# Texas Capital Bancshares Inc: Form 10-Q for the period ended Jun 30, 2023

- Company: [Texas Capital Bancshares Inc](/companies/tcbi.md) (CIK 1077428)
- Form: 10-Q
- Filed: 2023-07-20
- Accepted by EDGAR: Jul 20, 2023, 16:07 ET
- Period: 2023-06-30
- Accession: 0001077428-23-000155
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1077428/000107742823000155/tcbi-20230630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1077428/000107742823000155/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2023-04-01 to 2023-06-30 | $169.9m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2023-01-01 to 2023-06-30 | $319.7m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-04-01 to 2023-06-30 | $20.7m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-01-01 to 2023-06-30 | $32.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | $68.7m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | $107.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | $1.33 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | $2.02 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | $1.34 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | $2.05 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 48,421,276 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 48,736,382 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | $90.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-01-01 to 2023-06-30 | $4.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 6 months, 2023-01-01 to 2023-06-30 | $60.2m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2023-06-30 | $28.98bn | us-gaap:Assets |
| Total liabilities | at 2023-06-30 | $25.89bn | us-gaap:Liabilities |
| Long-term debt | at 2023-06-30 | $857.8m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2023-06-30 | $3.08bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 43,968 characters.

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.

### Results of Operations

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

*(dollars in thousands except per share data)*

|  | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net interest income | $231,990 | $205,533 | $467,335 | $389,079 |
| Provision for credit losses | 7,000 | 22,000 | 35,000 | 20,000 |
| Non-interest income | 46,011 | 26,240 | 83,414 | 46,523 |
| Non-interest expense | 181,644 | 164,303 | 375,671 | 317,395 |
| Income before income taxes | 89,357 | 45,470 | 140,078 | 98,207 |
| Income tax expense | 20,706 | 11,311 | 32,766 | 24,398 |
| Net income | 68,651 | 34,159 | 107,312 | 73,809 |
| Preferred stock dividends | 4,312 | 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 margin | 3.29% | 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 assets | 0.66% | 0.34% | 0.60% | 0.29% |
| Non-interest expense to average earning assets | 2.61% | 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.

### Taxable Equivalent Net Interest Income Analysis - Quarterly(1)

*(in thousands except percentages)*

| Assets | Three Months Ended June 30, 2023 Average Balance | Income/ Expense | Yield/ Rate | Three Months Ended June 30, 2022 Average Balance | Income/ Expense | Yield/ Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Investment securities(2) | $4,306,881 | $27,478 | 2.36% | $3,543,576 | $15,065 | 1.60% |
| Interest-bearing cash and cash equivalents | 3,286,091 | 41,571 | 5.07% | 4,747,377 | 9,394 | 0.79% |
| Loans held for sale | 28,414 | 599 | 8.46% | 8,123 | 62 | 3.07% |
| Loans held for investment, mortgage finance | 4,376,235 | 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 loans | 261,027 | — | — | 211,385 | — | — |
| Loans held for investment, net | 20,332,522 | 332,381 | 6.56% | 22,263,448 | 218,323 | 3.93% |
| Total earning assets | 27,953,908 | 402,029 | 5.69% | 30,562,524 | 242,844 | 3.16% |
| Cash and other assets | 1,049,145 |  |  | 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 deposits | 10,590,558 | 114,275 | 4.33% | 8,696,819 | 15,462 | 0.71% |
| Time deposits | 1,531,922 | 13,648 | 3.57% | 877,399 | 1,184 | 0.54% |
| Total interest bearing deposits | 13,468,222 | 137,391 | 4.09% | 11,245,947 | 20,566 | 0.73% |
| Short-term borrowings | 1,397,253 | 18,253 | 5.24% | 2,232,119 | 4,859 | 0.87% |
| Long-term debt | 883,871 | 14,282 | 6.48% | 929,616 | 11,393 | 4.92% |
| Total interest bearing liabilities | 15,749,346 | 169,926 | 4.33% | 14,407,682 | 36,818 | 1.02% |
| Non-interest bearing deposits | 9,749,105 |  |  | 13,747,876 |  |  |
| Other liabilities | 389,155 |  |  | 227,701 |  |  |
| Stockholders’ equity | 3,115,447 |  |  | 3,049,661 |  |  |
| **Total liabilities and stockholders’ equity** | $29,003,053 |  |  | $31,432,920 |  |  |
| Net interest income |  | $232,103 |  |  | $206,026 |  |
| Net interest margin |  |  | 3.29% |  |  | 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.

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

*(dollars in thousands)*

| Assets | Six Months Ended June 30, 2023 Average Balance | Revenue / Expense | Yield / Rate | Six Months Ended June 30, 2022 Average Balance | Revenue / Expense | Yield / Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Investment securities(2) | $4,184,349 | $52,770 | 2.34% | $3,606,069 | $32,808 | 1.75% |
| Interest bearing cash and cash equivalents | 4,407,486 | 104,007 | 4.76% | 6,639,327 | 12,965 | 0.39% |
| Loans held for sale | 35,902 | 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 loans | 256,900 | — | — | 211,995 | — | — |
| Loans held for investment, net | 19,487,421 | 629,040 | 6.51% | 21,737,947 | 405,922 | 3.77% |
| Total earning assets | 28,115,158 | 787,354 | 5.57% | 31,991,223 | 451,870 | 2.83% |
| Cash and other assets | 1,045,466 |  |  | 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 deposits | 10,891,309 | 219,982 | 4.07% | 9,553,920 | 24,045 | 0.51% |
| Time deposits | 1,481,569 | 24,182 | 3.29% | 957,615 | 2,269 | 0.48% |
| Total interest bearing deposits | 13,435,572 | 257,485 | 3.86% | 12,561,641 | 34,196 | 0.55% |
| Short-term borrowings | 1,320,493 | 32,997 | 5.04% | 2,002,724 | 5,617 | 0.57% |
| Long-term debt | 907,701 | 29,265 | 6.50% | 929,312 | 21,988 | 4.77% |
| Total interest bearing liabilities | 15,663,766 | 319,747 | 4.12% | 15,493,677 | 61,801 | 0.80% |
| Non-interest bearing deposits | 10,000,024 |  |  | 13,990,465 |  |  |
| Other liabilities | 412,758 |  |  | 235,378 |  |  |
| Stockholders’ equity | 3,084,076 |  |  | 3,116,785 |  |  |
| **Total liabilities and stockholders’ equity** | $29,160,624 |  |  | $32,836,305 |  |  |
| Net interest income |  | $467,607 |  |  | $390,069 |  |
| Net interest margin |  |  | 3.31% |  |  | 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.

### 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.

*(in thousands)*

| Interest income | Three Months Ended June 30, 2023/2022 Net Change Volume | Change Due To(1) Yield/Rate(2) | Volume | Six Months Ended June 30, 2023/2022 Net Change Yield/Rate(2) | Change Due To(1) |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Investment securities | $12,413 | $3,045 | $9,368 | $19,962 | $4,887 | $15,075 |
| Interest bearing cash and cash equivalents | 32,177 | (2,881) | 35,058 | 91,042 | (4,143) | 95,185 |
| Loans held for sale | 537 | 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 investment | 127,774 | (4,048) | 131,822 | 251,772 | (4,852) | 256,624 |
| Total interest income | 159,185 | (16,368) | 175,553 | 335,484 | (34,578) | 370,062 |
| **Interest expense** |  |  |  |  |  |  |
| Transaction deposits | 5,548 | (764) | 6,312 | 5,439 | (3,459) | 8,898 |
| Savings deposits | 98,813 | 3,352 | 95,461 | 195,937 | 3,983 | 191,954 |
| Time deposits | 12,464 | 881 | 11,583 | 21,913 | 1,287 | 20,626 |
| Short-term borrowings | 13,394 | (1,811) | 15,205 | 27,380 | (2,032) | 29,412 |
| Long-term debt | 2,889 | (561) | 3,450 | 7,277 | (529) | 7,806 |
| Total interest expense | 133,108 | 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.

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

*(in thousands)*

|  | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Service charges on deposit accounts | $5,158 | 6,102 | $10,180 | $12,217 |
| Wealth management and trust fee income | 3,715 | 4,051 | 7,144 | 7,963 |
| Brokered loan fees | 2,415 | 4,133 | 4,310 | 8,103 |
| Investment banking and trading income | 27,498 | 11,126 | 46,266 | 15,305 |
| Other | 7,225 | 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

*(in thousands)*

|  | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Salaries and benefits | $113,050 | $103,358 | $241,720 | $203,217 |
| Occupancy expense | 9,482 | 8,874 | 19,101 | 17,759 |
| Marketing | 6,367 | 8,506 | 15,411 | 13,483 |
| Legal and professional | 15,669 | 11,288 | 30,183 | 21,590 |
| Communications and technology | 20,525 | 15,649 | 38,048 | 30,349 |
| Federal Deposit Insurance Corporation insurance assessment | 3,693 | 3,318 | 5,863 | 7,299 |
| Other | 12,858 | 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.

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, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Commercial | $10,459,640 | $9,832,676 |
| Mortgage finance | 5,098,812 | 4,090,033 |
| Commercial real estate | 5,308,997 | 4,875,363 |
| Consumer | 531,635 | 552,848 |
| Gross loans held for investment | 21,399,084 | 19,350,920 |
| 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.

### 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)*

| Non-accrual loans held for investment Commercial: | June 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Business assets | $76,543 | $41,448 |
| Oil and gas properties | 3,184 | 3,658 |
| Accounts receivable and inventory | 137 | 1,405 |
| Other | — | 531 |
| Total commercial | 79,864 | 47,042 |
| Commercial real estate: |  |  |
| Commercial property | 175 | 1,263 |
| Total commercial real estate | 175 | 1,263 |
| Consumer |  |  |
| Single family residences | 1,000 | — |
| Other | — | 33 |
| Total consumer | 1,000 | 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 investment | 0.38% | 0.25% |
| Total non-performing assets to total assets | 0.28% | 0.17% |
| Allowance for credit losses on loans to non-accrual loans held for investment | 2.9x | 5.2x |
| 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, 2023 | June 30, 2022 |
| --- | ---: | ---: |
| Allowance for credit losses on loans to total loans held for investment | 1.11% | 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 investment | 1.32% | 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.

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

|  | Six Months Ended June 30, 2023 Net Charge-offs | Net Charge-offs to Average Loans(1) | 2022 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, 2023 | December 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 investment | 12.1% | 24.8% |
| Total earning assets | 9.3% | 17.4% |
| Total deposits | 11.1% | 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, 2023 Balance | % of Total | December 31, 2022 Balance | % of Total |
| --- | ---: | ---: | ---: | ---: |
| Customer deposits | $21,838,842 | 93.7% | $21,247,999 | 93.0% |
| Brokered deposits | 1,479,398 | 6.3% | 1,608,881 | 7.0% |
| Total deposits | $23,318,240 | 100.0% | $22,856,880 | 100.0% |

32

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, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Repurchase agreements | $— | $1,142 |
| FHLB borrowings | 1,350,000 | 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, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| FHLB borrowing capacity relating to loans and pledged securities | $3,253,409 | $2,621,218 |
| FHLB borrowing capacity relating to unencumbered securities | 4,238,418 | 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.

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.

## Market risk

As filed, 12,041 characters.

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)*

| Assets | 0-3 months | 4-12 months | 1-3 years | 3+ years | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| 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 loans | 19,731,115 | 203,597 | 68,469 | 261,636 | 20,264,817 |
| Fixed loans | 10,986 | 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 |
| CDs | 670,363 | 870,868 | 56,816 | 239 | 1,598,286 |
| Total interest bearing deposits | 12,960,965 | 870,868 | 56,816 | 239 | 13,888,888 |
| Short-term borrowings | 1,350,000 | — | — | — | 1,350,000 |
| Long-term debt | 311,902 | — | 174,326 | 371,567 | 857,795 |
| Total borrowings | 1,661,902 | — | 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 deposits |  |  |  |  | 9,429,352 |
| Stockholders’ equity |  |  |  |  | 3,081,927 |
| 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.

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:

*(in thousands)*

|  | Anticipated Impact Over the Next Twelve Months as Compared to Most Likely Scenario June 30, 2023 Increase 100 bps | 200 bps | Decrease 100 bps | 200 bps | June 30, 2022 Increase 100 bps | 200 bps | Decrease 100 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 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.

## Controls and procedures

As filed, 1,499 characters.

### 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.

## Risk factors

As filed, 155 characters.

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.

Filed Jul 20, 2023.
Source: SEC EDGAR, the filing index for accession 0001077428-23-000155. Last ingested by Listed: Nov 5, 2026, 14:39 ET. No prices; not investment advice.