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TEXAS CAPITAL BANCSHARES INC/TX - Quarter Report: 2023 June (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 June 30, 2023
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)

Securities registered under Section 12(b) of the Exchange 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          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            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. (Check one):
Large Accelerated Filerx Accelerated 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 July 19, 2023, 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 48,000,808


Table of Contents
Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended June 30, 2023

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




Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(in thousands except share data)June 30, 2023December 31, 2022
Assets
Cash and due from banks$260,314 $233,637 
Interest bearing cash and cash equivalents2,587,131 4,778,623 
Available-for-sale debt securities3,292,478 2,615,644 
Held-to-maturity debt securities900,315 935,514 
Equity securities33,860 33,956 
Investment securities4,226,653 3,585,114 
Loans held for sale29,097 36,357 
Loans held for investment, mortgage finance5,098,812 4,090,033 
Loans held for investment16,227,203 15,197,307 
Less: Allowance for credit losses on loans237,343 253,469 
Loans held for investment, net21,088,672 19,033,871 
Premises and equipment, net26,096 26,382 
Accrued interest receivable and other assets757,085 719,162 
Goodwill and intangibles, net1,496 1,496 
Total assets$28,976,544 $28,414,642 
Liabilities and Stockholders’ Equity
Liabilities:
Non-interest bearing deposits$9,429,352 $9,618,081 
Interest bearing deposits13,888,888 13,238,799 
Total deposits23,318,240 22,856,880 
Accrued interest payable29,658 24,000 
Other liabilities338,924 345,827 
Short-term borrowings1,350,000 1,201,142 
Long-term debt857,795 931,442 
Total liabilities25,894,617 25,359,291 
Stockholders’ equity:
Preferred stock, $0.01 par value, $1,000 liquidation value:
Authorized shares - 10,000,000
Issued shares - 300,000 at June 30, 2023 and December 31, 2022
300,000 300,000 
Common stock, $0.01 par value:
Authorized shares - 100,000,000
Issued shares - 51,087,965 and 50,867,298 at June 30, 2023 and December 31, 2022, respectively
511 509 
Additional paid-in capital1,035,063 1,025,593 
Retained earnings2,362,189 2,263,502 
Treasury stock - 3,095,444 and 2,083,535 shares at cost at June 30, 2023 and December 31, 2022, respectively
(175,528)(115,310)
Accumulated other comprehensive loss, net of taxes(440,308)(418,943)
Total stockholders’ equity3,081,927 3,055,351 
Total liabilities and stockholders’ equity$28,976,544 $28,414,642 
See accompanying notes to consolidated financial statements.
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TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND OTHER
COMPREHENSIVE INCOME/(LOSS) - UNAUDITED
Three Months Ended June 30,Six Months Ended June 30,
(in thousands except per share data)2023202220232022
Interest income
Interest and fees on loans$332,867 $218,292 $630,305 $405,948 
Investment securities27,478 14,665 52,770 31,967 
Interest bearing cash and cash equivalents41,571 9,394 104,007 12,965 
Total interest income401,916 242,351 787,082 450,880 
Interest expense
Deposits137,391 20,566 257,485 34,196 
Short-term borrowings18,253 4,859 32,997 5,617 
Long-term debt14,282 11,393 29,265 21,988 
Total interest expense169,926 36,818 319,747 61,801 
Net interest income231,990 205,533 467,335 389,079 
Provision for credit losses7,000 22,000 35,000 20,000 
Net interest income after provision for credit losses224,990 183,533 432,335 369,079 
Non-interest income
Service charges on deposit accounts5,158 6,102 10,180 12,217 
Wealth management and trust fee income3,715 4,051 7,144 7,963 
Brokered loan fees2,415 4,133 4,310 8,103 
Investment banking and trading income27,498 11,126 46,266 15,305 
Other7,225 828 15,514 2,935 
Total non-interest income46,011 26,240 83,414 46,523 
Non-interest expense
Salaries and benefits113,050 103,358 241,720 203,217 
Occupancy expense9,482 8,874 19,101 17,759 
Marketing6,367 8,506 15,411 13,483 
Legal and professional15,669 11,288 30,183 21,590 
Communications and technology20,525 15,649 38,048 30,349 
Federal Deposit Insurance Corporation insurance assessment3,693 3,318 5,863 7,299 
Other12,858 13,310 25,345 23,698 
Total non-interest expense181,644 164,303 375,671 317,395 
Income before income taxes89,357 45,470 140,078 98,207 
Income tax expense20,706 11,311 32,766 24,398 
Net income68,651 34,159 107,312 73,809 
Preferred stock dividends4,312 4,312 8,625 8,625 
Net income available to common stockholders$64,339 $29,847 $98,687 $65,184 
Other comprehensive income/(loss):
Change in unrealized gain/(loss)$(99,731)$(86,438)$(56,778)$(287,057)
Amounts reclassified into net income16,762 1,903 29,735 2,889 
Other comprehensive income/(loss)(82,969)(84,535)(27,043)(284,168)
Income tax expense/(benefit)(17,423)(17,752)(5,678)(59,675)
Other comprehensive income/(loss), net of tax(65,546)(66,783)(21,365)(224,493)
Comprehensive income/(loss)$3,105 $(32,624)$85,947 $(150,684)
Basic earnings per common share$1.34 $0.59 $2.05 $1.29 
Diluted earnings per common share$1.33 $0.59 $2.02 $1.28 
See accompanying notes to consolidated financial statements.
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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 March 31, 2022300,000 $300,000 50,710,858 $507 $1,011,353 $1,983,611 (417)$(8)$(205,425)$3,090,038 
Comprehensive income/(loss):
Net income— — — — — 34,159 — — — 34,159 
Change in other comprehensive income/(loss), net of taxes— — — — — — — — (66,783)(66,783)
Total comprehensive loss(32,624)
Stock-based compensation expense recognized in earnings— — — — 5,022 — — — — 5,022 
Preferred stock dividend— — — — — (4,312)— — — (4,312)
Issuance of stock related to stock-based awards— — 109,479 (1,270)— — — — (1,269)
Repurchase of common stock— — — — — — (941,879)(50,023)— (50,023)
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 
Balance at March 31, 2023300,000 $300,000 50,947,306 $509 $1,031,905 $2,297,850 (3,095,444)$(175,528)$(374,762)$3,079,974 
Comprehensive income/(loss):
Net income— — — — — 68,651 — — — 68,651 
Change in other comprehensive income/(loss), net of taxes— — — — — — — — (65,546)(65,546)
Total comprehensive income3,105 
Stock-based compensation expense recognized in earnings— — — — 5,069 — — — — 5,069 
Preferred stock dividend— — — — — (4,312)— — — (4,312)
Issuance of stock related to stock-based awards— — 140,659 (1,911)— — — — (1,909)
Balance at June 30, 2023300,000 $300,000 51,087,965 $511 $1,035,063 $2,362,189 (3,095,444)$(175,528)$(440,308)$3,081,927 
See accompanying notes to consolidated financial statements.

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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 December 31, 2021 (audited)
300,000 $300,000 50,618,911 $506 $1,008,559 $1,948,274 (417)$(8)$(47,715)$3,209,616 
Comprehensive income/(loss):
Net income— — — — — 73,809 — — — 73,809 
Change in other comprehensive income/(loss), net of taxes— — — — — — — — (224,493)(224,493)
Total comprehensive loss(150,684)
Stock-based compensation expense recognized in earnings
— — — — 10,429 — — — — 10,429 
Preferred stock dividend — — — — — (8,625)— — — (8,625)
Issuance of stock related to stock-based awards
— — 201,426 (3,883)— — — — (3,881)
Repurchase of common stock— — — — — — (941,879)(50,023)— (50,023)
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 
Balance at December 31, 2022 (audited)
300,000 $300,000 50,867,298 $509 $1,025,593 $2,263,502 (2,083,535)$(115,310)$(418,943)$3,055,351 
Comprehensive income/(loss):
Net income— — — — — 107,312 — — — 107,312 
Change in other comprehensive income/(loss), net of taxes— — — — — — — — (21,365)(21,365)
Total comprehensive income85,947 
Stock-based compensation expense recognized in earnings
— — — — 13,507 — — — — 13,507 
Preferred stock dividend— — — — — (8,625)— — — (8,625)
Issuance of stock related to stock-based awards
— — 220,667 (4,037)— — — — (4,035)
Repurchase of common stock— — — — — — (1,011,909)(60,218)— (60,218)
Balance at June 30, 2023300,000 $300,000 51,087,965 $511 $1,035,063 $2,362,189 (3,095,444)$(175,528)$(440,308)$3,081,927 
See accompanying notes to consolidated financial statements.
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TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Six Months Ended June 30,
(in thousands)20232022
Operating activities
Net income$107,312 $73,809 
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Provision for credit losses35,000 20,000 
Depreciation and amortization19,717 24,081 
Net gain recognized on investment securities(2,685)— 
Stock-based compensation expense13,507 10,612 
Purchases and originations of loans held for sale— (1,072)
Proceeds from sales and repayments of loans held for sale7,260 4,600 
Changes in operating assets and liabilities:
Accrued interest receivable and other assets(42,383)(10,753)
Accrued interest payable and other liabilities(47,067)25,259 
Net cash provided by operating activities90,661 146,536 
Investing activities
Purchases of available-for-sale securities(849,391)(637,803)
Proceeds from sales of available-for-sale debt securities56,923 — 
Proceeds from maturities, redemptions and pay-downs of available-for-sale debt securities106,988 333,811 
Proceeds from maturities, redemptions and pay-downs of held-to-maturity debt securities37,075 40,224 
Sales/(purchases) of equity securities, net2,292 855 
Originations of loans held for investment, mortgage finance(35,597,043)(54,492,183)
Proceeds from pay-offs of loans held for investment, mortgage finance34,588,264 55,418,173 
Net increase in loans held for investment, excluding mortgage finance loans(1,058,046)(2,188,546)
Purchase of premises and equipment, net(4,878)(9,201)
Net cash used in investing activities(2,717,816)(1,534,670)
Financing activities
Net increase/(decrease) in deposits461,360 (2,669,344)
Issuance of stock related to stock-based awards(4,035)(3,881)
Preferred dividends paid(8,625)(8,625)
Repurchase of common stock(60,218)(50,023)
Net increase (decrease) in short-term borrowings148,858 448,704 
Redemption of long-term debt(75,000)— 
Net cash provided by/(used in) financing activities462,340 (2,283,169)
Net decrease in cash and cash equivalents(2,164,815)(3,671,303)
Cash and cash equivalents at beginning of period5,012,260 7,946,659 
Cash and cash equivalents at end of period$2,847,445 $4,275,356 
Supplemental disclosures of cash flow information:
Cash paid during the period for interest$314,089 $60,572 
Cash paid during the period for income taxes43,286 29,350 
Transfers of debt securities from available-for-sale to held-to-maturity— 1,019,365 
See accompanying notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(1) Operations and Summary of Significant Accounting Policies
Organization and Nature of Business
Texas Capital Bancshares, Inc. (“TCBI” or the “Company”), a Delaware corporation, was incorporated in November 1996 and commenced banking operations in December 1998. The consolidated financial statements include the accounts of TCBI and its wholly owned subsidiary, Texas Capital Bank (the “Bank”).
The Company serves the needs of commercial businesses, entrepreneurs and professionals located in Texas through a custom array of financial products and services with high-quality personal service.
Basis of Presentation
The Company’s accounting and reporting policies conform to accounting principles generally accepted in the United States (“GAAP”) and to generally accepted practices within the banking industry. Certain prior period balances have been reclassified to conform to the current period presentation.
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 the Company’s financial position and results of operations. The consolidated financial statements have been prepared in accordance with GAAP for interim financial information and the instructions to Form 10-Q adopted by the U.S. Securities and Exchange Commission (“SEC”). Accordingly, the financial statements and the notes to the consolidated unaudited financial statements required by GAAP for complete annual financial statements do not include all of the information and should be read in conjunction with the consolidated financial statements, and notes thereto, for the year ended December 31, 2022, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.
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.
In the second quarter of 2023, changes were made to certain estimates used in the Company’s current expected credit loss model, the most significant of which are more granular estimates of historical loss rates to incorporate probability of default and loss severities and allocations of expected losses to outstanding loan balances and off-balance sheet financial instruments. As a result of these changes, corresponding adjustments were also made to the Company’s portfolio segments to appropriately pool loans with similar risk characteristics and to the speed at which the Company reverts to historical loss rates for periods beyond which management is able to develop reasonable and supportable forecasts.
The below accounting policy from the Company’s 2022 Form 10-K has been updated to incorporate these changes.
Allowance for Credit Losses
The Company’s allowance for credit losses is determined using a current expected credit loss (“CECL”) model. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor.
The following is a discussion of the allowance for credit losses on loans held for investment and off-balance sheet credit exposures. See Note 1 - Operations and Summary of Significant Accounting Policies - Investment Securities - Debt Securities in the Company’s 2022 Form 10-K for discussion of the allowance for credit losses on available-for-sale and held-to-maturity debt securities.
The CECL methodology recognizes lifetime expected credit losses immediately when a financial asset is originated or purchased. The allowance for credit losses on loans is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The allowance for credit losses on off-balance sheet financial instruments is recorded in other liabilities on the consolidated balance sheets,
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Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, credit quality, or term, as well as for changes in macroeconomic conditions, such as changes in unemployment rates, gross domestic product, property values, or other relevant factors.
The allowance for credit losses is comprised of reserves measured on a collective (pool) basis when similar risk characteristics exist. Loans that do not share risk characteristics are assigned a reserve based on an individual evaluation and are not included in the collective (pool) evaluation. For purposes of determining the collective (pool) allowance for credit losses, the loan portfolio is segregated into pools first by portfolio segment and then by past due status or credit grade. Each pool is assigned a loss estimate, reflecting historical loss rates that incorporate probability of default and severity of losses over the estimated remaining life of the loans. These loss estimates are then modified to incorporate a reasonable and supportable forecast of future losses at the pool level, as well as any necessary qualitative adjustments using a Portfolio Level Qualitative Factor (“PLQF”) and/or a Portfolio Segment Level Qualitative Factor (“SLQF”). A similar process is employed to calculate a reserve assigned to off-balance financial instruments, specifically unfunded loan commitments and letters of credit. Modified loss estimates are assigned based on the balance of the commitments estimated to be outstanding at the time of default. The PLQF and SLQF are utilized to address factors that are not present in historical loss rates and are otherwise unaccounted for in the quantitative process. The PLQF is used to apply a qualitative adjustment across the entire portfolio of loans, while the SLQF is designed to apply a qualitative adjustment across a single portfolio segment. Even though portions of the allowance may be allocated to specific loans, the entire allowance is available for any credit that, in management’s judgment, should be charged off.
The Company generally uses a two-year forecast period, based on a single forecast scenario or a blend of multiple forecast scenarios, using variables management believes are most relevant to each portfolio segment. For periods beyond which management is able to develop reasonable and supportable forecasts, the Company reverts to the average historical loss rate, reflecting historical default probabilities and loss severities, using a reversion speed that approximates 1 to 2 years. The forecast period and scenario(s) used are reviewed on a quarterly basis and may be adjusted based on management's view of the current economic conditions and level of predictability the forecast can provide.
Portfolio segments are used to pool loans with similar risk characteristics and align with the Company’s methodology for measuring expected credit losses. A summary of the primary portfolio segments is as follows:
Commercial. The commercial loan portfolio is comprised of lines of credit for working capital, term loans, reserve-based loans to energy exploration and production companies, and leases to finance equipment and other business assets across a variety of industries. These loans are used for general corporate purposes including financing working capital, internal growth, and acquisitions and are generally secured by accounts receivable, inventory, oil and gas reserves, equipment and other assets of clients’ businesses.
Mortgage Finance. Mortgage finance loans relate to mortgage warehouse lending operations in which the Company purchases mortgage loan ownership interests from unaffiliated mortgage originators that are generally held for a period of less than 30 days and more typically 10-20 days before they are sold to an approved investor. Volumes fluctuate based on the level of market demand for the product and the number of days between purchase and sale of the loans, which can be affected by changes in overall market interest rates and housing demand and tend to peak at the end of each month. Mortgage finance loans are consistently underwritten based on standards established by the approved investors. Market conditions or events of default by an investor or originator could require that the Company repurchases the remaining interests in the mortgage loans and hold them beyond the expected 10-20 days.
Commercial Real Estate (“CRE”). The CRE portfolio is comprised of construction/development financing and limited term financing provided to professional real estate developers, owners/managers of commercial real estate projects and properties, and residential builders/developers. Collateral properties include office buildings, warehouse/distribution buildings, shopping centers, hotels/motels, senior living, apartment buildings, residential and commercial tract developments, and raw land or lots to be developed into single-family homes. The primary source of repayment on these loans is expected to come from the sale, permanent financing or lease of the real property collateral. The performance of these loans is impacted by fluctuations in collateral values, the ability of the borrower to obtain permanent financing, and, in the case of loans to residential builder/developers, volatility in consumer demand.
Consumer. This category of loans is comprised of loans made to consumers for personal expenditures, first and second lien mortgages made for the purpose of purchasing or constructing 1-4 family residential dwellings and home equity revolving lines of credit.
The Company has several pass credit grades that are assigned to loans based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to watch credits which have all the characteristics of an acceptable credit risk but warrant more than the normal level of monitoring. Within the criticized/classified credit grades are special mention, substandard and doubtful. Special mention loans are those that are currently protected by the sound worth and paying capacity of the borrower, but that are potentially weak and constitute an additional credit risk. These loans have the potential to deteriorate to a substandard grade due to the existence of financial or administrative deficiencies. Substandard loans have a well-defined weakness or weaknesses that
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jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Some substandard loans are inadequately protected by the sound worth and paying capacity of the borrower and of the collateral pledged and may be considered impaired. Substandard loans can be accruing or can be on non-accrual depending on the circumstances of the individual loans. Loans classified as doubtful have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection in full highly questionable and improbable. The possibility of loss is extremely high. All doubtful loans are on non-accrual.
The methodology used in the estimation of the allowance, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and forecasted economic conditions. Changes are reflected in the pool-basis allowance and in reserves assigned on an individual basis as the collectability of classified loans is evaluated with new information. As the Company’s portfolio has matured, historical loss ratios have been closely monitored. The review of the appropriateness of the allowance is performed by executive management and presented to the audit and risk committees of the board of directors for their review. The committees report to the board as part of the board's quarterly review of the Company’s consolidated financial statements.
When management determines that foreclosure is probable, and for certain collateral-dependent loans where foreclosure is not considered probable, expected credit losses are based on the estimated fair value of the collateral adjusted for selling costs, when appropriate. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless either of the following applies: management has a reasonable expectation that a loan will be restructured or the extension or renewal options are included in the borrower contract and are not unconditionally cancellable.
The Company does not measure an allowance for credit losses on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when loans are placed on non-accrual status as discussed above.
(2) Earnings Per Share
The following table presents the computation of basic and diluted earnings per share:
Three Months Ended June 30,Six Months Ended June 30,
(in thousands except share and per share data)2023202220232022
Numerator:
Net income$68,651 $34,159 $107,312 $73,809 
Preferred stock dividends4,312 4,312 8,625 8,625 
Net income available to common stockholders$64,339 $29,847 $98,687 $65,184 
Denominator:
Basic earnings per common share—weighted average common shares47,906,624 50,258,681 48,166,977 50,462,735 
Effect of dilutive outstanding stock-settled awards514,652 542,947 569,405 607,034 
Dilutive earnings per common share—weighted average diluted common shares48,421,276 50,801,628 48,736,382 51,069,769 
Basic earnings per common share$1.34 $0.59 $2.05 $1.29 
Diluted earnings per common share$1.33 $0.59 $2.02 $1.28 
Anti-dilutive outstanding stock-settled awards533,363 430,224 341,728301,842

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(3) Investment Securities
The following is a summary of the Company’s investment securities: 
(in thousands)Amortized
Cost(1)
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
June 30, 2023
Available-for-sale debt securities:
U.S. Treasury securities$646,811 $— $(26,483)$620,328 
U.S. government agency securities125,000 — (21,314)103,686 
Residential mortgage-backed securities2,902,892 — (346,184)2,556,708 
CRT securities14,226 — (2,470)11,756 
Total available-for-sale debt securities3,688,929 — (396,451)3,292,478 
Held-to-maturity debt securities:
Residential mortgage-backed securities900,315 — (111,880)788,435 
Total held-to-maturity debt securities900,315 — (111,880)788,435 
Equity securities33,860 
Total investment securities(2)$4,226,653 
December 31, 2022
Available-for-sale debt securities:
U.S. Treasury securities$698,769 $— $(28,187)$670,582 
U.S. government agency securities125,000 — (22,846)102,154 
Residential mortgage-backed securities2,162,364 (331,320)1,831,047 
CRT securities14,713 — (2,852)11,861 
Total available-for-sale debt securities3,000,846 (385,205)2,615,644 
Held-to-maturity securities:
Residential mortgage-backed securities935,514 — (118,600)816,914 
Total held-to-maturity securities935,514 — (118,600)816,914 
Equity securities33,956 
Total investment securities(2)$3,585,114 
(1)    Excludes accrued interest receivable of $9.5 million and $6.6 million at June 30, 2023 and December 31, 2022, respectively, related to available-for-sale debt securities and $1.5 million and $1.5 million at June 30, 2023 and December 31, 2022, respectively, related to held-to-maturity debt securities that is recorded in accrued interest receivable and other assets on the consolidated balance sheets.
(2)    Includes available-for-sale debt securities and equity securities at estimated fair value and held-to-maturity debt securities at amortized cost.
Debt Securities
In the first quarter of 2023, the Company sold U.S. Treasury securities with an amortized cost of $56.4 million and realized a gain of $489,000.
The amortized cost and estimated fair value as of June 30, 2023, excluding accrued interest receivable, of available-for-sale and held-to-maturity debt securities are presented below by contractual maturity. Actual maturities may differ from contractual maturities of mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
Available-for-saleHeld-to-maturity
(in thousands)Amortized CostFair ValueAmortized CostFair Value
Due within one year$251,079 $245,016 $— $— 
Due after one year through five years445,732 418,385 — — 
Due after five years through ten years106,187 86,519 — — 
Due after ten years2,885,931 2,542,558 900,315 788,435 
Total$3,688,929 $3,292,478 $900,315 $788,435 
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The following table discloses the Company’s available-for-sale debt securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months:
Less Than 12 Months12 Months or LongerTotal
(in thousands)Fair ValueUnrealized LossFair ValueUnrealized LossFair ValueUnrealized Loss
June 30, 2023
U.S. Treasury securities$259,155 $(9,662)$361,173 $(16,821)$620,328 $(26,483)
U.S. government agency securities— — 103,686 (21,314)103,686 (21,314)
Residential mortgage-backed securities1,024,801 (27,157)1,531,907 (319,027)2,556,708 (346,184)
CRT securities— — 11,756 (2,470)11,756 (2,470)
Total$1,283,956 $(36,819)$2,008,522 $(359,632)$3,292,478 $(396,451)
December 31, 2022
U.S. Treasury securities$670,582 $(28,187)$— $— $670,582 $(28,187)
U.S. government agency securities— — 102,154 (22,846)102,154 (22,846)
Residential mortgage-backed securities261,502 (9,481)1,569,107 (321,839)1,830,609 (331,320)
CRT securities— — 11,861 (2,852)11,861 (2,852)
Total$932,084 $(37,668)$1,683,122 $(347,537)$2,615,206 $(385,205)
At June 30, 2023, the Company had 112 available-for-sale debt securities in an unrealized loss position, comprised of 11 U.S. Treasury securities, five U.S. government agency securities, 94 residential mortgage-backed securities and two CRT securities. The unrealized losses on the available-for-sale debt securities were the result of changes in market interest rates compared to the date the securities were acquired rather than the credit quality of the issuers or underlying loans. The Company does not currently intend to sell and based on current conditions it does not believe it is likely that the Company will be required to sell these available-for-sale debt securities before recovery of the amortized cost of such securities in an unrealized loss position and has, therefore recorded the unrealized losses related to this portfolio in accumulated other comprehensive income/loss, net (“AOCI”). Held-to-maturity securities consist of government guaranteed securities for which no loss is expected. At June 30, 2023 and December 31, 2022, no allowance for credit losses was established for available-for-sale or held-to-maturity debt securities.
At June 30, 2023, debt securities with carrying values of approximately $1.6 million were pledged to secure certain customer deposits at June 30, 2023. At December 31, 2022, debt securities with carrying values of approximately $16.1 million and $1.4 million were pledged to secure certain customer repurchase agreements and deposits, respectively.
Equity Securities
Equity securities consist of investments that qualify for consideration under the regulations implementing the Community Reinvestment Act and investments related to the Company’s non-qualified deferred compensation plan. The following is a summary of unrealized and realized gains/(losses) recognized on equity securities included in other non-interest income on the consolidated statements of income and other comprehensive income:
Three Months Ended June 30,Six Months Ended June 30,
(in thousands)2023202220232022
Net gains/(losses) recognized during the period$951 $(4,996)$2,196 $(8,636)
Less: Realized net gains/(losses) recognized on securities sold(10)(204)(606)(2)
Unrealized net gains/(losses) recognized on securities still held$961 $(4,792)$2,802 $(8,634)
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(4) Loans and Allowance for Credit Losses on Loans
As discussed in Note 1 - Operations and Summary of Significant Accounting Policies, in the second quarter of 2023, changes were made to certain estimates used in the Company’s current expected credit loss model which resulted in adjustments being made to the Company’s portfolio segments. As a result, certain prior period balances below have been reclassified to conform to the current period presentation of portfolio segments.
Loans are summarized by portfolio segment as follows:
(in thousands)June 30, 2023December 31, 2022
Loans held for investment(1):
Commercial$10,459,640 $9,832,676 
Mortgage finance5,098,812 4,090,033 
Commercial real estate5,308,997 4,875,363 
Consumer531,635 552,848 
Gross loans held for investment21,399,084 19,350,920 
Unearned income (net of direct origination costs)(73,069)(63,580)
Total loans held for investment21,326,015 19,287,340 
Allowance for credit losses on loans(237,343)(253,469)
Total loans held for investment, net$21,088,672 $19,033,871 
Loans held for sale:
Non-mortgage loans, at lower of cost or fair value29,097 36,357 
Total loans held for sale$29,097 $36,357 
(1)    Excludes accrued interest receivable of $105.7 million and $100.4 million at June 30, 2023 and December 31, 2022, respectively, that is recorded in accrued interest receivable and other assets on the consolidated balance sheets.


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The following tables summarize gross loans held for investment by year of origination and internally assigned credit grades:
(in thousands)202320222021202020192018
and prior
Revolving lines of creditRevolving lines of credit converted to term loansTotal
June 30, 2023
Commercial
(1-7) Pass$1,046,010 $1,914,964 $414,088 $173,152 $214,029 $365,905 $5,904,419 $18,637 $10,051,204 
(8) Special mention95 83,010 18,452 289 707 19,303 54,371 142 176,369 
(9) Substandard - accruing15,216 55,176 39,042 2,059 — 6,725 33,457 528 152,203 
(9+) Non-accrual— 42,076 3,211 436 23,385 7,421 161 3,174 79,864 
Total commercial$1,061,321 $2,095,226 $474,793 $175,936 $238,121 $399,354 $5,992,408 $22,481 $10,459,640 
Mortgage finance
(1-7) Pass$115,533 $54,104 $686,673 $341,626 $358,533 $3,542,343 $— $— $5,098,812 
(8) Special mention— — — — — — — — — 
(9) Substandard - accruing— — — — — — — — — 
(9+) Non-accrual— — — — — — — — — 
Total mortgage finance$115,533 $54,104 $686,673 $341,626 $358,533 $3,542,343 $— $— $5,098,812 
Commercial real estate
(1-7) Pass$398,476 $1,533,734 $1,056,719 $625,786 $418,687 $634,714 $408,959 $23,700 $5,100,775 
(8) Special mention1,048 55,675 22,329 24,047 12,016 39,960 — 5,414 160,489 
(9) Substandard - accruing— — 17,850 — — 29,708 — — 47,558 
(9+) Non-accrual— — — — — 175 — — 175 
Total commercial real estate$399,524 $1,589,409 $1,096,898 $649,833 $430,703 $704,557 $408,959 $29,114 $5,308,997 
Consumer
(1-7) Pass$19,368 $58,901 $89,294 $55,186 $14,480 $110,951 $180,651 $107 $528,938 
(8) Special mention— — — — — 1,376 — — 1,376 
(9) Substandard - accruing— — — — — — — 321 321 
(9+) Non-accrual— — — — — 1,000 — — 1,000 
Total consumer$19,368 $58,901 $89,294 $55,186 $14,480 $113,327 $180,651 $428 $531,635 
Total$1,595,746 $3,797,640 $2,347,658 $1,222,581 $1,041,837 $4,759,581 $6,582,018 $52,023 $21,399,084 
Gross charge-offs$— $90 $19,828 $— $8,243 $552 $— $871 $29,584 
(in thousands)202220212020201920182017
and prior
Revolving lines of creditRevolving lines of credit converted to term loansTotal
December 31, 2022
Commercial
(1-7) Pass$2,022,950 $678,473 $240,511 $254,985 $322,099 $227,853 $5,694,352 $20,933 $9,462,156 
(8) Special mention9,141 7,740 3,628 37,794 11,998 4,975 95,310 2,250 172,836 
(9) Substandard - accruing18,670 71,147 514 1,666 14,933 6,305 37,407 — 150,642 
(9+) Non-accrual376 512 751 30,392 6,226 2,520 6,265 — 47,042 
Total commercial$2,051,137 $757,872 $245,404 $324,837 $355,256 $241,653 $5,833,334 $23,183 $9,832,676 
Mortgage finance
(1-7) Pass$30,485 $482,477 $197,045 $267,758 $464,753 $2,647,515 $— $— $4,090,033 
(8) Special mention— — — — — — — — — 
(9) Substandard - accruing— — — — — — — — — 
(9+) Non-accrual— — — — — — — — — 
Total mortgage finance$30,485 $482,477 $197,045 $267,758 $464,753 $2,647,515 $— $— $4,090,033 
Commercial real estate
(1-7) Pass$1,362,160 $958,669 $670,113 $520,970 $263,240 $448,536 $465,834 $43,237 $4,732,759 
(8) Special mention3,494 6,524 46,512 5,295 19,350 4,038 — — 85,213 
(9) Substandard - accruing7,840 17,850 — 247 11,458 18,733 — — 56,128 
(9+) Non-accrual— — 1,081 — — 182 — — 1,263 
Total commercial real estate$1,373,494 $983,043 $717,706 $526,512 $294,048 $471,489 $465,834 $43,237 $4,875,363 
Consumer
(1-7) Pass$69,320 $95,470 $57,060 $24,773 $20,055 $89,919 $196,088 $130 $552,815 
(8) Special mention— — — — — — — — — 
(9) Substandard - accruing— — — — — — — — — 
(9+) Non-accrual— — — 33 — — — — 33 
Total Consumer$69,320 $95,470 $57,060 $24,806 $20,055 $89,919 $196,088 $130 $552,848 
Total$3,524,436 $2,318,862 $1,217,215 $1,143,913 $1,134,112 $3,450,576 $6,495,256 $66,550 $19,350,920 
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The following table details activity in the allowance for credit losses on loans. The changes made to the Company’s current expected credit loss model, as discussed above and in Note 1 - Operations and Summary of Significant Accounting Policies, resulted in a reallocation of the allowance for credit losses between loan portfolio segments and allowance balances allocated to off-balance sheet financial instruments, the results of which are included in the table below. The changes made result in a higher allocation of losses to off-balance sheet financial instruments. See Note 6 - Financial Instruments with Off-Balance Sheet Risk for information regarding the allowance for credit losses on off-balance sheet financial instruments. Allocation of a portion of the allowance to one category does not preclude its availability to absorb losses in other categories.
(in thousands)CommercialMortgage
Finance
Commercial Real EstateConsumerTotal
Six Months Ended June 30, 2023
Beginning balance$185,303 $10,745 $54,268 $3,153 $253,469 
Provision for credit losses on loans18,198 (3,660)(1,730)(785)12,023 
Charge-offs29,584 — — — 29,584 
Recoveries1,430 — — 1,435 
Net charge-offs (recoveries)28,154 — — (5)28,149 
Ending balance$175,347 $7,085 $52,538 $2,373 $237,343 
Six Months Ended June 30, 2022
Beginning balance$154,360 $6,083 $48,247 $3,176 $211,866 
Provision for credit losses on loans(10,128)12,975 16,820 (383)19,284 
Charge-offs2,978 — 350 — 3,328 
Recoveries1,172 — — 19 1,191 
Net charge-offs (recoveries)1,806 — 350 (19)2,137 
Ending balance$142,426 $19,058 $64,717 $2,812 $229,013 
The Company recorded a $12.0 million provision for credit losses on loans for the six months ended June 30, 2023, compared to a $19.3 million provision for the same period of 2022. The $12.0 million provision for credit losses on loans resulted primarily from an increase in non-accrual loans and growth in loans held for investment during the six months ended June 30, 2023. Net charge-offs of $28.1 million were recorded during the six months ended June 30, 2023, compared to net charge-offs of $2.1 million during the same period of 2022. Criticized loans totaled $619.4 million at June 30, 2023, $513.2 million at December 31, 2022 and $603.5 million at June 30, 2022.
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 June 30, 2023, the Company had $40.4 million in collateral-dependent commercial loans, collateralized by business assets.
The table below provides an age analysis of gross loans held for investment:
(in thousands)30-59 Days
Past Due
60-89 Days
Past Due
90 Days or More Past DueTotal Past
Due
Non-accrual(1)CurrentTotalNon-accrual With No Allowance
June 30, 2023
Commercial$2,273 $686 $64 $3,023 $79,864 $10,376,753 $10,459,640 $23,385 
Mortgage finance— — — — — 5,098,812 5,098,812 — 
Commercial real estate524 — — 524 175 5,308,298 5,308,997 — 
Consumer11 — — 11 1,000 530,624 531,635 1,000 
Total$2,808 $686 $64 $3,558 $81,039 $21,314,487 $21,399,084 $24,385 
(1)As of June 30, 2023, $1.4 million of non-accrual loans were earning interest income on a cash basis compared to $2.2 million as of December 31, 2022. Additionally, $37,000 of interest income was recognized on non-accrual loans for the six months ended June 30, 2023 compared to none for the same period in 2022. Accrued interest of $1.6 million and $4,000 was reversed during the six months ended June 30, 2023 and June 30, 2022, respectively.
Modifications to Borrowers Experiencing Financial Difficulty
The Company adopted Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measurement of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty.
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The table below details gross loans held for investment as of June 30, 2023 made to borrowers experiencing financial difficulty that were modified during the three and six months ended June 30, 2023:
(in thousands)Payment
Deferral
Term
Extension
Payment
Deferral
and Term
Extension
Interest Rate
Reduction
and Term
Extension
TotalPercentage of
Total Loans
Held for
Investment
Three Months Ended June 30, 2023
Commercial$— $261 $3,378 $— $3,639 0.02 %
Total$— $261 $3,378 $— $3,639 0.02 %
Six Months Ended June 30, 2023
Commercial$31,356 $1,144 $6,562 $14,532 $53,594 0.25 %
Total$31,356 $1,144 $6,562 $14,532 $53,594 0.25 %
The following table summarizes the financial impacts of loan modifications made to borrowers experiencing financial difficulty during the three and six months ended June 30, 2023:
Interest Rate
Reduction
Term Extension
(in months)
Total Payment
Deferrals
(in thousands)
Three Months Ended June 30, 2023
Commercial—%
4 to 12
$358 
Six Months Ended June 30, 2023
Commercial0.70%
4 to 36
$5,080 
As of June 30, 2023, commercial loans totaling $161,000 experienced a default subsequent to being granted a term extension modification in the prior twelve months. Default is defined as movement to nonperforming status, foreclosure or charge-off, whichever occurs first.
The table below provides an age analysis of gross loans held for investment as of June 30, 2023 made to borrowers experiencing financial difficulty that were modified on or after January 1, 2023, the date the Company adopted ASU 2022-02:
(in thousands)30-89 Days
Past Due
90+ Days
Past Due
Non-AccrualCurrentTotal
June 30, 2023
Commercial$— $— $6,723 $46,871 $53,594 
Total$— $— $6,723 $46,871 $53,594 
Troubled Debt Restructuring Disclosures Prior to the Adoption of ASU 2022-02
The Company did not have any loans that were restructured during the six months ended June 30, 2022.
As of December 31, 2022 and June 30, 2022, the Company did not have any loans considered restructured that were not on non-accrual. Of the non-accrual loans at December 31, 2022 and June 30, 2022, $531,000 and $17.3 million, respectively, met the criteria for restructured. These loans had no unfunded commitments at their respective balance sheet dates.
(5) Short-Term Borrowings and Long-Term Debt
The table below presents a summary of short-term borrowings:
(in thousands)June 30, 2023December 31, 2022
Customer repurchase agreements$— $1,142 
Federal Home Loan Bank borrowings1,350,000 1,200,000 
Total short-term borrowings$1,350,000 $1,201,142 
The table below presents a summary of long-term debt:
(in thousands)June 30, 2023December 31, 2022
Bank-issued floating rate senior unsecured credit-linked notes due 2024$198,496 $272,492 
Bank-issued 5.25% fixed rate subordinated notes due 2026
174,326 174,196 
Company-issued 4.00% fixed rate subordinated notes due 2031
371,567 371,348 
Trust preferred floating rate subordinated debentures due 2032 to 2036113,406 113,406 
Total long-term debt$857,795 $931,442 
In the second quarter of 2023, the Company partially paid down $75.0 million of the senior unsecured credit-linked notes in accordance with the term of the notes.
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(6) Financial Instruments with Off-Balance Sheet Risk
The table below presents the Company’s financial instruments with off-balance sheet risk, as well as the activity in the allowance for off-balance sheet credit losses related to those financial instruments. The changes made to the Company’s current expected credit loss model, as discussed in Note 1 - Operations and Summary of Significant Accounting Policies, resulted in a reallocation of the allowance for credit losses between loan portfolio segments and allowance balances allocated to off-balance sheet financial instruments, the results of which are included in the table below. The changes made result in a higher allocation of losses to off-balance sheet financial instruments. See Note 4 - Loans and Allowance for Credit Losses on Loans for information regarding the allowance for credit losses on loans.
(in thousands)CommercialMortgage
Finance
Commercial
Real Estate
ConsumerTotal
Six Months Ended June 30, 2023
Beginning balance$16,550 $— $5,222 $21 $21,793 
Provision for off-balance sheet credit losses17,187 — 5,693 97 22,977 
Ending balance$33,737 $— $10,915 $118 $44,770 
Six Months Ended June 30, 2022
Beginning balance$15,107 $— $2,136 $22 $17,265 
Provision for off-balance sheet credit losses(1,656)— 2,376 (4)716 
Ending balance$13,451 $— $4,512 $18 $17,981 
(in thousands)June 30, 2023December 31, 2022
Commitments to extend credit - period end balance$9,973,209 $9,673,082 
Standby letters of credit - period end balance488,525 417,896 
(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 capital consist of CET1 and “Additional Tier 1 Capital” instruments meeting stated requirements, (iii) requires that most deductions/adjustments to regulatory capital measures be made to CET1 and not to other components of capital and (iv) defines the scope of the deductions/adjustments to the capital measures.
Additionally, the Basel III Capital Rules require that the Company maintains a 2.5% capital conservation buffer with respect to each of CET1, Tier 1 and total capital to risk-weighted assets, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers. No dividends were declared or paid on the Company’s common stock during the six months ended June 30, 2023 or 2022. In January 2023, the Company completed the full $150.0 million of share repurchases authorized by the Company’s board of directors on April 19, 2022. On January 18, 2023, the Company’s board of directors authorized a new share repurchase program under which the Company may repurchase up to $150.0 million in shares of its outstanding common stock. During the six months ended June 30, 2023, the Company repurchased 1,011,909 shares of its common stock for an aggregate price of $59.7 million, at a weighted average price of $58.98 per share. The aggregate purchase price and weighted average price per share does not include the effect of excise tax incurred on net stock repurchases.
In February 2019, the federal bank regulatory agencies issued a final rule (the “2019 CECL Rule”) that revised certain capital regulations to account for changes to credit loss accounting under GAAP. The 2019 CECL Rule included a transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of adopting the new accounting standard related to the measurement of current expected credit losses on their regulatory capital ratios (three-year transition option). In March 2020, the federal bank regulatory agencies issued an interim final rule that maintains the three-year transition option of the 2019 CECL Rule and also provides banking organizations that were required under GAAP to implement CECL before the end of 2020 the option to delay for two years an estimate of the effect of CECL on regulatory capital, relative to the incurred loss methodology's effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company adopted CECL on January 1, 2020 and have elected to utilize the five-year transition option.
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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 June 30, 2023, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
Financial institutions are categorized as well capitalized based on total risk-based, Tier 1 risk-based, CET1 and Tier 1 leverage ratios. As shown in the table below, the Company’s and Bank’s capital ratios exceeded the regulatory definition of well capitalized as of June 30, 2023 and December 31, 2022. The regulatory authorities can apply changes in the classification of assets and such changes may retroactively subject the Company and the Bank to changes in capital ratios. Any such change could reduce one or more capital ratios below well capitalized status. In addition, a change may result in imposition of additional assessments by the Federal Deposit Insurance Corporation (“FDIC”) or could result in regulatory actions that could have a material effect on the Bank’s condition and results of operations.
Because the Bank had less than $15.0 billion in total consolidated assets as of December 31, 2009, it is allowed to continue to classify the trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1 capital.
At the beginning of each of the last five years of the life of the Bank-issued fixed rate subordinated notes due 2026, the amount that is eligible to be included in Tier 2 capital is reduced by 20% of the original amount of the notes (net of redemptions). In 2023, the amount of the notes that qualify as Tier 2 capital has been reduced by 60%.
The table below summarizes the Company’s and the Bank’s actual and required capital ratios under the Basel III Capital Rules. The ratios presented below include the effects of the election to utilize the five-year CECL transition described above.
ActualMinimum Capital Required(2)Capital Required to be Well Capitalized
(dollars in thousands)Capital AmountRatioCapital AmountRatioCapital AmountRatio
June 30, 2023
CET1
Company$3,225,555 12.18 %$1,854,443 7.00 %N/AN/A
Bank3,516,575 13.31 %1,849,426 7.00 %1,717,324 6.50 %
Total capital (to risk-weighted assets)
Company4,351,950 16.43 %2,781,665 10.50 %2,649,204 10.00 %
Bank4,071,403 15.41 %2,774,139 10.50 %2,642,037 10.00 %
Tier 1 capital (to risk-weighted assets)
Company3,635,555 13.72 %2,251,824 8.50 %1,589,523 6.00 %
Bank3,676,575 13.92 %2,245,731 8.50 %2,113,630 8.00 %
Tier 1 capital (to average assets)(1)
Company3,635,555 12.39 %1,173,583 4.00 %N/AN/A
Bank3,676,575 12.55 %1,171,431 4.00 %1,464,288 5.00 %
December 31, 2022
CET1
Company$3,180,208 13.00 %$1,712,608 7.00 %N/AN/A
Bank3,408,178 13.95 %1,710,056 7.00 %1,587,909 6.50 %
Total capital (to risk-weighted assets)
Company4,331,098 17.70 %2,568,912 10.50 %2,446,583 10.00 %
Bank3,987,720 16.32 %2,565,083 10.50 %2,442,937 10.00 %
Tier 1 capital (to risk-weighted assets)
Company3,590,208 14.67 %2,079,595 8.50 %1,467,950 6.00 %
Bank3,568,178 14.61 %2,076,496 8.50 %1,954,349 8.00 %
Tier 1 capital (to average assets)(1)
Company3,590,208 11.54 %1,244,494 4.00 %N/AN/A
Bank3,568,178 11.48 %1,243,232 4.00 %1,554,039 5.00 %
(1)    The Tier 1 capital ratio (to average assets) is not impacted by the Basel III Capital Rules; however, the Federal Reserve Board and the FDIC may require the Company and the Bank, respectively, to maintain a Tier 1 capital ratio (to average assets) above the required minimum.
(2)    Percentages represent the minimum capital ratios plus, as applicable, the fully phased-in 2.5% CET1 capital buffer under the Basel III Capital Rules.
The Company is required to maintain reserve balances in cash and on deposit with the Federal Reserve based on a percentage of transactional deposits; however, the Federal Reserve reduced the reserve requirement ratio to zero effective March 26, 2020, therefore the total requirement was zero at both June 30, 2023 and December 31, 2022.
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(8) Stock-Based Compensation
The Company has long-term incentive plans under which stock-based compensation awards are granted to employees and directors by the Company’s board of directors or its designated committee. Grants are subject to vesting requirements and may include, among other things, nonqualified stock options, stock appreciation rights, restricted stock units (“RSUs”), restricted stock and performance units, or any combination thereof.
The table below summarizes the Company’s stock-based compensation expense:
 Three Months Ended June 30,Six Months Ended June 30,
(in thousands)2023202220232022
Stock-settled awards:
RSUs$5,069 $5,022 $13,507 $10,429 
Cash-settled units— — 183 
Total$5,069 $5,024 $13,507 $10,612 
 
(in thousands except period data)June 30, 2023
Unrecognized compensation expense related to unvested stock-settled awards$40,155 
Weighted average period over which expense is expected to be recognized, in years2.3
(9) Fair Value Disclosures
The Company determines the fair market values of its assets and liabilities measured at fair value on a recurring and nonrecurring basis using the fair value hierarchy as prescribed in ASC 820. See Note 1 - Operations and Summary of Significant Accounting Policies in the Company’s 2022 Form 10-K for information regarding the fair value hierarchy and a description of the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial statements.
Assets and liabilities measured at fair value are as follows:
 Fair Value Measurements Using
(in thousands)Level 1Level 2Level 3
June 30, 2023
Available-for-sale debt securities:(1)
U.S. Treasury securities$620,328 $— $— 
U.S. government agency securities— 103,686 — 
Residential mortgage-backed securities— 2,556,708 — 
CRT securities— — 11,756 
Equity securities(1)(2)22,783 11,077 — 
Loans held for investment(3)— — 26,047 
Derivative assets(4)— 10,768 — 
Derivative liabilities(4)— 97,909 — 
Non-qualified deferred compensation plan liabilities(5)21,149 — — 
December 31, 2022
Available-for-sale debt securities:(1)
U.S. Treasury securities$670,582 $— $— 
U.S. government agency securities— 102,154 — 
Residential mortgage-backed securities— 1,831,047 — 
CRT securities— — 11,861 
Equity securities(1)(2)22,879 11,077 — 
Derivative assets(4)— 13,504 — 
Derivative liabilities(4)— 91,758 — 
Non-qualified deferred compensation plan liabilities(5)21,177 — — 
(1)Investment securities are measured at fair value on a recurring basis, generally monthly.
(2)Equity securities consist of investments that qualify for consideration under the regulations implementing the Community Reinvestment Act and investments related to non-qualified deferred compensation plan.
(3)Includes certain collateral-dependent loans held for investment for which a specific allocation of the allowance for credit losses is based upon the fair value of the loan’s underlying collateral. These loans held for investment are measured on a nonrecurring basis, generally annually or more often as warranted by market and economic conditions.
(4)Derivative assets and liabilities are measured at fair value on a recurring basis, generally quarterly.
(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 presents a reconciliation of the level 3 fair value category measured at fair value on a recurring basis:
Net Gains/(Losses)
(in thousands)Balance at Beginning of PeriodPurchases / AdditionsSales / ReductionsRealizedUnrealizedBalance at End of Period
Three Months Ended June 30, 2023
Available-for-sale debt securities:(1)
CRT securities$11,928 $— $— $— $(172)$11,756 
Three Months Ended June 30, 2022
Available-for-sale debt securities:(1)
Tax-exempt asset-backed securities$165,845 $— $(166,890)$— $1,045 $— 
CRT securities11,901 — — — (231)11,670 
Loans held for sale(2)8,085 — (4,029)— 210 4,266 
Six Months Ended June 30, 2023
Available-for-sale debt securities:(1)
CRT securities$11,861 $— $— $— $(105)$11,756 
Six Months Ended June 30, 2022
Available-for-sale debt securities:(1)
Tax-exempt asset-backed securities$180,033 $— $(170,626)$— $(9,407)$— 
CRT securities11,846 — — — (176)11,670 
Loans held for sale(2)7,658 1,327 (4,600)— (119)4,266 
(1)Unrealized gains/(losses) on available-for-sale debt securities are recorded in AOCI. 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 other non-interest income on the consolidated statements of income and other comprehensive income/(loss).
CRT securities
The fair value of CRT securities is based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs, the most significant of which were a discount rate and weighted-average life. At June 30, 2023, the discount rates utilized ranged from 6.25% to 11.37% and the weighted-average life ranged from 4.83 years to 8.17 years. On a combined amortized cost weighted-average basis a discount rate of 8.01% and a weighted-average life of 5.98 years were utilized to determine the fair value of these securities at June 30, 2023. At December 31, 2022, the combined weighted-average discount rate and weighted-average life utilized were 8.24% and 6.26 years, respectively.
Loans held for investment
Certain collateral-dependent loans held for investment are reported at fair value when, based upon an individual evaluation, the specific allocation of the allowance for credit losses that is deducted from the loan's amortized cost is based upon the fair value of the loan's underlying collateral. The $26.0 million fair value of loans held for investment at June 30, 2023 reported above includes impaired loans with a carrying value of $40.4 million that were reduced by specific allowance allocations totaling $14.3 million based on collateral valuations utilizing Level 3 inputs. There were no collateral-dependent loans held for investment reported at fair value at December 31, 2022.

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Fair Value of Financial Instruments
A summary of the carrying amounts and estimated fair values of financial instruments is as follows:
Carrying
Amount
Estimated Fair Value
(in thousands)TotalLevel 1Level 2Level 3
June 30, 2023
Financial assets:
Cash and cash equivalents$2,847,445 $2,847,445 $2,847,445 $— $— 
Available-for-sale debt securities3,292,478 3,292,478 620,328 2,660,394 11,756 
Held-to-maturity debt securities900,315 788,435 — 788,435 — 
Equity securities33,860 33,860 22,783 11,077 — 
Loans held for sale29,097 29,097 — 29,097 — 
Loans held for investment, net21,088,672 21,016,413 — — 21,016,413 
Derivative assets10,768 10,768 — 10,768 — 
Financial liabilities:
Total deposits23,318,240 23,497,477 — — 23,497,477 
Short-term borrowings1,350,000 1,350,000 — 1,350,000 — 
Long-term debt857,795 768,222 — 768,222 — 
Derivative liabilities97,909 97,909 — 97,909 — 
December 31, 2022
Financial assets:
Cash and cash equivalents$5,012,260 $5,012,260 $5,012,260 $— $— 
Available-for-sale debt securities2,615,644 2,615,644 670,582 1,933,201 11,861 
Held-to-maturity debt securities935,514 816,914 — 816,914 — 
Equity securities33,956 33,956 22,879 11,077 — 
Loans held for sale36,357 36,357 — — 36,357 
Loans held for investment, net19,033,871 18,969,922 — — 18,969,922 
Derivative assets13,504 13,504 — 13,504 — 
Financial liabilities:
Total deposits22,856,880 22,857,949 — — 22,857,949 
Short-term borrowings1,201,142 1,201,142 — 1,201,142 — 
Long-term debt931,442 881,716 — 881,716 — 
Derivative liabilities91,758 91,758 — 91,758 — 
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(10) Derivative Financial Instruments
The notional amounts and estimated fair values of derivative positions outstanding are presented in the following table.
 June 30, 2023December 31, 2022
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$3,100,000 $— $108,292 $3,000,000 $— $86,378 
Non-hedging derivatives
Customer-initiated and other derivatives:
Foreign currency forward contracts2,682 38 24 — — — 
Interest rate contracts:
Swaps5,036,185 87,403 87,377 4,396,367 83,529 83,529 
Caps and floors written1,251,159 2,661 4,636 220,142 — 2,583 
Caps and floors purchased1,251,159 4,636 2,661 220,142 2,583 — 
Forward contracts7,274,246 14,220 13,515 1,569,326 4,431 4,053 
Gross derivatives108,958 216,505 90,543 176,543 
Netting adjustment - offsetting derivative assets/liabilities(26,524)(26,524)(5,164)(5,164)
Netting adjustment - cash collateral received/posted(71,666)(92,072)(71,875)(79,621)
Net derivatives included on the consolidated balance sheets$10,768 $97,909 $13,504 $91,758 
The Company’s credit exposure on derivative instruments is limited to the net favorable value and interest payments by each counterparty. In some cases, collateral may be required from the counterparties involved if the net value of the derivative instruments exceeds a nominal amount. The Company’s credit exposure associated with these instruments, net of any collateral pledged, was approximately $10.8 million at June 30, 2023 and approximately $13.5 million at December 31, 2022. Collateral levels are monitored and adjusted on a regular basis for changes in the value of derivative instruments. At June 30, 2023, the Company had $156.9 million in cash collateral pledged to counterparties included in interest bearing cash and cash equivalents on the consolidated balance sheet and $74.5 million in cash collateral received from counterparties included in interest bearing deposits on the consolidated balance sheet. The comparative amounts at December 31, 2022, were $89.2 million in cash collateral pledged to counterparties and $72.5 million cash collateral received from counterparties.
The Company also enters into credit risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which the Company is either a participant or a lead bank. The risk participation agreements entered into by the Company as a participant bank provide credit protection to the financial institution counterparty should the borrower fail to perform on its interest rate derivative contract with that financial institution. The Company is party to 17 risk participation agreements where it acts as a participant bank with a notional amount of $328.2 million at June 30, 2023, compared to 19 risk participation agreements with a notional amount of $291.2 million at December 31, 2022. The maximum estimated exposure to these agreements, assuming 100% default by all obligors, was approximately $9.0 million at June 30, 2023 and $8.9 million at December 31, 2022. The fair value of these exposures was insignificant to the consolidated financial statements at both June 30, 2023 and December 31, 2022. Risk participation agreements entered into by the Company as the lead bank provide credit protection should the borrower fail to perform on its interest rate derivative contract. The Company is party to 12 risk participation agreements where the Company acts as the lead bank having a notional amount of $166.5 million at June 30, 2023, compared to 18 agreements having a notional amount of $222.0 million at December 31, 2022.
Derivatives Designated as Cash Flow Hedges
The Company enters into interest rate derivative contracts that are designated as qualifying cash flow hedges to hedge the exposure to variability in expected future cash flows attributable to changes in a contractually specified interest rate.
During the six months ended June 30, 2023, the Company recorded $45.5 million in unrealized losses to adjust its cash flow hedges to fair value, which was recorded net of tax to AOCI, and reclassified $26.0 million from AOCI into interest income on loans. Based on current market conditions, the Company estimates that during the next 12 months, an additional $68.9 million will be reclassified from AOCI as a decrease to interest income. As of June 30, 2023, the maximum length of time over which forecasted transactions are hedged is 3.25 years.
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(11) Accumulated Other Comprehensive Income
The following table provides the change in AOCI by component:
(in thousands)Cash Flow HedgesAvailable-for-Sale SecuritiesHeld-to-Maturity SecuritiesTotal
Three Months Ended June 30, 2023
Beginning balance$(46,916)$(281,063)$(46,783)$(374,762)
Change in unrealized gain/(loss)(59,057)(40,674)— (99,731)
Amounts reclassified into net income14,919 — 1,843 16,762 
Total other comprehensive income/(loss)(44,138)(40,674)1,843 (82,969)
Income tax expense/(benefit)(9,269)(8,541)387 (17,423)
Total other comprehensive income/(loss), net of tax(34,869)(32,133)1,456 (65,546)
Ending balance$(81,785)$(313,196)$(45,327)$(440,308)
Three Months Ended June 30, 2022
Beginning balance$— $(151,564)$(53,861)$(205,425)
Change in unrealized gain/(loss)304 (86,742)— (86,438)
Amounts reclassified into net income(704)— 2,607 1,903 
Total other comprehensive income/(loss)(400)(86,742)2,607 (84,535)
Income tax expense/(benefit)(84)(18,216)548 (17,752)
Total other comprehensive income/(loss), net of tax(316)(68,526)2,059 (66,783)
Ending balance$(316)$(220,090)$(51,802)$(272,208)
Six Months Ended June 30, 2023
Beginning balance$(66,394)$(304,309)$(48,240)$(418,943)
Change in unrealized gain/(loss)(45,529)(11,249)— (56,778)
Amounts reclassified into net income26,048 — 3,687 29,735 
Total other comprehensive income/(loss)(19,481)(11,249)3,687 (27,043)
Income tax expense/(benefit)(4,090)(2,362)774 (5,678)
Total other comprehensive income/(loss), net of tax(15,391)(8,887)2,913 (21,365)
Ending balance$(81,785)$(313,196)$(45,327)$(440,308)
Six Months Ended June 30, 2022
Beginning balance$— $(47,715)$— $(47,715)
Change in unrealized gain/(loss)304 (218,196)(69,165)(287,057)
Amounts reclassified into net income(704)— 3,593 2,889 
Total other comprehensive income/(loss)(400)(218,196)(65,572)(284,168)
Income tax expense/(benefit)(84)(45,821)(13,770)(59,675)
Total other comprehensive income/(loss), net of tax(316)(172,375)(51,802)(224,493)
Ending balance$(316)$(220,090)$(51,802)$(272,208)
(12) New Accounting Standards
There were no accounting standards or updates issued during the second quarter of 2023.
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ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company’s financial condition and results of operations for the six months ended June 30, 2023 and 2022 should be read in conjunction with its audited consolidated financial statements and the related notes to the consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”). Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results for the year ending December 31, 2023 or any future period.
Forward-Looking Statements
This report contains “forward-looking statements” within the meaning of and pursuant to the Private Securities Litigation Reform Act of 1995 regarding, among other things, the Company’s financial condition, results of operations, business plans, strategies, future performance and business and industry outlook. These statements are not historical in nature and may often be identified by the use of words such as “believes,” “projects,” “expects,” “may,” “estimates,” “should,” “plans,” “targets,” “intends” “could,” “would,” “anticipates,” “potential,” “confident,” “optimistic” or the negative thereof, or other variations thereon, or comparable terminology, or by discussions of strategy, objectives, estimates, trends, guidance, expectations and future plans.
Because forward-looking statements relate to future results and occurrences, they are subject to inherent and various uncertainties, risks, and changes in circumstances that are difficult to predict, may change over time, are based on management’s expectations and assumptions at the time the statements are made and are not guarantees of future results. Numerous risks and other factors, many of which are beyond management’s control, could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. While there can be no assurance that any list of risks is complete, important risk and other factors that could cause actual results to differ materially from those contemplated by forward-looking statements include, but are not limited to, credit quality and risk, the unpredictability of economic and business conditions that may impact the Company or its customers, recent adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, liquidity and regulatory responses to these developments, the Company’s ability to effective manage its liquidity risk and any growth plans and the availability of capital and funding, the Company’s ability to effectively manage information technology systems, cyber incidents or other failures, disruptions or security breaches, interest rates, including the impact of rising rates on the Company’s securities portfolio and funding costs, commercial and residential real estate values, adverse or unexpected economic conditions, including inflation, recession, the threat of recession, and market conditions in Texas, the United States or globally, including governmental and consumer responses to those economic and market conditions, fund availability, accounting estimates and risk management processes, the transition away from the London Interbank Offered Rate (LIBOR), legislative and regulatory changes, enforcement actions and regulatory examinations and investigations, ratings or interpretations, business strategy execution, the failure to identify, attract and retain key personnel and other employees, increased or expanded competition from banks and other financial service providers in the Company’s markets, the failure to maintain adequate regulatory capital, environmental liability associated with properties related to the Company’s lending activities, and severe weather, natural disasters, acts of war, terrorism, global conflict, or other external events, climate change and related legislative and regulatory initiatives as well as the risks more fully described in the 2022 10-K, including the “Risk Factors” section in Part I, Item 1A of the 2022 10-K, Quarterly Reports on Form 10-Q, including the “Risk Factors” section in Part II, Item 1A of this report, and in its other documents and filings with the SEC. The information contained in this report speaks only as of its date. Except to the extent required by applicable law or regulation, the Company disclaims any obligation to update such factors or to publicly announce the results of any revisions to any of the forward-looking statements included herein to reflect future events or developments.
Overview
Recent Industry Developments
During the first half of 2023, the banking industry experienced significant volatility with multiple high-profile bank failures and industry wide concerns related to liquidity, deposit outflows, unrealized securities losses and eroding consumer confidence in the banking system. Despite these negative industry developments, the Company’s liquidity position and balance sheet remains robust. The Company’s total deposits increased by 2% as compared to December 31, 2022, to $23.3 billion at June 30, 2023. During the first half of 2023, the Company took a number of preemptive actions, which included pro-active outreach to clients and a robust review of its borrowing and liquidity positions to ensure that the Company is positioned to best serve its clients. Furthermore, the Company’s capital remains at historically high levels with CET1 and Total Capital ratios of 12.2% and 16.4%, respectively, as of June 30, 2023.
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Results of Operations
Selected income statement data and key performance indicators are presented in the table below:
Three Months Ended June 30,Six Months Ended June 30,
(dollars in thousands except per share data)2023202220232022
Net interest income$231,990 $205,533 $467,335 $389,079 
Provision for credit losses7,000 22,000 35,000 20,000 
Non-interest income46,011 26,240 83,414 46,523 
Non-interest expense181,644 164,303 375,671 317,395 
Income before income taxes89,357 45,470 140,078 98,207 
Income tax expense20,706 11,311 32,766 24,398 
Net income68,651 34,159 107,312 73,809 
Preferred stock dividends4,312 4,312 8,625 8,625 
Net income available to common stockholders$64,339 $29,847 $98,687 $65,184 
Basic earnings per common share$1.34 $0.59 $2.05 $1.29 
Diluted earnings per common share$1.33 $0.59 $2.02 $1.28 
Net interest margin3.29 %2.68 %3.31 %2.45 %
Return on average assets (“ROA”)0.95 %0.44 %0.74 %0.45 %
Return on average common equity (“ROE”)9.17 %4.35 %7.15 %4.67 %
Efficiency ratio(1)65.3 %70.9 %68.2 %72.9 %
Non-interest income to average earning assets0.66 %0.34 %0.60 %0.29 %
Non-interest expense to average earning assets2.61 %2.16 %2.69 %2.00 %
(1)    Non-interest expense divided by the sum of net interest income and non-interest income.
Three months ended June 30, 2023 compared to three months ended June 30, 2022
The Company reported net income of $68.7 million and net income available to common stockholders of $64.3 million for the second quarter of 2023, compared to net income of $34.2 million and net income available to common stockholders of $29.8 million for the second quarter of 2022. On a fully diluted basis, earnings per common share were $1.33 for the second quarter of 2023, compared to $0.59 for the same period in 2022. ROE was 9.17% and ROA was 0.95% for the second quarter of 2023, compared to 4.35% and 0.44%, respectively, for the same period in 2022. The increase in net income for the second quarter of 2023 compared to the second quarter of 2022 resulted primarily from increases in net interest income and non-interest income as well as a decrease in provision for credit losses, partially offset by an increase in non-interest expense.
Six months ended June 30, 2023 compared to six months ended June 30, 2022
The Company reported net income of $107.3 million and net income available to common stockholders of $98.7 million for the six months ended June 30, 2023, compared to net income of $73.8 million and net income available to common stockholders of $65.2 million for the same period in 2022. On a fully diluted basis, earnings per common share were $2.02 for the six months ended June 30, 2023, compared to $1.28 for the same period in 2022. ROE was 7.15% and ROA was 0.74% for the six months ended June 30, 2023, compared to 4.67% and 0.45%, respectively, for the same period in 2022. The increase in net income for the six months ended June 30, 2023 compared to the same period in 2022 resulted primarily from increases in net interest income and non-interest income, partially offset by increases in the provision for credit losses and non-interest expense.
Details of the changes in the various components of net income are discussed below.

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Taxable Equivalent Net Interest Income Analysis - Quarterly(1)

Three Months Ended June 30, 2023Three Months Ended June 30, 2022
(in thousands except percentages)Average
Balance
Income/
Expense
Yield/
Rate
Average
Balance
Income/
Expense
Yield/
Rate
Assets
Investment securities(2)$4,306,881 $27,478 2.36 %$3,543,576 $15,065 1.60 %
Interest-bearing cash and cash equivalents3,286,091 41,571 5.07 %4,747,377 9,394 0.79 %
Loans held for sale28,414 599 8.46 %8,123 62 3.07 %
Loans held for investment, mortgage finance4,376,235 36,198 3.32 %5,858,599 49,914 3.42 %
Loans held for investment(3)16,217,314 296,183 7.33 %16,616,234 168,409 4.07 %
Less: Allowance for credit losses on loans261,027 — — 211,385 — — 
Loans held for investment, net20,332,522 332,381 6.56 %22,263,448 218,323 3.93 %
Total earning assets27,953,908 402,029 5.69 %30,562,524 242,844 3.16 %
Cash and other assets1,049,145 870,396 
Total assets$29,003,053 $31,432,920 
Liabilities and Stockholders’ Equity
Transaction deposits$1,345,742 $9,468 2.82 %$1,671,729 $3,920 0.94 %
Savings deposits10,590,558 114,275 4.33 %8,696,819 15,462 0.71 %
Time deposits1,531,922 13,648 3.57 %877,399 1,184 0.54 %
Total interest bearing deposits13,468,222 137,391 4.09 %11,245,947 20,566 0.73 %
Short-term borrowings1,397,253 18,253 5.24 %2,232,119 4,859 0.87 %
Long-term debt883,871 14,282 6.48 %929,616 11,393 4.92 %
Total interest bearing liabilities15,749,346 169,926 4.33 %14,407,682 36,818 1.02 %
Non-interest bearing deposits9,749,105 13,747,876 
Other liabilities389,155 227,701 
Stockholders’ equity3,115,447 3,049,661 
Total liabilities and stockholders’ equity$29,003,053 $31,432,920 
Net interest income$232,103 $206,026 
Net interest margin3.29 %2.68 %
(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.
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Taxable Equivalent Net Interest Income Analysis - Year to Date(1)
Six Months Ended June 30, 2023Six Months Ended June 30, 2022
(dollars in thousands)Average
Balance
Revenue /
Expense
Yield /
Rate
Average
Balance
Revenue /
Expense
Yield /
Rate
Assets
Investment securities(2)$4,184,349 $52,770 2.34 %$3,606,069 $32,808 1.75 %
Interest bearing cash and cash equivalents4,407,486 104,007 4.76 %6,639,327 12,965 0.39 %
Loans held for sale35,902 1,537 8.63 %7,880 175 4.49 %
Loans held for investment, mortgage finance
3,834,529 64,726 3.40 %5,796,097 93,380 3.25 %
Loans held for investment(3)15,909,792 564,314 7.15 %16,153,845 312,542 3.90 %
Less: Allowance for credit losses on loans256,900 — — 211,995 — — 
Loans held for investment, net
19,487,421 629,040 6.51 %21,737,947 405,922 3.77 %
Total earning assets28,115,158 787,354 5.57 %31,991,223 451,870 2.83 %
Cash and other assets1,045,466 845,082 
Total assets$29,160,624 $32,836,305 
Liabilities and Stockholders’ Equity
Transaction deposits$1,062,694 $13,321 2.53 %$2,050,106 $7,882 0.78 %
Savings deposits10,891,309 219,982 4.07 %9,553,920 24,045 0.51 %
Time deposits1,481,569 24,182 3.29 %957,615 2,269 0.48 %
Total interest bearing deposits13,435,572 257,485 3.86 %12,561,641 34,196 0.55 %
Short-term borrowings1,320,493 32,997 5.04 %2,002,724 5,617 0.57 %
Long-term debt907,701 29,265 6.50 %929,312 21,988 4.77 %
Total interest bearing liabilities15,663,766 319,747 4.12 %15,493,677 61,801 0.80 %
Non-interest bearing deposits10,000,024 13,990,465 
Other liabilities412,758 235,378 
Stockholders’ equity3,084,076 3,116,785 
Total liabilities and stockholders’ equity$29,160,624 $32,836,305 
Net interest income$467,607 $390,069 
Net interest margin3.31 %2.45 %
(1)Taxable equivalent rates used where applicable.
(2)Yields on investment securities are calculated using available-for-sale securities at amortized cost.
(3)Average balances include non-accrual loans.

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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 June 30, 2023/2022Six Months Ended June 30, 2023/2022
 Net
Change
Change Due To(1)Net
Change
Change Due To(1)
(in thousands)VolumeYield/Rate(2)VolumeYield/Rate(2)
Interest income
Investment securities$12,413 $3,045 $9,368 $19,962 $4,887 $15,075 
Interest bearing cash and cash equivalents32,177 (2,881)35,058 91,042 (4,143)95,185 
Loans held for sale537 155 382 1,362 686 676 
Loans held for investment, mortgage finance(13,716)(12,639)(1,077)(28,654)(31,156)2,502 
Loans held for investment127,774 (4,048)131,822 251,772 (4,852)256,624 
Total interest income159,185 (16,368)175,553 335,484 (34,578)370,062 
Interest expense
Transaction deposits5,548 (764)6,312 5,439 (3,459)8,898 
Savings deposits98,813 3,352 95,461 195,937 3,983 191,954 
Time deposits12,464 881 11,583 21,913 1,287 20,626 
Short-term borrowings13,394 (1,811)15,205 27,380 (2,032)29,412 
Long-term debt2,889 (561)3,450 7,277 (529)7,806 
Total interest expense133,108 1,097 132,011 257,946 (750)258,696 
Net interest income$26,077 $(17,465)$43,542 $77,538 $(33,828)$111,366 
(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 $232.0 million for the three months ended June 30, 2023, compared to $205.5 million for the same period in 2022. The increase was primarily due to an increase in yields on average earning assets, partially offset by an increase in funding costs and a decrease in average earning assets.
Average earning assets for the three months ended June 30, 2023 decreased $2.6 billion compared to the same period in 2022, which included a $1.5 billion decrease in average interest-bearing cash and cash equivalents and a $1.5 billion decrease in average loans held for investment, mortgage finance. Average interest-bearing liabilities increased $1.3 billion for the three months ended June 30, 2023 compared to the same period in 2022, primarily due to a $2.2 billion increase in average interest-bearing deposits. Average non-interest bearing deposits for the three months ended June 30, 2023 decreased to $9.7 billion from $13.7 billion to the same period in 2022.
Net interest margin for the three months ended June 30, 2023 was 3.29%, compared to 2.68% for the same period in 2022. 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 6.56% for the three months ended June 30, 2023, compared to 3.93% for the same period in 2022, and the yield on earning assets increased to 5.69% for the three months ended June 30, 2023, compared to 3.16% for the same period in 2022. Total cost of deposits increased to 2.37% for the three months ended June 30, 2023 from 0.33% for the same period in 2022, and total funding costs, including non-interest bearing deposits and stockholders' equity, increased to 2.38% for the three months ended June 30, 2023, compared to 0.47% for the same period in 2022.
Net interest income was $467.3 million for the six months ended June 30, 2023, compared to $389.1 million for the same period in 2022. The increase was primarily due to an increase in yields on average earnings assets, partially offset by rising funding costs and a decrease in total average earning assets.
Average earning assets decreased $3.9 billion for the six months ended June 30, 2023, compared to the same period in 2022, which included decreases of $2.2 billion in average interest-bearing cash and cash equivalents and $2.0 million in average loans held for investment, mortgage finance. Average interest-bearing liabilities increased $170.1 million for the six months ended June 30, 2023, compared to the same period in 2022, primarily due to an $873.9 million increase in average interest-bearing deposits partially offset by a $682.2 million decrease in average short-term borrowings. Average non-interest bearing deposits for the six months ended June 30, 2023 decreased to $10.0 billion from $14.0 billion for the same period in 2022.
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Net interest margin for the six months ended June 30, 2023 was 3.31%, compared to 2.45% for the same period of 2022. The increase was primarily due to the effect of rising interest rates on earning asset yields and a shift in earning asset composition, partially offset by higher funding costs, also as a result of rising interest rates, compared to the same period in 2022.
The yield on total loans held for investment increased to 6.51% for the six months ended June 30, 2023, compared to 3.77% for the same period in 2022, and the yield on earning assets increased to 5.57% for the six months ended June 30, 2023, compared to 2.83% for the same period in 2022. Total cost of deposits increased to 2.22% for the six months ended June 30, 2023 from 0.26% for the same period in 2022 and total funding costs, including non-interest bearing deposits and stockholders' equity, increased to 2.24% for the six months ended June 30, 2023, compared to 0.38% for the same period in 2022.
Non-interest Income 
 
Three Months Ended June 30,Six Months Ended June 30,
(in thousands)2023202220232022
Service charges on deposit accounts$5,158 6,102 $10,180 $12,217 
Wealth management and trust fee income3,715 4,051 7,144 7,963 
Brokered loan fees2,415 4,133 4,310 8,103 
Investment banking and trading income27,498 11,126 46,266 15,305 
Other7,225 828 15,514 2,935 
Total non-interest income$46,011 $26,240 $83,414 $46,523 
Non-interest income increased $19.8 million during the three months ended June 30, 2023, compared to the same period in 2022. The increase was primarily due to increases in investment banking and trading income and other non-interest income.
Non-interest income increased by $36.9 million during the six months ended June 30, 2023 to $83.4 million, compared to $46.5 million for the same period in 2022. The increase was primarily due to increases in investment banking and trading income and other non-interest income, partially offset by a decrease in brokered loans fees.
Non-interest Expense 
Three Months Ended June 30,Six Months Ended June 30,
(in thousands)2023202220232022
Salaries and benefits$113,050 $103,358 $241,720 $203,217 
Occupancy expense9,482 8,874 19,101 17,759 
Marketing6,367 8,506 15,411 13,483 
Legal and professional15,669 11,288 30,183 21,590 
Communications and technology20,525 15,649 38,048 30,349 
Federal Deposit Insurance Corporation insurance assessment3,693 3,318 5,863 7,299 
Other12,858 13,310 25,345 23,698 
Total non-interest expense$181,644 $164,303 $375,671 $317,395 
Non-interest expense increased $17.3 million during the six months ended June 30, 2023, compared to the same period in 2022. The increase was primarily due to increases in salaries and benefits, legal and professional and communications and technology expenses, partially offset by a decrease in marketing expense.
Non-interest expense for the six months ended June 30, 2023 increased $58.3 million compared to the same period in 2022, primarily due to increases in salaries and benefits, legal and professional and communications and technology expenses.
Analysis of Financial Condition
Loans Held for Investment
As discussed in Note 1 - Operations and Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this report, in the second quarter of 2023, changes were made to certain estimates used in the Company’s current expected credit loss model which resulted in adjustments being made to the Company’s portfolio segments. As a result, certain prior period balances below have been reclassified to conform to the current period presentation of portfolio segments.
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The following table summarizes the Company’s loans held for investment by portfolio segment. See Note 1 - Operations and Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this report for details of these portfolio segments.
(in thousands)June 30, 2023December 31, 2022
Commercial$10,459,640 $9,832,676 
Mortgage finance5,098,812 4,090,033 
Commercial real estate5,308,997 4,875,363 
Consumer531,635 552,848 
Gross loans held for investment21,399,084 19,350,920 
Unearned income (net of direct origination costs)(73,069)(63,580)
Total loans held for investment$21,326,015 $19,287,340 
Total loans held for investment were $21.3 billion at June 30, 2023, an increase of $2.0 billion from December 31, 2022. The Company experienced broad-based loan growth across all loan categories, except for consumer, as it has continued to execute on its long-term strategy. Mortgage finance loans relate to the mortgage warehouse lending operations in which the Company purchases mortgage loan ownership interests that are typically sold within 10 to 20 days and represent 24% of total loans held for investment at June 30, 2023 compared to 21% at December 31, 2022. Volumes fluctuate based on the level of market demand for the product and the number of days between purchase and sale of the loans, which can be affected by changes in overall market interest rates, and tend to peak at the end of each month.
The Company originates a substantial majority of all loans held for investment. The Company also participates in syndicated loan relationships, both as a participant and as an agent. As of June 30, 2023, the Company had $4.4 billion in syndicated loans, $1.2 billion of which the Company administered as agent. All syndicated loans, whether the Company acts as agent or participant, are underwritten to the same standards as all other loans the Company originates. As of June 30, 2023, $3.0 million of syndicated loans were on non-accrual.
Portfolio Concentrations
Although more than 50% of the Company’s total loan exposure is outside of Texas and more than 50% of deposits are sourced outside of Texas, Texas concentration remains significant. As of June 30, 2023, a majority of the loans held for investment, excluding mortgage finance and other national lines of business, were to businesses with headquarters or operations in Texas. This geographic concentration subjects the Company’s loan portfolio to the general economic conditions within this state. The risks created by this concentration have been considered by management in the determination of the appropriateness of the allowance for credit losses.
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Non-performing Assets
Non-performing assets include non-accrual loans and leases and repossessed assets. The table below summarizes non-accrual loans by portfolio segment and by type of property securing the credit.
(dollars in thousands)June 30, 2023December 31, 2022
Non-accrual loans held for investment
Commercial:
Business assets$76,543 $41,448 
Oil and gas properties3,184 3,658 
Accounts receivable and inventory137 1,405 
Other— 531 
Total commercial79,864 47,042 
Commercial real estate:
Commercial property175 1,263 
Total commercial real estate175 1,263 
Consumer
Single family residences1,000 — 
Other— 33 
Total consumer1,000 33 
Total non-accrual loans held for investment$81,039 $48,338 
Non-accrual loans held for sale— — 
Other real estate owned (“OREO”)— — 
Total non-performing assets$81,039 $48,338 
Non-accrual loans held for investment to total loans held for investment0.38 %0.25 %
Total non-performing assets to total assets0.28 %0.17 %
Allowance for credit losses on loans to non-accrual loans held for investment2.9x5.2x
Loans held for investment past due 90 days and accruing$64 $131 
Loans held for investment past due 90 days to total loans held for investment— %— %
Loans held for sale past due 90 days and accruing$— $— 
Summary of Credit Loss Experience
The provision for credit losses, comprised of a provision for loans and off-balance sheet credit losses, is a charge to earnings to maintain the allowance for credit losses at a level consistent with management’s assessment of expected losses at each balance sheet date. Below is a discussion of provision for credit losses on loans. The changes made to the Company’s current expected credit loss model, as discussed above and in Note 1 - Operations and Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this report, resulted in a reallocation of the allowance for credit losses between loan portfolio segments and allowance balances allocated to off-balance sheet financial instruments. The changes made result in a higher allocation of losses to off-balance sheet financial statements. See Note 6 - Financial Instruments with Off-Balance Sheet Risk in the accompanying notes to the consolidated financial statements included elsewhere in this report for presentation of the activity in the allowance for credit losses for off-balance asset credit losses.
The Company recorded a provision for credit losses on loans of $12.0 million for the six months ended June 30, 2023 compared to a provision of $19.3 million for the six months ended June 30, 2022. The provision for credit losses on loans for the six months ended June 30, 2023 reflects an increase in non-accrual loans and growth in loans held for investment during the six months ended June 30, 2023. The Company recorded $28.1 million in net charge-offs during the six months ended June 30, 2023 compared to $2.1 million in net charge-offs during the same period in 2022. Criticized loans totaled $619.4 million at June 30, 2023, compared to $513.2 million and $603.5 million at December 31, 2022 and June 30, 2022, respectively.
The table below presents key metrics related to the Company’s credit loss experience: 
June 30, 2023June 30, 2022
Allowance for credit losses on loans to total loans held for investment1.11 %0.95 %
Allowance for credit losses on loans to average total loans held for investment(1)1.20 %1.04 %
Total allowance for credit losses to total loans held for investment1.32 %1.03 %
Total provision for credit losses to average total loans held for investment(1)(2)0.36 %0.18 %
(1)    Ratios are calculated using average balance for the six months ended June 30, 2023 and 2022, respectively.
(2) Ratios are annualized utilizing provision for credit losses for the six months ended June 30, 2023 and 2022, respectively.
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The table below details net charge-offs/(recoveries) as a percentage of average total loans by portfolio segment:
Six Months Ended June 30,
20232022
Net
Charge-offs
Net Charge-offs
to Average
Loans(1)
Net
Charge-offs
Net Charge-offs
to Average
Loans(1)
Commercial$28,154 0.55 %$1,806 0.03 %
Mortgage finance— — %— — %
CRE— — %350 0.02 %
Consumer(5)— %(19)(0.01)%
Total$28,149 0.29 %$2,137 0.02 %
(1)Ratios are annualized utilizing net charge-offs for the six months ended June 30, 2023 and 2022, respectively.
Liquidity and Capital Resources
Liquidity
In general terms, liquidity is a measurement of the Company’s ability to meet its cash needs. The Company’s objectives in managing its liquidity are to maintain the ability to meet loan commitments, repurchase investment securities and repay deposits and other liabilities in accordance with their terms, without an adverse impact on current or future earnings. The Company’s liquidity strategy is guided by policies, formulated and monitored by senior management and the Asset and Liability Management Committee (“ALCO”), which take into account the demonstrated marketability of the Company’s assets, the sources and stability of its funding and the level of unfunded commitments. The Company regularly evaluates all of its various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness. The Company’s principal source of funding is customer deposits, supplemented by short-term borrowings, primarily from federal funds purchased and Federal Home Loan Bank (“FHLB”) borrowings, which are generally used to fund mortgage finance assets and long-term debt. The Company also relies on the availability of the mortgage secondary market provided by Ginnie Mae and government sponsored entities to support the liquidity of mortgage finance assets.
The following table summarizes the Company’s interest bearing cash and cash equivalents:
(dollars in thousands)June 30, 2023December 31, 2022
Interest bearing cash and cash equivalents$2,587,131 $4,778,623 
Interest bearing cash and cash equivalents as a percent of:
Total loans held for investment12.1 %24.8 %
Total earning assets9.3 %17.4 %
Total deposits11.1 %20.9 %
Liquidity to support growth in loans held for investment has been fulfilled primarily through growth in customer deposits. The Company’s goal is to obtain as much of its funding for loans held for investment and other earning assets as possible from customer deposits, which are generated principally through development of long-term customer relationships, with a significant focus on treasury management products. As of June 30, 2023, estimated uninsured deposits represented approximately 40% of total deposits. In addition, the Company also has access to deposits through brokered channels. The following table summarizes period-end total deposits:
(dollars in thousands)June 30, 2023December 31, 2022
Balance% of TotalBalance% of Total
Customer deposits$21,838,842 93.7 %$21,247,999 93.0 %
Brokered deposits1,479,398 6.3 %1,608,881 7.0 %
Total deposits$23,318,240 100.0 %$22,856,880 100.0 %
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The Company has short-term borrowing sources available to supplement deposits and meet its funding needs. Such borrowings are generally used to fund mortgage finance loans, due to their liquidity, short duration and interest spreads available. These borrowing sources include federal funds purchased from downstream correspondent bank relationships (which consist of banks that are smaller than the Bank) and from upstream correspondent bank relationships (which consist of banks that are larger than the Bank), customer repurchase agreements and advances from the FHLB and the Federal Reserve. The following table summarizes short-term borrowings, all of which mature within one year:
(in thousands)June 30, 2023December 31, 2022
Repurchase agreements$— $1,142 
FHLB borrowings1,350,000 1,200,000 
Total short-term and other borrowings$1,350,000 $1,201,142 
The following table summarizes the Company’s short-term borrowing capacities net of balances outstanding:
(in thousands)June 30, 2023December 31, 2022
FHLB borrowing capacity relating to loans and pledged securities$3,253,409 $2,621,218 
FHLB borrowing capacity relating to unencumbered securities4,238,418 3,539,297 
Total FHLB borrowing capacity(1)$7,491,827 $6,160,515 
Unused federal funds lines available from commercial banks$1,458,000 $1,479,000 
Unused Federal Reserve borrowings capacity$3,726,632 $3,574,762 
Unused revolving line of credit(2)$100,000 $75,000 
(1)FHLB borrowings are collateralized by a blanket floating lien on certain real estate secured loans, mortgage finance assets and certain pledged securities.
(2)Unsecured revolving, non-amortizing line of credit with maturity date of February 8, 2024. Proceeds may be used for general corporate purposes, including funding regulatory capital infusions into the Bank. The loan agreement contains customary financial covenants and restrictions. No borrowings were made against this line of credit during the six months ended June 30, 2023.
The Company has long-term debt outstanding of $857.8 million as of June 30, 2023, comprised of trust preferred securities, subordinated notes and senior unsecured credit linked notes with maturity dates ranging from September 2024 to December 2036. In the second quarter of 2023, the Company partially paid down $75.0 million of the senior unsecured credit-linked notes in accordance with the terms of the notes. See Note 5 - Short-Term Borrowings and Long-Term Debt in the accompanying notes to the consolidated financial statements included elsewhere in this report for additional information. The Company may consider raising additional capital, if needed, in public or private offerings of debt or equity securities to supplement deposits and meet its long-term funding needs.
As the Company is a holding company and is a separate operating entity from the Bank, the Company’s primary sources of liquidity are dividends received from the Bank and borrowings from outside sources. Banking regulations may limit the amount of dividends that may be paid by the Bank. See Note 7 - Regulatory Ratios and Capital in the accompanying notes to the consolidated financial statements included elsewhere in this report for additional information regarding dividend restrictions and “Liquidity Risks” included in Part I, Item 1A of the 2022 Form 10-K.
Periodically, based on market conditions and other factors, and subject to compliance with applicable laws and regulations and the terms of its existing indebtedness, the Company may repay, repurchase, exchange or redeem outstanding indebtedness, or otherwise enter into transactions regarding debt or capital structure. For example, the Company periodically evaluates and may engage in liability management transactions, including repurchases or redemptions of outstanding subordinated notes, which may be funded by the issuance of, or exchanges of, newly issued unsecured borrowings to actively manage the debt maturity profile and interest cost.
Capital Resources
The Company’s equity capital averaged $3.1 billion for the six months ended June 30, 2023 compared to $3.1 billion for the same period in 2022. The Company has not paid any cash dividends on common stock since operations commenced and has no plans to do so in the foreseeable future.
In January 2023, the Company completed the full $150.0 million of share repurchases authorized by the Company’s board of directors on April 19, 2022. On January 18, 2023, the Company’s board of directors authorized a new share repurchase program under which the Company may repurchase up to $150.0 million in shares of outstanding common stock. Any repurchases under the repurchase program have been made in accordance with applicable securities laws in open market or private transactions. The extent to which the Company repurchases shares, and the timing of such repurchases, will be at management’s discretion and will depend upon a variety of factors, including market conditions, capital position and amount of retained earnings, regulatory requirements and other considerations. No time limit was set for the completion of the share repurchase program, and the program may be suspended or discontinued at any time. During the six months ended June 30, 2023, the Company repurchased 1,011,909 shares of its common stock for an aggregate purchase price of $59.7 million, at a weighted average price of $58.98 per share. The aggregate purchase price and weighted average price per share does not include the effect of excise tax expense incurred on net stock repurchases.
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For additional information on the Company’s capital and stockholders’ equity, see Note 7 - Regulatory Ratios and Capital in the accompanying notes to the consolidated financial statements included elsewhere in this report.
Critical Accounting Estimates
SEC guidance requires disclosure of “critical accounting estimates.” The SEC defines “critical accounting estimates” as those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant.
The Company follows financial accounting and reporting policies that are in accordance with accounting principles generally accepted in the United States. The more significant of these policies are summarized in Note 1 - Operations and Summary of Significant Accounting Policies in the notes to the consolidated financial statements included elsewhere in this report and in the Company’s 2022 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 meet the SEC’s definition of a critical accounting policy.
Allowance for Credit Losses
Management considers the policies related to the allowance for credit losses as the most critical to the financial statement presentation. The total allowance for credit losses includes activity related to allowances calculated in accordance with Accounting Standards Codification 326, Credit Losses. The allowance for credit losses is established through a provision for credit losses charged to current earnings. The amount maintained in the allowance reflects management’s continuing evaluation of the credit losses expected to be recognized over the life of the loans in the Company’s portfolio. The allowance for credit losses on loans is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. The allowance for credit losses on off-balance sheet financial instruments is recorded in other liabilities on the consolidated balance sheets. For purposes of determining the allowance for credit losses, the loan portfolio is segregated into pools first by portfolio segment and then by past due status or credit grade. Each pool is assigned a loss estimate, reflecting historical loss rates that incorporate probability of default and severity of losses over the estimated remaining life of the loans. Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective (pool) 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. Modifications to loss estimates are made to incorporate a reasonable and supportable forecast of future losses at the pool level, as well as any necessary qualitative adjustments using a Portfolio Level Qualitative Factor (“PLQF”) and/or a Portfolio Segment Level Qualitative Factor (“SLQF”). A similar process is employed to calculate a reserve assigned to off-balance sheet financial instruments, specifically unfunded loan commitments and letters of credit. Modified loss estimates are assigned based on the balance of the commitments estimated to be outstanding at the time of default. The PLQF and SLQF are utilized to address factors that are not present in historical loss rates and are otherwise unaccounted for in the quantitative process. A reserve is recorded upon origination or purchase of a loan. See “Summary of Credit Loss Experience” above and Note 4 - Loans and Allowance for Credit Losses on Loans in the accompanying notes to the consolidated financial statements included elsewhere in this report for further discussion of the risk factors considered by management in establishing the allowance for credit losses.
Management considers a range of macroeconomic scenarios in connection with the allowance estimation process. Within the various economic scenarios considered as of June 30, 2023, the quantitative estimate of the allowance for credit loss would increase by approximately $153.3 million under sole consideration of the most severe downside scenario. The quoted sensitivity calculation reflects the sensitivity of the modeled allowance estimate to macroeconomic forecast data, but is absent of qualitative overlays and other qualitative adjustments that are part of the quarterly reserving process and does not necessarily reflect the nature and extent of future changes in the allowance for reasons including increases or decreases in qualitative adjustments, changes in the risk profile and size of the portfolio, changes in the severity of the macroeconomic scenario and the range of scenarios under management consideration.
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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk represents the potential economic loss on trading and non-trading portfolios and financial instruments due to adverse price movements in markets including interest rates, foreign exchange rates, credit spreads, commodity prices and equity and related implied volatility levels.
The Company is subject to market risk primarily through the effect of changes in interest rates on its portfolio of assets held for purposes other than trading and interest rate derivative instruments that are used for managing interest rate risk.
In addition, the Company has exposure to market risk through its trading desk that engages in fixed income and equity securities, derivatives and foreign exchange transactions to support the investing and hedging activities of customers. The Company uses Value-at-Risk (“VaR”) as a means to measure, monitor, and limit aggregate market risk on the trading portfolio. VaR is a statistical risk measure estimating potential loss at the 95th percentile based on a one-year history of market risk factors associated with the trading portfolio. VaR provides a consistent cross-asset measure for risk profiles and allows for diversification benefit based on historical correlations across market moves. As of June 30, 2023, the Company’s exposure through its trading desk does not post a significant market risk to the Company. All statistical models involve a degree of uncertainty and VaR is calculated at a statistical confidence interval of the 95th percentile based on one-year daily historic market moves. Larger economic losses are possible, particularly during stressed macroeconomic and market conditions.
The responsibility for managing market risk rests with the ALCO, which operates under policy guidelines established by the Company’s board of directors. Oversight of the Company’s compliance with the guidelines is the ongoing responsibility of the ALCO, with exceptions reported to the Executive Risk Committee and the board of directors, if necessary, on a quarterly basis.
Interest Rate Risk Management
The Company’s interest rate sensitivity as of June 30, 2023 is illustrated in the following table. The table reflects rate-sensitive positions as of June 30, 2023 and is not necessarily indicative of positions on other dates. The table does not take into account the effect of the Company’s derivatives designated as cash flow hedges. 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. Certain variable rate loans have embedded floors which limit the decline in 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.
(in thousands)0-3 months4-12 months1-3 years3+ yearsTotal
Assets
Interest bearing cash and cash equivalents$2,587,131 $— $— $— $2,587,131 
Investment securities(1)45,942 246,072 259,155 3,675,484 4,226,653 
Variable loans19,731,115 203,597 68,469 261,636 20,264,817 
Fixed loans10,986 86,959 210,844 854,575 1,163,364 
Total loans(2)19,742,101 290,556 279,313 1,116,211 21,428,181 
Total interest sensitive assets$22,375,174 $536,628 $538,468 $4,791,695 $28,241,965 
Liabilities
Interest bearing customer deposits$12,290,602 $— $— $— $12,290,602 
CDs670,363 870,868 56,816 239 1,598,286 
Total interest bearing deposits12,960,965 870,868 56,816 239 13,888,888 
Short-term borrowings1,350,000 — — — 1,350,000 
Long-term debt311,902 — 174,326 371,567 857,795 
Total borrowings1,661,902 — 174,326 371,567 2,207,795 
Total interest sensitive liabilities$14,622,867 $870,868 $231,142 $371,806 $16,096,683 
GAP$7,752,307 $(334,240)$307,326 $4,419,889 $— 
Cumulative GAP$7,752,307 $7,418,067 $7,725,393 $12,145,282 $12,145,282 
Non-interest bearing deposits9,429,352 
Stockholders’ equity3,081,927 
Total$12,511,279 
(1)Available-for-sale debt securities and equity securities based on fair market value.
(2)Total loans include gross loans held for investment and loans held for sale.
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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 non-interest bearing deposits and stockholders’ equity. Management performs a sensitivity analysis to identify interest rate risk exposure on net interest income. Management also quantifies and measures 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, SOFR, Bloomberg Short Term Yield Index and other alternative indexes are the basis for most of the 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 the Company’s primary interest rate exposures. Interest rate derivative contracts may be used to manage exposure to adverse fluctuations in these primary interest rate exposures as is discussed in more detail under the heading Use of Derivatives to Manage Interest Rate and Other Risks below.
For modeling purposes, the “shock test” scenarios as of June 30, 2023 assume immediate, sustained 100 and 200 basis point increases in interest rates as well as 100 and 200 basis point decreases in interest rates. As of June 30, 2022, the scenarios assumed a sustained 100 and 200 basis point increase in interest rates, as well as a 100 basis point decrease in interest rates. The Company will continue to evaluate these scenarios as interest rates change.
During 2023, the Company’s interest rate risk exposure model incorporated updated assumptions regarding the level of interest rate, including indeterminable maturity deposits (non-interest bearing deposits, interest bearing transaction accounts and savings accounts) and loan and security prepayments behaviors for a given level of market rate change. In the current environment of changing 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 results for 2023. This modeling indicated interest rate sensitivity as follows:
 Anticipated Impact Over the Next Twelve Months as Compared to Most Likely Scenario
  
June 30, 2023June 30, 2022
IncreaseDecreaseIncreaseDecrease
(in thousands)100 bps200 bps100 bps200 bps100 bps200 bps100 bps
Change in net interest income$26,320 $52,538 $(38,844)$(79,029)$91,461 $163,136 $(114,831)
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.
Use of Derivatives to Manage Interest Rate and Other Risks
In the ordinary course of business, the Company enters into derivative transactions to manage various risks and to accommodate the business requirements of its customers.
On the date the Company enters into a derivative contract, the derivative is designated as either a fair value hedge, cash flow hedge, net investment hedge, or a designation is not made as it is a customer-related transaction, an economic hedge for asset/liability risk management purposes or another stand-alone derivative created through the Company’s operations.
To manage the sensitivity of earnings and capital to interest rate, prepayment, credit, price and foreign currency fluctuations (asset and liability management positions), the Company may enter into derivative transactions. In addition, the Company enters into interest rate and foreign exchange derivative contracts to support the business requirements of its customers (customer-related positions).
For additional information regarding derivatives, see Note 10 - Derivative Financial Instruments in the accompanying notes to the consolidated financial statements included elsewhere in this report.
LIBOR Transition
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 extended publication of the most commonly used U.S. dollar LIBOR settings to June 30, 2023 and ceased 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
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as practicable and in any event by December 31, 2021. On March 15, 2022, President Biden signed into law the “Adjustable Interest Rate (LIBOR) Act,” as part of the Consolidated Appropriations Act, 2022, which provides for a statutory transition to a replacement rate selected by the Federal Reserve based on the SOFR for contracts referencing LIBOR that contain no fallback provisions or ineffective fallback provisions, unless a replacement rate is selected by a determining person as outlined in the statute. On December 16, 2022, the Federal Reserve adopted a final rule implementing the Adjustable Interest Rate (LIBOR) Act by identifying benchmark rates based on SOFR that will replace LIBOR in certain financial contracts after June 30, 2023. As of June 30, 2023, the Company has transitioned substantially all of its financial instruments to an alternative benchmark rate.
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ITEM 4.    CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the supervision and participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s 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, the Company has concluded that, as of the end of such period, its disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed in the reports that the Company files or submits under the Exchange Act and were effective in ensuring that information required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to the Company's management, including its 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 the Company’s 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, the Company’s internal control over financial reporting.
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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 March 31, 2023 Quarterly Report on Form 10-Q and in the 2022 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 six months ended June 30, 2023 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 Share(2)Plans or Programs(1)Plans or Programs(1)
January 2023564,206 $61.50 564,206 $150,000,000 
February 2023— — — 150,000,000 
March 2023447,703 55.80 447,703 125,019,420 
April 2023— — — 125,019,420 
May 2023— — — 125,019,420 
June 2023— — — 125,019,420 
Total1,011,909 $58.98 1,011,909 $125,019,420 
(1)    On April 19, 2022, the Company’s board of directors authorized a share repurchase program under which the Company could repurchase up to $150.0 million in shares of its outstanding common stock. In January 2023, the Company completed the full $150.0 million of repurchases authorized under this plan. On January 18, 2023, the Company’s board of directors authorized a new share repurchase program under which the Company may repurchase up to $150.0 million in shares of its outstanding common stock. 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 the Company repurchases shares, and the timing of such repurchases, will be at management’s discretion and will depend upon a variety of factors, including market conditions, the Company’s 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.
(2)    The aggregate purchase price and weighted average price per share does not include the effect of excise tax expense incurred on net stock repurchases. For the six months ended June 30, 2023, excise tax expense totaled $540,000.
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ITEM 6.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Exhibits

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: July 20, 2023
/s/ J. Matthew Scurlock
J. Matthew Scurlock
Chief Financial Officer
(Duly authorized officer and principal financial officer)
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