense
Yield/
Rate
Average
Balance
Income/
Expense
Yield/
Rate
Assets
Investment securities(2)$3,509,044 $15,002 1.58 %$3,775,812 $10,684 1.12 %
Interest-bearing cash and cash equivalents4,453,806 24,596 2.19 %9,046,095 3,606 0.16 %
Loans held for sale1,029,983 11,316 4.36 %18,791 54 1.14 %
Loans held for investment, mortgage finance5,287,531 52,756 3.96 %7,987,521 58,913 2.93 %
Loans held for investment(3)16,843,922 218,512 5.15 %15,266,167 143,864 3.74 %
Less: Allowance for credit losses on loans229,005 — — 220,984 — — 
Loans held for investment, net21,902,448 271,268 4.91 %23,032,704 202,777 3.49 %
Total earning assets30,895,281 322,182 4.10 %35,873,402 217,121 2.40 %
Cash and other assets918,630 855,555 
Total assets$31,813,911 $36,728,957 
Liabilities and Stockholders’ Equity
Transaction deposits$1,444,964 $5,239 1.44 %$3,012,547 $4,737 0.62 %
Savings deposits10,249,387 46,555 1.80 %10,044,995 8,262 0.33 %
Time deposits1,701,238 8,523 1.99 %1,640,562 1,720 0.42 %
Total interest bearing deposits13,395,589 60,317 1.79 %14,698,104 14,719 0.40 %
Short-term borrowings1,931,537 10,011 2.06 %2,299,692 748 0.13 %
Long-term debt921,707 12,663 5.45 %927,626 10,586 4.53 %
Total interest bearing liabilities16,248,833 82,991 2.03 %17,925,422 26,053 0.58 %
Non-interest bearing deposits12,214,531 15,363,568 
Other liabilities305,554 275,317 
Stockholders’ equity3,044,993 3,164,650 
Total liabilities and stockholders’ equity$31,813,911 $36,728,957 
Net interest income$239,191 $191,068 
Net interest margin3.05 %2.11 %
Net interest spread2.07 %1.82 %
 
(1)Taxable equivalent rates used where applicable.
(2)Yields on investment securities are calculated using available-for-sale securities at amortized cost.
(3)Average balances included non-accrual loans.

27


Taxable Equivalent Net Interest Income Analysis - Year to Date(1)

Nine months ended September 30, 2022Nine months ended September 30, 2021
(in thousands except percentages)Average
Balance
Revenue/
Expense
Yield/
Rate
Average
Balance
Revenue/
Expense
Yield/
Rate
Assets
Investment securities(2)$3,573,372 $47,811 1.69 %$3,581,845 $32,412 1.20 %
Interest-bearing cash and cash equivalents5,902,815 37,561 0.85 %10,814,879 9,500 0.12 %
Loans held for sale352,325 11,491 4.36 %117,604 2,430 2.76 %
Loans held for investment, mortgage finance5,624,712 146,135 3.47 %7,875,138 181,256 3.08 %
Loans held for investment(3)16,386,399 531,054 4.33 %15,321,641 432,777 3.78 %
Less: Allowance for credit losses on loans217,728 — — 238,996 — — 
Loans held for investment, net21,793,383 677,189 4.15 %22,957,783 614,033 3.58 %
Total earning assets31,621,895 774,052 3.25 %37,472,111 658,375 2.35 %
Cash and other assets869,867 971,628 
Total assets$32,491,762 $38,443,739 
Liabilities and Stockholders’ Equity
Transaction deposits$1,846,175 $13,122 0.95 %$3,596,301 $15,993 0.59 %
Savings deposits9,788,290 70,599 0.96 %11,400,029 28,040 0.33 %
Time deposits1,208,213 10,792 1.19 %1,864,867 6,961 0.50 %
Total interest-bearing deposits12,842,678 94,513 0.98 %16,861,197 50,994 0.40 %
Short-term borrowings1,978,735 15,628 1.06 %2,443,853 3,842 0.21 %
Long-term debt926,749 34,651 5.00 %759,584 27,052 4.76 %
Total interest-bearing liabilities15,748,162 144,792 1.23 %20,064,634 81,888 0.55 %
Non-interest bearing deposits13,391,981 14,978,324 
Other liabilities259,028 286,328 
Stockholders’ equity3,092,591 3,114,453 
Total liabilities and stockholders’ equity$32,491,762 $38,443,739 
Net interest income$629,260 $576,487 
Net interest margin2.64 %2.06 %
Net interest spread2.02 %1.80 %

(4)Taxable equivalent rates used where applicable.
(5)Yields on investment securities are calculated using available-for-sale securities at amortized cost.
(6)Average balances include non-accrual loans
28


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 September 30, 2022/2021Nine months ended September 30, 2022/2021
 Net
Change
Change due to(1)Net
Change
Change Due To(1)
(in thousands)VolumeYield/Rate(2)VolumeYield/Rate(2)
Interest income:
Investment securities$4,318 $(753)$5,071 $15,399 $(4)$15,403 
Interest bearing cash and cash equivalents20,990 (1,852)22,842 28,061 (4,368)32,429 
Loans held for sale11,262 2,906 8,356 9,061 648 8,413 
Loans held for investment, mortgage finance loans(6,157)(19,940)13,783 (35,121)(51,706)16,585 
Loans held for investment74,648 14,873 59,775 98,277 30,046 68,231 
Total105,061 (4,766)109,827 115,677 (25,384)141,061 
Interest expense:
Transaction deposits502 (2,450)2,952 (2,871)(7,775)4,904 
Savings deposits38,293 170 38,123 42,559 (3,974)46,533 
Time deposits6,803 64 6,739 3,831 (2,660)6,491 
Short-term borrowings9,263 (121)9,384 11,786 (1,027)12,813 
Long-term debt2,077 (68)2,145 7,599 6,255 1,344 
Total56,938 (2,405)59,343 62,904 (9,181)72,085 
Net interest income$48,123 $(2,361)$50,484 $52,773 $(16,203)$68,976 
(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 $239.1 million for the three months ended September 30, 2022, compared to $190.5 million for the same period in 2021. The increase was primarily due to an increase in yields on average earning assets, partially offset by an increase in funding costs.
Average earning assets for the three months ended September 30, 2022 decreased $5.0 billion compared to the same period in 2021, which included a $4.6 billion decrease in average interest-bearing cash and cash equivalents. The decrease in average interest bearing cash and cash equivalents resulted primarily from our proactive exit of certain high-cost indexed deposit products beginning in the second half of 2021. Average interest-bearing liabilities for the three months ended September 30, 2022 decreased $1.7 billion compared to the same period in 2021, primarily due to a $1.3 billion decrease in average interest-bearing deposits. Average demand deposits for the three months ended September 30, 2022 decreased $3.1 billion compared to the same period in 2021.
Net interest margin for the three months ended September 30, 2022 was 3.05%, compared to 2.11% for the same period in 2021. The increase in net interest margin was primarily due to an increase in yields on average earnings assets and a shift in earning asset composition, partially offset by an increase in funding costs. The increases in yields on earnings assets and cost of funds are attributed to the impact of rising interest rates.
The yield on total loans held for investment increased to 4.91% for the three months ended September 30, 2022, compared to 3.49% for the same period in 2021, and the yield on earning assets increased to 4.10% for the three months ended September 30, 2022, compared to 2.40% for the same period in 2021. Total cost of deposits increased to 0.93% for the three months ended September 30, 2022 from 0.19% for the same period in 2021, and total funding costs, including all deposits, long-term debt and stockholders' equity, increased to 1.04% for the three months ended September 30, 2022, compared to 0.28% for the same period in 2021.
Net interest income was $628.2 million for the nine months ended September 30, 2022, compared to $574.8 million for the same period in 2021. The increase was primarily due to an increase in yields on earnings assets, partially offset by rising funding costs.
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Average earning assets decreased $5.9 billion for the nine months ended September 30, 2022, compared to the same period in 2021, which included a $4.9 billion decrease in average interest-bearing cash and cash equivalents. Average interest-bearing liabilities decreased $4.3 billion for the nine months ended September 30, 2022, compared to the same period in 2021, primarily due to a $4.0 billion decrease in average interest-bearing deposits. Average demand deposits for the nine months ended September 30, 2022 decreased to $13.4 billion from $15.0 billion for the same period in 2021.
Net interest margin for the nine months ended September 30, 2022 was 2.64%, compared to 2.06% for the same period of 2021. The increase was primarily due to the effect of rising interest rates on earning asset yields and a shift in earning asset composition, partially offset by higher funding costs, also as a result of rising interest rates, compared to the same period in 2021.
The yield on total loans held for investment increased to 4.15% for the nine months ended September 30, 2022, compared to 3.58% for the same period in 2021, and the yield on earning assets increased to 3.25% for the nine months ended September 30, 2022, compared to 2.35% for the same period in 2021. Total cost of deposits increased to 0.48% for the nine months ended September 30, 2022 from 0.21% for the same period in 2021 and total funding costs, including all deposits, long-term debt and stockholders' equity, increased to 0.60% for the nine months ended September 30, 2022, compared to 0.29% for the same period in 2021.
Non-interest Income 
 Three months ended September 30,Nine months ended September 30,
(in thousands)2022202120222021
Service charges on deposit accounts$5,701 $4,622 $17,726 $13,972 
Wealth management and trust fee income3,631 3,382 11,594 9,380 
Brokered loan fees3,401 6,032 11,504 22,276 
Servicing income212 292 677 15,236 
Investment banking and trading income7,812 4,127 23,117 17,985 
Net gain/(loss) on sale of loans held for sale— (1,185)— 1,317 
Other4,576 7,509 7,239 26,605 
Total non-interest income$25,333 $24,779 $71,857 $106,771 
Non-interest income increased $554,000 during the three months ended September 30, 2022, compared to the same period in 2021. The increase was primarily due to increases in service charges on deposit accounts and investment banking and trading income, as well as the elimination of net losses recorded in the prior year on the sale of loans held for sale, partially offset by decreases in brokered loan fees and other non-interest income.
Non-interest income decreased $34.9 million during the nine months ended September 30, 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, as well as a decrease in other non-interest income.
Non-interest Expense 
 Three months ended September 30,Nine months ended September 30,
(in thousands)2022202120222021
Salaries and benefits$129,336 $87,503 $333,319 $261,855 
Occupancy expense9,433 8,324 27,192 24,463 
Marketing8,282 2,123 21,765 5,720 
Legal and professional16,775 11,055 38,365 28,479 
Communications and technology18,470 28,374 48,819 58,695 
FDIC insurance assessment3,953 4,500 11,252 16,339 
Servicing-related expenses— 2,396 — 27,740 
Other10,798 8,712 33,730 29,072 
Total non-interest expense$197,047 $152,987 $514,442 $452,363 
Non-interest expense for the three months ended September 30, 2022 increased $44.1 million compared to the same period in 2021. The third quarter of 2022 included $13.7 million in salaries and benefits expense and $3.0 million in legal and professional expense related to the sale of our insurance premium finance subsidiary. Also contributing to the increase in non-interest expense were increases in salaries and benefits expense, resulting from an increase in headcount, and marketing expense, partially offset by a decrease in communications and technology expense related to the elimination of write-offs of certain software assets recorded in the prior year.
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Non-interest expense increased by $62.1 million during the nine months ended September 30, 2022, compared to the same period in 2021. Year-to-date 2022 expenses included $13.7 million in salaries and benefits expense and $3.0 million in legal and professional expense related to the sale of our insurance premium finance subsidiary. The increase in non-interest expense also included increases in salaries and benefits expense, driven by an increase in headcount, and marketing expense, partially offset by a decrease in servicing-related expenses resulting 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: 
 September 30, 2022December 31, 2021
(in thousands)
Commercial$8,813,614 $9,897,561 
Energy1,106,097 721,373 
Mortgage finance4,908,822 7,475,497 
Real estate5,015,704 4,777,530 
Gross loans held for investment$19,844,237 $22,871,961 
Deferred income (net of direct origination costs)(56,456)(65,007)
Total loans held for investment19,787,781 22,806,954 
Allowance for credit losses on loans(234,613)(211,866)
Total loans held for investment, net$19,553,168 $22,595,088 
Total loans held for investment of $19.8 billion at September 30, 2022 decreased $3.0 billion from December 31, 2021, primarily as a result of a $3.1 billion reclassification of our insurance premium finance subsidiary loans from loans held for investment to loans held for sale as of September 30, 2022. Excluding the reclassification of loans held for investment to loans held for sale, we experienced loan growth across all loan categories, except for mortgage finance loans, as we executed on our long-term strategy. 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 25% of total loans held for investment at September 30, 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. Mortgage finance loan balances have declined as compared to December 31, 2021 as interest rates have continued to rise during 2022.
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 September 30, 2022, we had $3.6 billion in syndicated loans, $804.9 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 September 30, 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 September 30, 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.
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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)September 30, 2022December 31, 2021
Non-accrual loans held for investment(1):
Commercial:
Assets of the borrowers$23,561 $18,366 
Accounts receivable and inventory3,337 5,501 
Other1,070 2,045 
Total commercial27,968 25,912 
Energy:
Oil and gas properties6,500 28,380 
Total energy6,500 28,380 
Real estate:
Assets of the borrowers— 13,741 
Commercial property1,268 2,840 
Single family residences128 1,629 
Total real estate1,396 18,210 
Total non-accrual loans held for investment35,864 72,502 
Non-accrual loans held for sale(2)1,340 — 
Other real estate owned— — 
Total non-performing assets$37,204 $72,502 
Non-accrual loans held for investment to total loans held for investment0.18 %0.32 %
Total non-performing assets to total assets0.12 %0.21 %
Allowance for credit losses on loans to non-accrual loans held for investment6.5x2.9x
Loans held for investment past due 90 days and still accruing$30,664 $3,467 
Loans held for investment past due 90 days to total loans held for investment0.15 %0.02 %
Loans held for sale past due 90 days and still accruing(2)(3)$4,877 $3,986 
(1)As of September 30, 2022 and December 31, 2021, non-accrual loans include $2.2 million and $19.4 million, respectively, in loans that met the criteria for restructured.
(2)Includes $1.3 million in non-accrual loans and $3.1 million in loans past due 90 days and still accruing associated to our insurance premium finance subsidiary.
(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 $32.0 million provision for credit losses for the nine months ended September 30, 2022, compared to a negative provision of $20.0 million for the same period in 2021. The $32.0 million provision for credit losses resulted from updated views on the downside risks to the economic forecast, partially offset by a decline in criticized loans. We recorded $4.9 million in net charge-offs during the nine months ended September 30, 2022, compared to net charge-offs of $11.9 million during the nine months ended September 30, 2021. Criticized loans totaled $484.0 million at September 30, 2022, compared to $582.9 million and $728.9 million at December 31, 2021 and September 30, 2021, respectively. The decrease in criticized loans as compared to June 30, 2022 was primarily due to the resolution of one mortgage finance credit that was downgraded in the second quarter of 2022 and resolved in the third quarter of 2022 with no losses recorded.
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The table below presents key metrics related to our credit loss experience: 
September 30, 2022September 30, 2021
Allowance for credit losses on loans to total loans held for investment1.19 %0.93 %
Allowance for credit losses on loans to average total loans held for investment(1)1.07 %0.96 %
Total provision for credit losses to average total loans held for investment(1)(2)0.19 %(0.12)%
Total allowance for credit losses to total loans held for investment1.30 %1.01 %
(1)    Ratios are calculated using average balance for the nine months ended September 30, 2022 and 2021, respectively.
(2) Ratios are annualized utilizing provision for credit losses for the nine months ended September 30, 2022 and 2021, respectively.
The table below details net charge-offs/(recoveries) as a percentage of average total loans by loan category:
Nine months ended September 30,
20222021
Net Charge-offsNet Charge-offs
Netto AverageNetto Average
Charge-offsLoans(1)Charge-offsLoans(1)
Commercial$2,661 0.03 %$5,749 0.08 %
Energy1,859 0.28 %5,052 1.01 %
Mortgage finance— — %— — %
Real estate350 0.01 %1,080 0.03 %
Total$4,870 0.03 %$11,881 0.07 %
(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 Federal Home Loan Banks (“FHLB”) borrowings, which are generally used to fund mortgage finance assets and 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 nine 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)September 30, 2022December 31, 2021September 30, 2021
Interest bearing cash and cash equivalents$3,399,638 $7,765,996 $8,317,926 
Interest bearing cash and cash equivalents as a percent of:
Total loans held for investment17.2 %34.1 %35.0 %
Total earning assets11.5 %22.9 %23.4 %
Total deposits13.9 %27.6 %27.9 %
Our liquidity supports growth in loans held for investment and has 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.
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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)September 30, 2022December 31, 2021September 30, 2021
Deposits from core customers$23,209,196 $25,409,180 $27,339,071 
Deposits from core customers as a percent of total deposits94.7 %90.4 %91.7 %
Relationship brokered deposits$21,799 $1,855,892 $1,488,066 
Relationship brokered deposits as a percent of average total deposits0.1 %6.6 %5.0 %
Traditional brokered deposits$1,267,568 $844,293 $986,531 
Traditional brokered deposits as a percent of total deposits5.2 %3.0 %3.3 %
Average deposits from core customers(1)$24,705,297 $28,734,460 $28,930,264 
Average deposits from core customers as a percent of average total deposits94.1 %91.1 %90.8 %
Average relationship brokered deposits(1)$617,273 $1,608,587 $1,516,026 
Average relationship brokered deposits as a percent of average total deposits2.4 %5.1 %4.8 %
Average traditional brokered deposits(1)$912,089 $1,188,544 $1,393,231 
Average traditional brokered deposits as a percent of average total deposits3.5 %3.8 %4.4 %
(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)September 30, 2022December 31, 2021
Repurchase agreements$1,480 2,832 
FHLB borrowings1,700,000 2,200,000 
Total short-term borrowings$1,701,480 2,202,832 
The following table summarizes our short-term borrowing capacities net of balances outstanding.
(in thousands)September 30, 2022December 31, 2021
FHLB borrowing capacity relating to loans$3,078,457 $5,190,703 
FHLB borrowing capacity relating to securities3,324,946 3,352,111 
Total FHLB borrowing capacity(1)$6,403,403 $8,542,814 
Unused federal funds lines available from commercial banks$1,456,000 $892,000 
Unused Federal Reserve borrowings capacity$3,572,804 $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 nine months ended September 30, 2022.
We also have long-term debt outstanding of $930.8 million as of September 30, 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 - Short-term Borrowings and Long-term Debt 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 the 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 Ratios and Capital in the accompanying notes to the consolidated unaudited financial statements included elsewhere in this report for additional information regarding dividend restrictions.
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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 September 30, 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
Average total equity was $3.1 billion for the nine months ended September 30, 2022. 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.
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. During the nine months ended September 30, 2022, the Company repurchased 941,879 shares of its common stock for an aggregate purchase price of $50.0 million, at a weighted average price of $53.11 per share. These repurchases were all made during the second quarter of 2022.
See Note 7 - Regulatory Ratios and Capital in the accompanying notes to the consolidated unaudited financial statements included elsewhere in this report for additional information regarding capital.
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.
Management considers a range of macroeconomic scenarios in connection with the allowance estimation process. Within the various economic scenarios considered as of September 30, 2022, the quantitative estimate of the allowance for credit loss would increase by approximately $73.0 million under sole consideration of the most severe downside scenario. The quoted
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sensitivity calculation reflects the sensitivity of the modeled allowance estimate to macroeconomic forecast data, but is absent of qualitative overlays and other qualitative adjustments that are part of the quarterly reserving process and does not necessarily reflect the nature and extent of future changes in the allowance for reasons including increases or decreases in qualitative adjustments, changes in the risk profile and size of the portfolio, changes in the severity of the macroeconomic scenario and the range of scenarios under management consideration.
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.
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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. The financial instruments subject to market risk can be classified either as held for trading purposes or held for purposes 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 and risk appetite established by the Company’s board of directors. 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 September 30, 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.
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Interest Rate Sensitivity Gap Analysis
September 30, 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$3,399,638 $— $— $— $3,399,638 
Investment securities(1)46,054 434 321,649 3,001,485 3,369,622 
Variable loans19,513,046 241,729 58,513 279,547 20,092,835 
Fixed loans190,709 1,602,641 194,994 905,236 2,893,580 
Total loans(2)19,703,755 1,844,370 253,507 1,184,783 22,986,415 
Total interest sensitive assets$23,149,447 $1,844,804 $575,156 $4,186,268 $29,755,675 
Liabilities:
Interest bearing customer deposits$11,416,366 $— $— $— $11,416,366 
CDs & IRAs101,728 181,908 36,129 179 319,944 
Traditional brokered deposits169,956 1,097,612 — — 1,267,568 
Total interest bearing deposits11,688,050 1,279,520 36,129 179 13,003,878 
Short-term borrowings1,701,480 — — — 1,701,480 
Long-term debt385,397 — — 545,369 930,766 
Total interest sensitive liabilities$13,774,927 $1,279,520 $36,129 $545,548 $15,636,124 
GAP$9,374,520 $565,284 $539,027 $3,640,720 $— 
Cumulative GAP$9,374,520 $9,939,804 $10,478,831 $14,119,551 $14,119,551 
Non-interest bearing deposits11,494,685 
Stockholders’ equity2,885,775 
Total$14,380,460 
(1)Available-for-sale debt securities and equity securities based on fair market value.
(2)Total loans include gross loans held for investments and loans held for sale at fair value.
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, Secured Overnight Financing Rate, Bloomberg Short Term Yield Index, 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. Interest rate derivative contracts may be used to manage our exposure to adverse fluctuations in these primary interest rate exposures. See Note 10 - Derivative Financial Instruments for more information on interest rate derivative contracts.
For modeling purposes, the “shock test” scenarios as of September 30, 2022 assume immediate, sustained 100 and 200 basis point increases in interest rates as well as a 100 basis point decrease in interest rates. As of September 30, 2021, the scenarios assumed a sustained 100 and 200 basis point increase in interest rates. As short-term rates remained low through 2021, we did 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.
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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 increasing 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
  September 30, 2022September 30, 2021
(in thousands)100 bps Increase200 bps Increase100 bps Decrease100 bps Increase200 bps Increase
Change in net interest income$76,688 $134,859 $(103,564)$42,678 $104,513 
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 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 alternative indexed products in December 2021. Over the next 9 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.
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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
The Company repurchased shares of its common stock in the open market during the nine months ended September 30, 2022 as follows:
Total Number ofApproximate Dollar Value
Shares Purchased as Partof Shares That May Yet
Total Number ofAverage Price Paidof Publicly AnnouncedBe Purchased Under the
Shares Purchasedper SharePlans or Programs(1)Plans or Programs(1)
May 1 through May 31, 2022902,418 $53.22 902,418 $101,975,648 
June 1 through June 30, 202239,461 $50.66 39,461 $99,976,436 
July 1 through July 31, 2022— $— — $99,976,436 
August 1 through August 31, 2022— $— — $99,976,436 
September 1 through September 30, 2022— $— — $99,976,436 
Total941,879 $53.11 941,879 $99,976,436 
(1)    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.
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ITEM 6.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Exhibits

2.1
31.1
31.2
32.1
32.2
101.INSXBRL 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.SCHXBRL Taxonomy Extension Schema Document*
101.CALXBRL Taxonomy Extension Calculation Linkbase Document*
101.DEFXBRL Taxonomy Extension Definition Linkbase Document*
101.LABXBRL Taxonomy Extension Label Linkbase Document*
101.PREXBRL Taxonomy Extension Presentation Linkbase Document*
104Cover Page Interactive Data File (embedded within the Inline XBRL document)

*    Filed herewith
**    Furnished herewith
+    Management contract or compensatory plan arrangement

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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: October 20, 2022
/s/ J. Matthew Scurlock
J. Matthew Scurlock
Chief Financial Officer
(Duly authorized officer and principal financial officer)

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