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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, 2021
☐ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from              to             
Commission file number 001-34657
TEXAS CAPITAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Delaware   75-2679109
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification Number)
2000 McKinney Avenue
Suite 700
Dallas TX USA 75201
(Address of principal executive offices) (Zip Code)
(214) 932-6600
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.01 per share TCBI Nasdaq Stock Market
5.75% Non-Cumulative Perpetual Preferred Stock Series B, par value $0.01 per share TCBIO Nasdaq Stock Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ý        No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý        ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer x Accelerated Filer ☐
Non-Accelerated Filer ☐ Smaller Reporting Company ☐
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐        No  ý
On July 21, 2021, the number of shares set forth below was outstanding with respect to each of the issuer's classes of common stock:
Common Stock, par value $0.01 per share 50,597,797


Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended June 30, 2021

Index
 





PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(in thousands except share data) June 30, 2021 December 31, 2020
(Unaudited)
Assets
Cash and due from banks $ 202,549  $ 173,573 
Interest-bearing deposits in other banks 6,768,650  9,032,807 
Investment securities 3,798,275  3,196,970 
Loans held for sale ($63.7 million and $239.1 million at June 30, 2021 and December 31, 2020, respectively, at fair value)
63,747  283,165 
Loans held for investment, mortgage finance 8,772,799  9,079,409 
Loans held for investment (net of unearned income) 15,168,565  15,351,451 
Less: Allowance for credit losses on loans 221,511  254,615 
Loans held for investment, net 23,719,853  24,176,245 
Mortgage servicing rights, net 1,316  105,424 
Premises and equipment, net 21,969  24,546 
Accrued interest receivable and other assets 634,719  715,699 
Goodwill and intangible assets, net 17,464  17,667 
Total assets $ 35,228,542  $ 37,726,096 
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest-bearing $ 14,228,038  $ 12,740,947 
Interest-bearing 14,611,525  18,255,642 
Total deposits 28,839,563  30,996,589 
Accrued interest payable 8,116  11,150 
Other liabilities 324,039  339,486 
Federal funds purchased and repurchase agreements 14,481  111,751 
Other borrowings 2,000,000  3,000,000 
Long-term debt 927,386  395,896 
Total liabilities 32,113,585  34,854,872 
Stockholders’ equity:
Preferred stock, $0.01 par value, $1,000 liquidation value:
Authorized shares—10,000,000
Issued shares—300,000 and 6,000,000 at June 30, 2021 and December 31, 2020, respectively
300,000  150,000 
Common stock, $0.01 par value:
Authorized shares—100,000,000
Issued shares— 50,592,618 and 50,470,867 at June 30, 2021 and December 31, 2020, respectively
506  504 
Additional paid-in capital 992,469  991,898 
Retained earnings 1,848,379  1,713,056 
Treasury stock (shares at cost: 417 at June 30, 2021 and December 31, 2020)
(8) (8)
Accumulated other comprehensive income/(loss), net of taxes (26,389) 15,774 
Total stockholders’ equity 3,114,957  2,871,224 
Total liabilities and stockholders’ equity $ 35,228,542  $ 37,726,096 
See accompanying notes to consolidated financial statements.
4

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) 2021 2020 2021 2020
Interest income
Interest and fees on loans $ 210,611  $ 247,595  $ 426,203  $ 531,220 
Investment securities 10,918  2,024  20,805  4,207 
Federal funds sold and securities purchased under resale agreements —  77  1  691 
Interest-bearing deposits in other banks 2,961  2,314  5,893  21,900 
Total interest income 224,490  252,010  452,902  558,018 
Interest expense
Deposits 16,271  32,294  36,275  94,468 
Federal funds purchased 51  176  126  845 
Other borrowings 451  4,569  2,968  14,151 
Long-term debt 10,723  5,043  16,466  10,307 
Total interest expense 27,496  42,082  55,835  119,771 
Net interest income 196,994  209,928  397,067  438,247 
Provision for credit losses (19,000) 100,000  (25,000) 196,000 
Net interest income after provision for credit losses 215,994  109,928  422,067  242,247 
Non-interest income
Service charges on deposit accounts 4,634  2,459  9,350  5,752 
Wealth management and trust fee income 3,143  2,348  5,998  4,815 
Brokered loan fees 6,933  10,764  16,244  18,779 
Servicing income 5,935  6,120  14,944  10,866 
Swap fees 534  1,468  1,060  4,225 
Net gain/(loss) on sale of loans held for sale (3,070) 39,023  2,502  26,023 
Other 11,993  8,303  19,096  11,805 
Total non-interest income 30,102  70,485  69,194  82,265 
Non-interest expense
Salaries and employee benefits 86,830  100,791  174,352  177,984 
Net occupancy expense 7,865  9,134  16,139  17,846 
Marketing 1,900  7,988  3,597  16,510 
Legal and professional 9,147  11,330  17,424  28,796 
Communications and technology 14,352  42,760  30,321  56,551 
Federal Deposit Insurance Corporation (“FDIC”) insurance assessment 5,226  7,140  11,839  12,989 
Servicing-related expenses 12,355  20,100  25,344  36,454 
Merger-related expenses —  10,486  —  17,756 
Other 11,385  12,606  20,360  22,866 
Total non-interest expense 149,060  222,335  299,376  387,752 
Income/(loss) before income taxes 97,036  (41,922) 191,885  (63,240)
Income tax expense/(benefit) 23,555  (7,606) 46,466  (12,237)
Net income/(loss) 73,481  (34,316) 145,419  (51,003)
Preferred stock dividends 6,317  2,437  10,096  4,875 
Net income/(loss) available to common stockholders $ 67,164  $ (36,753) $ 135,323  $ (55,878)
Other comprehensive loss
Change in unrealized gain/(loss) on available-for-sale debt securities, before tax $ 38,037  $ (5,435) $ (53,370) $ (10,727)
Income tax expense/(benefit) 7,989  (1,142) (11,207) (2,253)
Other comprehensive income/(loss), net of tax 30,048  (4,293) (42,163) (8,474)
Comprehensive income/(loss) $ 103,529  $ (38,609) $ 103,256  $ (59,477)
Basic earnings/(loss) per common share $ 1.33  $ (0.73) $ 2.68  $ (1.11)
Diluted earnings/(loss) per common share $ 1.31  $ (0.73) $ 2.65  $ (1.11)
See accompanying notes to consolidated financial statements.
5

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED
Preferred Stock Common Stock Additional   Treasury Stock Accumulated
Other 		 
  Paid-in Retained Comprehensive  
(in thousands except share data) Shares Amount Shares Amount Capital Earnings Shares Amount Income/(Loss) Total
Balance at March 31, 2020 6,000,000  $ 150,000  50,408,195  $ 504  $ 979,939  $ 1,637,392  (417) $ (8) $ 4,769  $ 2,772,596 
Comprehensive loss:
Net loss —  —  —  —  —  (34,316) —  —  —  (34,316)
Change in unrealized gain on available-for-sale securities, net of taxes —  —  —  —  —  —  —  —  (4,293) (4,293)
Total comprehensive loss (38,609)
Stock-based compensation expense recognized in earnings
—  —  —  —  3,322  —  —  —  —  3,322 
Preferred stock dividend —  —  —  —  —  (2,437) —  —  —  (2,437)
Issuance of stock related to stock-based awards
—  —  27,894  —  (117) —  —  —  —  (117)
Balance at June 30, 2020 6,000,000  $ 150,000  50,436,089  $ 504  $ 983,144  $ 1,600,639  (417) $ (8) $ 476  $ 2,734,755 
Balance at March 31, 2021 6,300,000  $ 450,000  50,558,184  $ 505  $ 984,207  $ 1,781,215  (417) $ (8) $ (56,437) $ 3,159,482 
Comprehensive income:
Net income —  —  —  —  —  73,481  —  —  —  73,481 
Change in unrealized gain on available-for-sale securities, net of taxes —  —  —  —  —  —  —  —  30,048  30,048 
Total comprehensive income 103,529 
Stock-based compensation expense recognized in earnings
—  —  —  —  8,315  —  —  —  —  8,315 
Preferred stock dividend —  —  —  —  —  (6,317) —  —  —  (6,317)
Issuance of stock related to stock-based awards
—  —  34,434  1  (53) —  —  —  —  (52)
Redemption of preferred stock (6,000,000) (150,000) —  —  —  —  —  —  —  (150,000)
Balance at June 30, 2021 300,000  $ 300,000  50,592,618  $ 506  $ 992,469  $ 1,848,379  (417) $ (8) $ (26,389) $ 3,114,957 


See accompanying notes to consolidated financial statements.
6

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED - CONTINUED
Preferred Stock Common Stock Additional   Treasury Stock Accumulated
Other 		 
  Paid-in Retained Comprehensive  
(in thousands except share data) Shares Amount Shares Amount Capital Earnings Shares Amount Income/(Loss) Total
Balance at December 31, 2019 (audited) 6,000,000  $ 150,000  50,338,158  $ 503  $ 978,205  $ 1,663,671  (417) $ (8) $ 8,950  $ 2,801,321 
Impact of adoption of new accounting standards, net of taxes(1) —  —  —  —  —  (7,154) —  —  —  (7,154)
Comprehensive loss:
Net loss —  —  —  —  —  (51,003) —  —  —  (51,003)
Change in unrealized gain/(loss) on available-for-sale securities, net of taxes —  —  —  —  —  —  —  —  (8,474) (8,474)
Total comprehensive loss (59,477)
Stock-based compensation expense recognized in earnings
—  —  —  —  6,549  —  —  —  —  6,549 
Preferred stock dividend —  —  —  —  —  (4,875) —  —  —  (4,875)
Issuance of stock related to stock-based awards
—  —  97,931  1  (1,610) —  —  —  —  (1,609)
Balance at June 30, 2020 6,000,000  $ 150,000  50,436,089  $ 504  $ 983,144  $ 1,600,639  (417) $ (8) $ 476  $ 2,734,755 
Balance at December 31, 2020 (audited) 6,000,000  $ 150,000  50,470,867  $ 504  $ 991,898  $ 1,713,056  (417) $ (8) $ 15,774  $ 2,871,224 
Comprehensive income:
Net income —  —  —  —  —  145,419  —  —  —  145,419 
Change in unrealized gain/(loss) on available-for-sale securities, net of taxes —  —  —  —  —  —  —  —  (42,163) (42,163)
Total comprehensive income 103,256 
Stock-based compensation expense recognized in earnings
—  —  —  —  13,776  —  —  —  —  13,776 
Issuance of preferred stock 300,000  300,000  —  —  (10,277) —  —  —  —  289,723 
Preferred stock dividend —  —  —  —  —  (10,096) —  —  —  (10,096)
Issuance of stock related to stock-based awards
—  —  121,751  2  (2,928) —  —  —  —  (2,926)
Redemption of preferred stock (6,000,000) (150,000) —  —  —  —  —  —  —  (150,000)
Balance at June 30, 2021 300,000  $ 300,000  50,592,618  $ 506  $ 992,469  $ 1,848,379  (417) $ (8) $ (26,389) $ 3,114,957 
(1)    Represents the impact of adopting Accounting Standard Update (“ASU”) 2016-13. See Note 1 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020 for more information.

See accompanying notes to consolidated financial statements.
7

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
  Six months ended June 30,
(in thousands) 2021 2020
Operating activities
Net income/(loss) $ 145,419  $ (51,003)
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
Provision for credit losses (25,000) 196,000 
Depreciation and amortization 47,531  31,320 
Net (gain)/loss on sale of loans held for sale (2,502) (26,023)
Increase/(decrease) in valuation allowance on mortgage servicing rights (16,448) 20,818 
Stock-based compensation expense 14,804  7,029 
Purchases and originations of loans held for sale (1,409,716) (4,931,981)
Proceeds from sales and repayments of loans held for sale 1,618,331  7,022,960 
Changes in operating assets and liabilities:
Accrued interest receivable and other assets 85,388  (74,155)
Accrued interest payable and other liabilities (19,164) 57,795 
Net cash provided by operating activities 438,643  2,252,760 
Investing activities
Purchases of investment securities (903,395) (10,813)
Principal payments received on investment securities 240,891  5,168 
Originations of mortgage finance loans (88,516,423) (94,837,775)
Proceeds from pay-offs of mortgage finance loans 88,823,033  94,034,998 
Proceeds from sale of mortgage servicing rights 108,646  — 
Net increase/(decrease) in loans held for investment, excluding mortgage finance loans 174,095  (207,635)
Purchase of premises and equipment, net (1,516) (2,344)
Net cash used in investing activities (74,669) (1,018,401)
Financing activities
Net increase/(decrease) in deposits (2,157,026) 3,709,102 
Costs from issuance of stock related to stock-based awards and warrants (2,926) (1,609)
Net proceeds from issuance of preferred stock 289,723  — 
Redemption of preferred stock (150,000) — 
Preferred dividends paid (10,096) (4,875)
Net increase/(decrease) in other borrowings (1,000,000) 300,000 
Net increase/(decrease) in federal funds purchased and repurchase agreements (97,270) 54,024 
Net proceeds from issuance of long-term debt 639,440  — 
Redemption of long-term debt (111,000) — 
Net cash provided by/(used in) financing activities (2,599,155) 4,056,642 
Net increase/(decrease) in cash and cash equivalents (2,235,181) 5,291,001 
Cash and cash equivalents at beginning of period 9,206,380  4,425,583 
Cash and cash equivalents at end of period $ 6,971,199  $ 9,716,584 
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 58,869  $ 112,217 
Cash paid during the period for income taxes 36,701  19,835 
See accompanying notes to consolidated financial statements.
8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(1) Operations and Summary of Significant Accounting Policies
Organization and Nature of Business
Texas Capital Bancshares, Inc. (the “Company”), a Delaware corporation, was incorporated in November 1996 and commenced banking operations in December 1998. The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiary, Texas Capital Bank, National Association (the “Bank”). We serve the needs of commercial businesses and professionals and entrepreneurs located in Texas as well as operate several lines of business serving a regional or national clientele of commercial borrowers. We are primarily a secured lender, with the majority of our loans held for investment, excluding mortgage finance loans and other national lines of business, being made to businesses headquartered or with operations in Texas. Our national lines of business provide specialized lending products to businesses throughout the United States.
Basis of Presentation
Our accounting and reporting policies conform to accounting principles generally accepted in the United States (“GAAP”) and to generally accepted practices within the banking industry. Certain prior period balances have been reclassified to conform to the current period presentation.
The consolidated interim financial statements are unaudited and certain information and disclosures in the notes to consolidated financial statements that are presented in accordance with GAAP have been condensed or omitted. In the opinion of management, the interim financial statements include all normal and recurring adjustments and the disclosures made are adequate to make the interim financial information not misleading. The consolidated financial statements have been prepared in accordance with GAAP for interim financial information and the instructions to Form 10-Q adopted by the U.S. Securities and Exchange Commission (“SEC”). Accordingly, the financial statements do not include all of the information and notes to the consolidated financial statements required by GAAP for complete annual financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2020, included in our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for credit losses, the fair value of financial instruments and the status of contingencies are particularly susceptible to significant change.
(2) Earnings Per Share
The following table presents the computation of basic and diluted earnings per share:
  Three months ended June 30, Six months ended June 30,
(in thousands except share and per share data) 2021 2020 2021 2020
Numerator:
Net income/(loss) $ 73,481  $ (34,316) $ 145,419  $ (51,003)
Preferred stock dividends 6,317  2,437  10,096  4,875 
Net income/(loss) available to common stockholders $ 67,164  $ (36,753) $ 135,323  $ (55,878)
Denominator:
Denominator for basic earnings per share—weighted average shares 50,580,184  50,392,394  50,549,236  50,401,401 
Effect of employee stock-based awards(1) 513,476  23,937  553,851  71,749 
Denominator for dilutive earnings per share—adjusted weighted average shares and assumed conversions
51,093,660  50,416,331  51,103,087  50,473,150 
Basic earnings/(loss) per common share $ 1.33  $ (0.73) $ 2.68  $ (1.11)
Diluted earnings/(loss) per common share $ 1.31  $ (0.73) $ 2.65  $ (1.11)
(1)SARs and RSUs outstanding of 98,079 at June 30, 2021 and 510,095 at June 30, 2020 have not been included in diluted earnings/(loss) per common share because to do so would have been antidilutive for the periods presented.
9

(3) Investment Securities
Available-for-Sale Debt Securities
The following is a summary of available-for-sale debt securities: 
(in thousands) Amortized
Cost(1) 		Gross
Unrealized
Gains 		Gross
Unrealized
Losses 		Estimated
Fair
Value
June 30, 2021
Available-for-sale debt securities:
U.S. government agency securities $ 125,000  $ —  $ (2,585) $ 122,415 
Residential mortgage-backed securities 3,477,491  771  (41,116) 3,437,146 
Tax-exempt asset-backed securities 173,427  12,527  —  185,954 
Credit risk transfer (“CRT”) securities 14,713  —  (3,000) 11,713 
Total $ 3,790,631  $ 13,298  $ (46,701) $ 3,757,228 
December 31, 2020
Available-for-sale debt securities:
U.S. government agency securities $ 125,000  $ 1  $ (1,412) $ 123,589 
Residential mortgage-backed securities 2,818,518  11,566  (1,128) 2,828,956 
Tax-exempt asset-backed securities 184,940  14,236  —  199,176 
Credit risk transfer securities 14,713  —  (3,296) 11,417 
Total
$ 3,143,171  $ 25,803  $ (5,836) $ 3,163,138 
(1)Excludes accrued interest receivable of $6.9 million and $6.0 million at June 30, 2021 and December 31, 2020, respectively, that is recorded in accrued interest receivable and other assets on the consolidated balance sheets.
10

The amortized cost and estimated fair value, excluding accrued interest receivable, and weighted average yield of available-for-sale debt securities are presented below by contractual maturity:  
(in thousands, except percentage data) Less Than
One Year 		After One
Through
Five Years 		After Five
Through
Ten Years 		After Ten
Years 		Total
June 30, 2021
Available-for-sale:
U.S. government agency securities:(1)
Amortized cost $ —  $ —  $ 125,000  $ —  $ 125,000 
Estimated fair value —  —  122,415  —  122,415 
Weighted average yield(3) —  % —  % 1.13  % —  % 1.13  %
Residential mortgage-backed securities:(1)
Amortized cost $ —  $ 356  $ 17,354  $ 3,459,781  $ 3,477,491 
Estimated fair value —  395  16,787  3,419,964  3,437,146 
Weighted average yield(3) —  % 4.59  % 1.08  % 1.19  % 1.19  %
Tax-exempt asset-backed securities:(1)
Amortized Cost $ —  $ —  $ —  $ 173,427  $ 173,427 
Estimated fair value —  —  —  185,954  185,954 
Weighted average yield(2)(3) —  % —  % —  % 4.95  % 4.95  %
CRT securities:(1)
Amortized Cost $ —  $ —  $ —  $ 14,713  $ 14,713 
Estimated fair value —  —  —  11,713  11,713 
Weighted average yield(3) —  % —  % —  % 0.92  % 0.92  %
Total available-for-sale debt securities:
Amortized cost $ 3,790,631 
Estimated fair value $ 3,757,228 
December 31, 2020
Available-for-sale:
U.S. government agency securities:(1)
Amortized cost $ —  $ —  $ 125,000  $ —  $ 125,000 
Estimated fair value —  —  123,589  —  123,589 
Weighted average yield(3) —  % —  % 1.13  % —  % 1.13  %
Residential mortgage-backed securities:(1)
Amortized cost $ —  $ 545  $ 17,500  $ 2,800,473  $ 2,818,518 
Estimated fair value —  605  17,490  2,810,861  2,828,956 
Weighted average yield(3) —  % 4.58  % 1.08  % 1.25  % 1.25  %
Tax-exempt asset-backed securities:(1)
Amortized Cost $ —  $ —  $ —  $ 184,940  $ 184,940 
Estimated fair value —  —  —  199,176  199,176 
Weighted average yield(2)(3) —  % —  % —  % 4.92  % 4.92  %
CRT securities:(1)
Amortized Cost $ —  $ —  $ —  $ 14,713  $ 14,713 
Estimated fair value —  —  —  11,417  11,417 
Weighted average yield(3) —  % —  % —  % 0.15  % 0.15  %
Total available-for-sale debt securities:
Amortized cost $ 3,143,171 
Estimated fair value $ 3,163,138 
(1)Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
(2)Yields have been adjusted to a tax equivalent basis assuming a 21% federal tax rate.
(3)Yields are calculated based on amortized cost.
11

The following table discloses our available-for-sale debt securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months:
Less Than 12 Months 12 Months or Longer Total
(in thousands) Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss
June 30, 2021
U.S. government agency securities $ 122,415  $ (2,585) $ —  $ —  $ 122,415  $ (2,585)
Residential mortgage-backed securities 3,257,258  (41,116) —  —  3,257,258  (41,116)
CRT securities —  —  11,713  (3,000) 11,713  (3,000)
Total $ 3,379,673  $ (43,701) $ 11,713  $ (3,000) $ 3,391,386  $ (46,701)
December 31, 2020
U.S. government agency securities $ 98,588  $ (1,412) $ —  $ —  $ 98,588  $ (1,412)
Residential mortgage-backed securities 354,387  (1,128) —  —  354,387  (1,128)
CRT securities —  —  11,417  (3,296) 11,417  (3,296)
Total $ 452,975  $ (2,540) $ 11,417  $ (3,296) $ 464,392  $ (5,836)
At June 30, 2021, we had 114 securities in an unrealized loss position, comprised of five U.S. government agency securities, two CRT securities and 107 residential mortgage-backed securities. Based upon our June 30, 2021 review of securities with unrealized losses we have determined that all losses resulted from factors not deemed credit-related. We have evaluated the near-term prospects of each securities portfolio in relation to the severity of the unrealized losses and adverse conditions related to the securities among other factors. Based on that evaluation management has determined that we have the ability and intent to hold the securities until recovery of fair value and have recorded the unrealized losses in accumulated other comprehensive income (“AOCI”).
Available-for-sale debt securities with carrying values of approximately $26.3 million and $1.3 million were pledged to secure certain customer repurchase agreements and deposits, respectively, at June 30, 2021. The comparative amounts at December 31, 2020 were $31.7 million and $1.9 million, respectively.
Equity Securities
Equity securities consist of investments that qualify for consideration under the regulations implementing the Community Reinvestment Act and investments related to our non-qualified deferred compensation plan. At June 30, 2021 and December 31, 2020, we had $41.0 million and $33.8 million, respectively, in equity securities recorded at fair value. The following is a summary of unrealized and realized gains/(losses) recognized on equity securities included in other non-interest income in the consolidated statements of income and other comprehensive income:
Three months ended June 30, Six months ended June 30,
(in thousands) 2021 2020 2021 2020
Net gains/(losses) recognized during the period $ 3,268  $ 2,912  $ 3,646  $ (65)
Less: Realized net gains/(losses) recognized during the period on equity securities sold
351  (226) 749  (245)
Unrealized net gains/(losses) recognized during the period on equity securities still held
$ 2,917  $ 3,138  $ 2,897  $ 180 
(4) Loans Held for Investment and Allowance for Credit Losses on Loans
Loans held for investment are summarized by portfolio segment as follows:
(in thousands) June 30, 2021 December 31, 2020
Commercial $ 9,054,764  $ 8,861,580 
Energy 618,371  766,217 
Mortgage finance(1) 8,772,799  9,079,409 
Real estate 5,564,623  5,794,624 
Gross loans held for investment(2) 24,010,557  24,501,830 
Unearned income (net of direct origination costs) (69,193) (70,970)
Allowance for credit losses on loans (221,511) (254,615)
Total loans held for investment, net(2) $ 23,719,853  $ 24,176,245 
(1)    Balances at June 30, 2021 and December 31, 2020 are stated net of $617.9 million and $1.2 billion of participations sold, respectively.
(2)    Excludes accrued interest receivable of $53.8 million and $56.5 million at June 30, 2021 and December 31, 2020, respectively, that is recorded in accrued interest receivable and other assets on the consolidated balance sheets.
12

The following tables summarize our gross loans held for investment by year of origination and internally assigned credit grades:
(in thousands) 2021 2020 2019 2018 2017 2016 and prior Revolving lines of credit Revolving lines of credit converted to term loans Total
June 30, 2021
Commercial
(1-7) Pass $ 637,105  $ 3,394,502  $ 602,181  $ 441,326  $ 209,229  $ 297,669  $ 3,082,499  $ 59,164  $ 8,723,675 
(8) Special mention —  3,575  82,607  48,393  8,464  5,633  21,060  6,660  176,392 
(9) Substandard - accruing —  1,288  27,441  25,620  9,988  31,354  16,621  7,029  119,341 
(9+) Non-accrual —  6,105  3,243  846  5,549  11,945  7,315  353  35,356 
Total commercial $ 637,105  $ 3,405,470  $ 715,472  $ 516,185  $ 233,230  $ 346,601  $ 3,127,495  $ 73,206  $ 9,054,764 
Energy
(1-7) Pass $ 2,500  $ —  $ —  $ 3,539  $ 7,743  $ 21,621  $ 487,723  $ —  $ 523,126 
(8) Special mention —  —  —  —  —  —  52,035  —  52,035 
(9) Substandard - accruing —  —  —  —  —  10,344  —  —  10,344 
(9+) Non-accrual 9,908  —  —  —  —  12,813  10,145  —  32,866 
Total energy $ 12,408  $ —  $ —  $ 3,539  $ 7,743  $ 44,778  $ 549,903  $ —  $ 618,371 
Mortgage finance
(1-7) Pass $ 77,749  $ 825,516  $ 908,556  $ 750,947  $ 536,746  $ 5,673,285  $ —  $ —  $ 8,772,799 
(8) Special mention —  —  —  —  —  —  —  —  — 
(9) Substandard - accruing —  —  —  —  —  —  —  —  — 
(9+) Non-accrual —  —  —  —  —  —  —  —  — 
Total mortgage finance $ 77,749  $ 825,516  $ 908,556  $ 750,947  $ 536,746  $ 5,673,285  $ —  $ —  $ 8,772,799 
Real estate
CRE
(1-7) Pass $ 182,837  $ 468,969  $ 811,387  $ 706,881  $ 301,041  $ 531,045  $ 46,790  $ 38,402  $ 3,087,352 
(8) Special mention —  16,327  30,667  38,126  74,135  50,797  —  —  210,052 
(9) Substandard - accruing 17,850  —  309  46,923  53,179  66,710  —  5,022  189,993 
(9+) Non-accrual —  —  —  —  —  206  —  —  206 
RBF
(1-7) Pass 127,790  106,195  30,165  13,214  562  11,863  594,642  —  884,431 
(8) Special mention —  —  —  —  —  —  —  —  — 
(9) Substandard - accruing —  —  —  —  —  —  —  —  — 
(9+) Non-accrual —  —  —  —  —  —  —  —  — 
Other
(1-7) Pass 51,092  183,013  149,031  94,703  95,927  171,454  43,935  29,716  818,871 
(8) Special mention —  —  2,115  —  —  —  —  1,018  3,133 
(9) Substandard - accruing —  —  —  4,194  14,255  21,195  —  —  39,644 
(9+) Non-accrual —  —  —  —  908  2,987  —  14,099  17,994 
Secured by 1-4 family
(1-7) Pass 38,055  63,661  57,792  28,368  41,393  74,893  4,545  —  308,707 
(8) Special mention —  —  —  —  —  1,758  —  —  1,758 
(9) Substandard - accruing —  —  —  —  —  2,268  —  —  2,268 
(9+) Non-accrual —  —  —  —  —  214  —  —  214 
Total real estate $ 417,624  $ 838,165  $ 1,081,466  $ 932,409  $ 581,400  $ 935,390  $ 689,912  $ 88,257  $ 5,564,623 
Total loans held for investment $ 1,144,886  $ 5,069,151  $ 2,705,494  $ 2,203,080  $ 1,359,119  $ 7,000,054  $ 4,367,310  $ 161,463  $ 24,010,557 
13


(in thousands) 2020 2019 2018 2017 2016 2015 and prior Revolving lines of credit Revolving lines of credit converted to term loans Total
December 31, 2020
Commercial
(1-7) Pass $ 1,259,949  $ 2,816,425  $ 543,438  $ 374,455  $ 192,060  $ 213,212  $ 3,020,353  $ 40,253  $ 8,460,145 
(8) Special mention 2,664  115,015  38,751  26,423  1,983  290  19,971  22,797  227,894 
(9) Substandard - accruing 15,773  15,854  18,068  32,241  15,297  19,639  22,932  1,641  141,445 
(9+) Non-accrual 1,820  8,360  377  1,292  802  15,157  3,836  452  32,096 
Total commercial $ 1,280,206  $ 2,955,654  $ 600,634  $ 434,411  $ 210,142  $ 248,298  $ 3,067,092  $ 65,143  $ 8,861,580 
Energy
(1-7) Pass $ —  $ 12,020  $ 7,598  $ 26,931  $ —  $ 23,750  $ 553,970  $ —  $ 624,269 
(8) Special mention —  —  —  —  —  13,358  76,866  —  90,224 
(9) Substandard - accruing —  —  —  —  —  —  —  —  — 
(9+) Non-accrual —  —  —  5,705  1,972  8,009  36,038  —  51,724 
Total energy $ —  $ 12,020  $ 7,598  $ 32,636  $ 1,972  $ 45,117  $ 666,874  $ —  $ 766,217 
Mortgage finance
(1-7) Pass $ 755,309  $ 1,063,641  $ 821,122  $ 483,436  $ 106,013  $ 5,849,888  $ —  $ —  $ 9,079,409 
(8) Special mention —  —  —  —  —  —  —  —  — 
(9) Substandard - accruing —  —  —  —  —  —  —  —  — 
(9+) Non-accrual —  —  —  —  —  —  —  —  — 
Total mortgage finance $ 755,309  $ 1,063,641  $ 821,122  $ 483,436  $ 106,013  $ 5,849,888  $ —  $ —  $ 9,079,409 
Real estate
CRE
(1-7) Pass $ 352,688  $ 892,831  $ 923,762  $ 444,587  $ 208,426  $ 451,283  $ 62,336  $ 61,133  $ 3,397,046 
(8) Special mention 3,475  11,170  6,485  88,633  11,153  17,623  —  1,247  139,786 
(9) Substandard - accruing —  327  47,708  11,601  32,645  30,766  —  15,940  138,987 
(9+) Non-accrual —  —  —  —  5,749  4,852  —  —  10,601 
RBF
(1-7) Pass 162,397  60,077  65,271  3,727  5,888  8,483  551,703  —  857,546 
(8) Special mention —  353  —  —  —  —  —  —  353 
(9) Substandard - accruing —  —  —  —  —  —  —  —  — 
(9+) Non-accrual —  —  —  —  —  —  —  —  — 
Other
(1-7) Pass 190,995  150,787  119,696  120,817  82,465  113,105  16,630  39,129  833,624 
(8) Special mention —  6,700  2,240  —  1,843  7,195  —  1,018  18,996 
(9) Substandard - accruing —  —  2,567  14,452  3,301  14,453  —  —  34,773 
(9+) Non-accrual —  —  —  927  5,524  6,403  —  14,496  27,350 
Secured by 1-4 family
(1-7) Pass 58,515  63,031  46,623  54,096  72,527  31,880  4,697  —  331,369 
(8) Special mention 646  —  —  635  —  1,768  —  —  3,049 
(9) Substandard - accruing —  —  —  817  —  109  —  —  926 
(9+) Non-accrual —  —  —  —  —  218  —  —  218 
Total real estate $ 768,716  $ 1,185,276  $ 1,214,352  $ 740,292  $ 429,521  $ 688,138  $ 635,366  $ 132,963  $ 5,794,624 
Total loans held for investment $ 2,804,231  $ 5,216,591  $ 2,643,706  $ 1,690,775  $ 747,648  $ 6,831,441  $ 4,369,332  $ 198,106  $ 24,501,830 

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The following table details activity in the allowance for credit losses on loans. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
(in thousands) Commercial Energy Mortgage
Finance 		Real
Estate 		Total
Six months ended June 30, 2021
Allowance for credit losses on loans:
Beginning balance $ 73,061  $ 84,064  $ 4,699  $ 92,791  $ 254,615 
Provision for credit losses on loans 12,035  (23,768) 352  (12,932) (24,313)
Charge-offs 3,863  6,418  —  1,192  11,473 
Recoveries 1,358  1,324  —  —  2,682 
Net charge-offs (recoveries) 2,505  5,094  —  1,192  8,791 
Ending balance $ 82,591  $ 55,202  $ 5,051  $ 78,667  $ 221,511 
Six months ended June 30, 2020
Allowance for credit losses on loans:
Beginning balance $ 102,254  $ 60,253  $ 2,265  $ 30,275  $ 195,047 
Impact of Current Expected Credit Loss (“CECL”) adoption (15,740) 24,154  2,031  (1,860) 8,585 
Provision for credit losses on loans 28,850  117,963  299  45,823  192,935 
Charge-offs 32,940  100,098  —  —  133,038 
Recoveries 770  423  —  —  1,193 
Net charge-offs (recoveries) 32,170  99,675  —  —  131,845 
Ending balance $ 83,194  $ 102,695  $ 4,595  $ 74,238  $ 264,722 
We recorded a $25.0 million negative provision for credit losses for the six months ended June 30, 2021, compared to a provision of $196.0 million for the same period in 2020. The decreased provision resulted primarily from decreases in charge-offs and non-accrual loans, as well as improvement in the economic outlook as the economy continues to recover from the impacts of the COVID-19 pandemic. We recorded $8.8 million in net charge-offs during the six months ended June 30, 2021, compared to $131.8 million during the same period in 2020. Criticized loans totaled $891.6 million at June 30, 2021, compared to $1.0 billion at June 30, 2020.
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. The following table summarizes collateral-dependent gross loans held for investment by collateral type as follows:
Collateral Type
(in thousands) Real Property Total
June 30, 2021
Real estate
Other $ 908  $ 908 
Total collateral-dependent loans held for investment
$ 908  $ 908 

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The table below provides an age analysis of our loans held for investment:
(in thousands) 30-59 Days
Past Due 		60-89 Days
Past Due 		90 Days or More Past Due(1) Total Past
Due 		Non-Accrual Loans(2) Current Total Non-Accrual With No Allowance
June 30, 2021
Commercial $ 16,215  $ 1,555  $ 7,607  $ 25,377  $ 35,356  $ 8,994,031  $ 9,054,764  $ 12,451 
Energy —  —  —  —  32,866  585,505  618,371  9,908 
Mortgage finance loans
—  —  —  —  —  8,772,799  8,772,799  — 
Real estate
CRE
—  —  —  —  206  3,487,397  3,487,603  — 
RBF
—  —  —  —  —  884,431  884,431  — 
Other
888  3,672  —  4,560  17,994  857,088  879,642  2,777 
Secured by 1-4 family
—  37  64  101  214  312,632  312,947  — 
Total loans held for investment
$ 17,103  $ 5,264  $ 7,671  $ 30,038  $ 86,636  $ 23,893,883  $ 24,010,557  $ 25,136 
(1)Loans past due 90 days and still accruing includes premium finance loans of $3.0 million. These loans are generally secured by obligations of insurance carriers to refund premiums on canceled insurance policies. The receipt of the refund of premiums from the insurance carriers can take 180 days or longer from the cancellation date.
(2)As of June 30, 2021 and December 31, 2020, none of our non-accrual loans were earning interest income on a cash basis. Additionally, no interest income was recognized on non-accrual loans for the six months ended June 30, 2021. Accrued interest of $468,000 was reversed during the six months ended June 30, 2021.
As of June 30, 2021 and December 31, 2020, we did not have any loans considered restructured that were not on non-accrual. Of the non-accrual loans at June 30, 2021 and December 31, 2020, $24.4 million and $45.4 million, respectively, met the criteria for restructured. These loans had no unfunded commitments at their respective balance sheet dates.
We did not have any loans that were restructured during the six months ended June 30, 2021 or 2020. As of June 30, 2021 and 2020, we did not have any loans that were restructured within the last 12 months that subsequently defaulted.
(5) Certain Transfers of Financial Assets
On April 20, 2021, we entered into an agreement to sell our portfolio of mortgage servicing rights (“MSRs”) and to transition the Mortgage Correspondent Aggregation (“MCA”) program to a third-party. The sale of MSRs was completed on June 1, 2021, and the transfer of servicing on the underlying mortgage loans is expected to occur on August 1, 2021. Transition activities began immediately following the execution of the agreement and are expected to be significantly complete by September 30, 2021.
The table below presents a reconciliation of the changes in loans held for sale:
Six Months Ended June 30,
(in thousands) 2021 2020
Outstanding balance(1):
Beginning balance $ 281,137  $ 2,568,362 
Loans purchased and originated 1,409,716  4,931,981 
Payments and loans sold (1,625,973) (7,052,942)
Ending balance 64,880  447,401 
Fair value adjustment:
Beginning balance 2,028  8,772 
Increase/(decrease) to fair value (3,161) (1,592)
Ending balance (1,133) 7,180 
Loans held for sale at fair value $ 63,747  $ 454,581 
(1)    Includes $44.1 million of loans held for sale that are carried at lower of cost or market as of December 31, 2020, as well as $5.8 million as of December 31, 2019.
No loans held for sale were on non-accrual as of June 30, 2021. At December 31, 2020 we had $7.0 million in non-accrual loans held for sale, comprised of one loan previously reported in loans held for investment that was transferred to loans held for sale as of December 31, 2020 and subsequently sold at carrying value. At June 30, 2021 and December 31, 2020, we had $2.7 million and $16.7 million, respectively, of loans held for sale that were 90 days or more past due. The $2.7 million in loans held for sale that were 90 days or more past due at June 30, 2021 was comprised of loans guaranteed by U.S. government agencies
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that were purchased out of Ginnie Mae securities and recorded as loans held for sale, at fair value, on the balance sheet. Interest on these past due loans accrues at the debenture rate guaranteed by the U.S. government. At December 31, 2020, $3.3 million of the $16.7 million in loans held for sale that were 90 days or more past due were loans guaranteed by U.S. government agencies that were purchased out of Ginnie Mae securities and recorded as loans held for sale, at fair value, on the balance sheet and $13.4 million were loans that, pursuant to Ginnie Mae servicing guidelines, we have the unilateral right, but not the obligation, to repurchase if defined delinquent loan criteria are met, and therefore must record as held for sale on our balance sheet regardless of whether the repurchase option has been exercised.
From time to time we retain the right to service the loans sold through the MCA program, creating MSRs which are recorded as assets on our consolidated balance sheets. A summary of MSR activity is as follows:
Six months ended June 30,
(in thousands) 2021 2020
MSRs:
Balance, beginning of year $ 131,391  $ 70,707 
Capitalized servicing rights 15,835  45,397 
Amortization (18,629) (14,032)
Sales (127,281) — 
Balance, end of period $ 1,316  $ 102,072 
Valuation allowance:
Balance, beginning of year $ 25,967  $ 5,803 
Change in valuation allowance (25,967) 20,818 
Balance, end of period $ —  $ 26,621 
MSRs, net $ 1,316  $ 75,451 
MSRs, fair value $ 1,326  $ 75,451 
At June 30, 2021 and December 31, 2020, our portfolio of MSRs was comprised of residential mortgage loans with outstanding principal balances of $129.3 million and $13.8 billion, respectively.
In connection with the servicing of these loans, we hold deposits in the name of investors representing escrow funds for taxes and insurance, as well as collections in transit to such investors. These escrow funds are segregated and held in separate non-interest-bearing deposit accounts at the Bank. These deposits, included in total non-interest-bearing deposits on the consolidated balance sheets, were insignificant at June 30, 2021 and $152.6 million at December 31, 2020.
To mitigate exposure to potential impairment charges from adverse changes in the fair value of our MSR portfolio, we enter into certain derivative contracts, as is further discussed in Note 11 - Derivative Financial Instruments. The following summarizes the assumptions used by management to determine the fair value of MSRs:
June 30, 2021 December 31, 2020
Average discount rates 9.00  % 9.09  %
Expected prepayment speeds 9.48  % 16.37  %
Weighted-average life, in years 7.1 4.9
A sensitivity analysis of changes in the fair value of our MSR portfolio resulting from certain key assumptions is presented in the following table:
(in thousands) June 30, 2021 December 31, 2020
50 bp adverse change in prepayment speed $ (162) $ (12,203)
100 bp adverse change in prepayment speed (285) (16,062)
These sensitivities are hypothetical and actual results may differ materially due to a number of factors. The effect on fair value of a 10% variation in assumptions generally cannot be determined with confidence because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may be correlated with changes in other factors, which could impact the sensitivity analysis as presented.
In conjunction with the sale and securitization of loans held for sale, we may be exposed to liability resulting from repurchase, indemnification and make-whole agreements. Our estimated exposure related to those agreements totaled $648,000 and $621,000 at June 30, 2021 and December 31, 2020, respectively, and is recorded in other liabilities on the consolidated balance sheets. $47,000 in make-whole obligation payments were made during the six months ended June 30, 2021 compared to $4.5 million during the six months ended June 30, 2020.
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(6) Long-term Debt
From November 2002 to September 2006 various Texas Capital Statutory Trusts were created and subsequently issued floating rate trust preferred securities in various private offerings totaling $113.4 million. For the three and six months ended June 30, 2021, the combined weighted-average interest rate on the trust preferred subordinated debentures was 2.14% and 2.17%, respectively, compared to 3.02% and 3.41%, respectively, for the same periods in 2020. The details of the trust preferred subordinated debentures as of June 30, 2021 are summarized below:
(dollar amounts in thousands) Texas Capital
Bancshares
Statutory Trust I 		Texas Capital
Statutory
Trust II 		Texas Capital
Statutory
Trust III 		Texas Capital
Statutory
Trust IV 		Texas Capital
Statutory Trust V
Date issued November 19, 2002 April 10, 2003 October 6, 2005 April 28, 2006 September 29, 2006
Trust preferred securities issued $10,310 $10,310 $25,774 $25,774 $41,238
Floating or fixed rate securities Floating Floating Floating Floating Floating
Interest rate on subordinated debentures
3 month LIBOR
 + 3.35%
3 month LIBOR
 + 3.25%
3 month LIBOR
 + 1.51%
3 month LIBOR
 + 1.60%
3 month LIBOR
 + 1.71%
Maturity date November 2032 April 2033 December 2035 June 2036 December 2036
On September 21, 2012, the Company issued $111.0 million of subordinated notes. The notes mature in September 2042 and bear interest at a rate of 6.50% per annum, payable quarterly. The indenture governing the notes contains customary covenants and restrictions. These notes were redeemed on June 21, 2021.
On January 31, 2014, the Bank issued $175.0 million of subordinated notes in an offering to institutional investors exempt from registration under Section 3(a)(2) of the Securities Act of 1933 and 12 C.F.R. Part 16. The notes mature in January 2026 and bear interest at a rate of 5.25% per annum, payable semi-annually. The notes are unsecured and are subordinate to the Bank’s obligations to its depositors, its obligations under banker’s acceptances and letters of credit, certain obligations to Federal Reserve Banks and the FDIC and the Bank’s obligations to its other creditors, except any obligations which expressly rank on a parity with or junior to the notes. The notes qualify as Tier 2 capital for regulatory capital purposes, subject to applicable limitations. At the beginning of each of the last five years of the life of the notes, 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 2021, the amount of the notes that qualify as Tier 2 capital has been reduced by 20%.
On March 9, 2021, the Bank issued and sold $275 million of senior unsecured credit-linked notes. The notes mature on September 30, 2024, and accrue interest at a rate equal to the higher of LIBOR plus 4.50% or 4.25%, payable quarterly on each of March 31, June 30, September 30 and December 31. For the three and six months ended June 30, 2021, the weighted-average interest rate on the notes was 5.62% and 5.60%, respectively. The notes effectively transfer the risk of first losses on a $2.2 billion reference pool of the Bank’s mortgage warehouse loans to the purchasers of the notes in an amount up to $275.0 million. In the event of a failure to pay by the relevant mortgage originator, insolvency of the relevant mortgage originator, or restructuring of such loans that results in a loss on a loan included in the reference pool, the principal balance of the notes will be reduced to the extent of such loss and recognized as a debt extinguishment gain within non-interest income on our consolidated statements of income and other comprehensive income. The purchasers of the notes have the option to acquire the underlying mortgage loan collateralizing the reference warehouse line of credit in lieu of a principal reduction on the notes. Losses on our warehouse lines of credit have not generally been significant. The notes are recorded in long-term debt on our consolidated balance sheets and accounted for at amortized cost. The fair value of the credit-linked note is based on observable inputs, when available, and as such are categorized as Level 2 liabilities. Because the notes are variable rate debt, the fair value approximates carrying value.
On May 6, 2021, the Company issued and sold $375.0 million of subordinated notes. The notes mature in May 2031 and bear interest at a fixed rate of 4.00% per annum, payable semi-annually. Net proceeds from the transaction were $370.7 million providing additional capital to be used for general corporate purposes. A portion of the proceeds were also used to redeem the Company’s 6.50% fixed rate subordinated notes, as is described above. The indenture governing the notes contains customary covenants and restrictions.
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(7) Financial Instruments with Off-Balance Sheet Risk
The table below presents our financial instruments with off-balance sheet risk, as well as the activity in the allowance for off-balance sheet credit losses related to those financial instruments. This allowance is recorded in other liabilities on the consolidated balance sheets.
Three months ended June 30, Six months ended June 30,
(in thousands) 2021 2020 2021 2020
Beginning balance of allowance for off-balance sheet credit losses
$ 17,147  $ 10,174  $ 17,434  $ 8,640 
Impact of CECL adoption
—  —  —  563 
Provision for off-balance sheet credit losses
(400) 2,094  (687) 3,065 
Ending balance of allowance for off-balance sheet credit losses
$ 16,747  $ 12,268  $ 16,747  $ 12,268 
(in thousands) June 30, 2021 December 31, 2020
Commitments to extend credit - period end balance $ 8,228,992  $ 8,530,453 
Standby letters of credit - period end balance $ 328,726  $ 268,894 
(8) Regulatory Restrictions
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The Basel III regulatory capital framework (the “Basel III Capital Rules”) adopted by U.S. federal regulatory authorities, among other things, (i) establishes the capital measure called “Common Equity Tier 1” (“CET1”), (ii) specifies that Tier 1 capital consist of CET1 and “Additional Tier 1 Capital” instruments meeting stated requirements, (iii) requires that most deductions/adjustments to regulatory capital measures be made to CET1 and not to other components of capital and (iv) defines the scope of the deductions/adjustments to the capital measures.
Additionally, the Basel III Capital Rules require that we maintain a 2.5% capital conservation buffer with respect to each of CET1, Tier 1 and total capital to risk-weighted assets, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers.
In February 2019, the federal bank regulatory agencies issued a final rule (the “2019 CECL Rule”) that revised certain capital regulations to account for changes to credit loss accounting under GAAP. The 2019 CECL Rule included a transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of adopting the new accounting standard related to the measurement of current expected credit losses on their regulatory capital ratios (three-year CECL transition option). In March 2020, the federal bank regulatory agencies issued an interim final rule that maintains the three-year CECL 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 CECL transition option). We adopted CECL on January 1, 2020 and have elected to utilize the five-year CECL transition option.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of CET1, Tier 1 and total capital to risk-weighted assets and of Tier 1 capital to average assets, each as defined in the regulations. Management believes, as of June 30, 2021, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
Financial institutions are categorized as well capitalized or adequately capitalized, based on minimum total risk-based, Tier 1 risk-based, CET1 and Tier 1 leverage ratios. As shown in the table below, the Company’s capital ratios exceeded the regulatory definition of adequately capitalized as of June 30, 2021 and December 31, 2020. Based upon the information in its most recently filed call report, the Bank met the capital ratios necessary to be well capitalized. The regulatory authorities can apply changes in classification of assets and such changes may retroactively subject the Company to changes in capital ratios. Any
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such change could reduce one or more capital ratios below well-capitalized status. In addition, a change may result in imposition of additional assessments by the FDIC or could result in regulatory actions that could have a material effect on our condition and results of operations.
Because our Bank had less than $15.0 billion in total consolidated assets as of December 31, 2009, we are allowed to continue to classify our trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1 capital.
The table below summarizes our actual and required capital ratios under the Basel III Capital Rules. The ratios presented below include the effects of our election to utilize the five-year CECL transition described above.
Actual Minimum Capital Required Capital Required to be Well Capitalized
(dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio
June 30, 2021
CET1
Company $ 2,835,896  10.53  % $ 1,885,230  7.00  % N/A N/A
Bank 2,897,617  10.76  % 1,884,671  7.00  % 1,750,052  6.50  %
Total capital (to risk-weighted assets)
Company 3,978,147  14.77  % 2,827,845  10.50  % N/A N/A
Bank 3,469,176  12.89  % 2,827,006  10.50  % 2,692,387  10.00  %
Tier 1 capital (to risk-weighted assets)
Company 3,245,896  12.05  % 2,289,208  8.50  % N/A N/A
Bank 3,057,617  11.36  % 2,288,529  8.50  % 2,153,910  8.00  %
Tier 1 capital (to average assets)(1)
Company 3,245,896  8.38  % 1,548,586  4.00  % N/A N/A
Bank 3,057,617  7.90  % 1,548,104  4.00  % 1,935,130  5.00  %
December 31, 2020
CET1
Company $ 2,708,150  9.35  % $ 2,026,400  7.00  % N/A N/A
Bank 2,744,211  9.48  % 2,025,417  7.00  % 1,880,745  6.50  %
Total capital (to risk-weighted assets)
Company 3,498,737  12.08  % 3,039,600  10.50  % N/A N/A
Bank 3,375,983  11.67  % 3,038,126  10.50  % 2,893,453  10.00  %
Tier 1 capital (to risk-weighted assets)
Company 2,968,150  10.25  % 2,460,628  8.50  % N/A N/A
Bank 2,904,211  10.04  % 2,459,435  8.50  % 2,314,763  8.00  %
Tier 1 capital (to average assets)(1)
Company 2,968,150  7.52  % 1,578,651  4.00  % N/A N/A
Bank 2,904,211  7.36  % 1,578,207  4.00  % 1,972,758  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.
Our mortgage finance loan volumes can increase significantly at month-end, causing a meaningful difference between ending and average balances for any period. As CET1, Tier 1 and total capital ratios are calculated using quarter-end risk-weighted assets and our mortgage finance loans are 100% risk-weighted (excluding MCA loans held for sale, which receive lower risk weights), the period-end fluctuation in these balances can significantly impact our reported ratios. Due to the actual risk profile and liquidity of this asset class, we do not believe that the period-end balance is representative of risk characteristics that would justify higher allocations, and while we manage capital allocated to mortgage finance loans based on changing trends in average balances, we do monitor our capital allocation to confirm that all capital levels remain above well-capitalized levels. To better align the actual risk profile of this asset class to its required capital allocation, the Bank issued and sold senior unsecured credit-linked notes in the first quarter of 2021 that effectively transfer the risk of first losses on a $2.2 billion reference pool of the Bank's mortgage warehouse loans to the purchasers of the notes in an amount up to $275.0 million. The issuance of these notes decreases the required risk-weight on the $2.2 billion reference pool, which significantly improves our reported ratios.
Dividends that may be paid by banks are routinely restricted by various regulatory authorities. The amount that can be paid in any calendar year without prior approval of our Bank’s regulatory agencies cannot exceed the lesser of the net profits (as defined) for that year plus the net profits for the preceding two calendar years, or retained earnings. The Basel III Capital Rules further limit the amount of dividends that may be paid by our Bank. No dividends were declared or paid on our common stock during the six months ended June 30, 2021, or during the year ended December 31, 2020.
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(9) Stock-based Compensation
We have long-term incentive plans under which stock-based compensation awards are granted to employees and directors by the board of directors, or its designated committee. Grants are subject to vesting requirements and may include, among other things, nonqualified stock options, stock appreciation rights (“SARs”), restricted stock units (“RSUs”), restricted stock and performance units, or any combination thereof. There are 2,550,000 total shares authorized for grant under the plans.
The table below summarizes our stock-based compensation expense:
  Three months ended June 30, Six months ended June 30,
(in thousands) 2021 2020 2021 2020
Stock-settled awards:
RSUs $ 8,315  $ 3,313  $ 13,775  $ 6,532 
Restricted stock —  9  1  17 
Cash-settled units 121  338  1,028  480 
Total $ 8,436  $ 3,660  $ 14,804  $ 7,029 
 
(in thousands except period data) June 30, 2021
Unrecognized compensation expense related to unvested stock-settled awards $ 45,429 
Weighted average period over which expense is expected to be recognized, in years 2.3
(10) Fair Value Disclosures
We determine the fair market values of our assets and liabilities measured at fair value on a recurring and nonrecurring basis using the fair value hierarchy as prescribed in ASC 820. See Note 1 - Operations and Summary of Significant Accounting Policies in our 2020 Form 10-K for information regarding the fair value hierarchy and a description of the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial instruments.
Assets and liabilities measured at fair value are as follows:
  Fair Value Measurements Using
(in thousands) Level 1 Level 2 Level 3
June 30, 2021
Available-for-sale debt securities:(1)
U.S. government agency securities $ —  $ 122,415  $ — 
Residential mortgage-backed securities —  3,437,146  — 
Tax-exempt asset-backed securities —  —  185,954 
CRT securities —  —  11,713 
Equity securities(1)(2) 33,906  7,141  — 
Loans held for sale(3) —  55,520  8,227 
Loans held for investment(4) —  —  908 
Derivative assets(5) —  64,349  — 
Derivative liabilities(5) —  64,347  — 
Non-qualified deferred compensation plan liabilities(6) 29,552  —  — 
December 31, 2020
Available-for-sale debt securities:(1)
U.S. government agency securities $ —  $ 123,589  $ — 
Residential mortgage-backed securities —  2,828,956  — 
Tax-exempt asset-backed securities —  —  199,176 
CRT securities —  —  11,417 
Equity securities(1)(2) 26,593  7,239  — 
Loans held for sale(3) —  232,147  6,933 
Loans held for investment(4) —  —  21,209 
Derivative assets(5) —  102,720  — 
Derivative liabilities(5) —  99,255  — 
Non-qualified deferred compensation plan liabilities(6) 26,593  —  — 
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(1)Securities are measured at fair value on a recurring basis, generally monthly, except for tax-exempt asset-backed securities and CRT securities which are measured quarterly.
(2)Equity securities consist of investments that qualify for consideration under the regulations implementing the Community Reinvestment Act and investments related to our non-qualified deferred compensation plan.
(3)Loans held for sale purchased through the MCA program are measured at fair value on a recurring basis, generally monthly.
(4)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.
(5)Derivative assets and liabilities are measured at fair value on a recurring basis, generally quarterly.
(6)Non-qualified deferred compensation plan liabilities represent the fair value of the obligation to the employee, which generally corresponds to the fair value of the invested assets, and are measured at fair value on a recurring basis, generally monthly.
Level 3 Valuations
The following table presents a reconciliation of the Level 3 fair value category measured at fair value on a recurring basis:
Net Realized/Unrealized Gains (Losses)
(in thousands) Balance at Beginning of Period Purchases / Additions Sales / Reductions Realized Unrealized Balance at End of Period
Three months ended June 30, 2021
Available-for-sale debt securities:(1)
Tax-exempt asset-backed securities $ 181,566  $ —  $ (142) $ —  $ 4,530  $ 185,954 
CRT securities 11,465  —  —  —  248  11,713 
Loans held for sale(2) 7,275  1,148  (246) —  50  8,227 
Three months ended June 30, 2020
Available-for-sale debt securities:(1)
Tax-exempt asset-backed securities $ 191,474  $ 8,470  $ (132) $ —  $ (8,395) $ 191,417 
CRT securities 8,015  —  —  —  2,938  10,953 
Loans held for sale(2) 6,694  107  (780) 88  50  6,159 
Six months ended June 30, 2021
Available-for-sale debt securities:(1)
Tax-exempt asset-backed securities $ 199,176  $ —  $ (11,513) $ —  $ (1,709) $ 185,954 
CRT securities 11,417  —  —  —  296  11,713 
Loans held for sale(2) 6,933  1,685  (525) 5  129  8,227 
Six months ended June 30, 2020
Available-for-sale debt securities:(1)
Tax-exempt asset-backed securities $ 197,027  $ 8,470  $ (4,485) $ —  $ (9,595) $ 191,417 
CRT securities 11,964  —  —  —  (1,011) 10,953 
Loans held for sale(2) 7,043  320  (1,464) 116  144  6,159 
(1)Unrealized gains/(losses) on available-for-sale debt securities are recorded in AOCI and relate to assets that remain outstanding at period end. Realized gains/(losses) are recorded in other non-interest income.
(2)Realized and unrealized gains/(losses) on loans held for sale are recorded in gain/(loss) on sale of loans held for sale.
Tax-exempt asset-backed securities
The fair value of tax-exempt asset-backed securities is based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs, the most significant of which were a discount rate and a weighted-average life. At June 30, 2021, the discount rates utilized ranged from 2.29% to 2.37% and the weighted-average life ranged from 5.0 to 5.1 years. On a combined amortized cost weighted-average basis a discount rate of 2.33% and weighted-average life of 5.0 years were utilized to determine the fair value of these securities at June 30, 2021. At December 31, 2020, the combined weighted-average discount rate and weighted-average life utilized were 2.49% and 5.5 years, respectively.
CRT securities
The fair value of CRT securities is based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs, the most significant of which were a discount rate and a weighted-average life. At June 30, 2021, the discount rates utilized ranged from 3.09% to 7.97% and the weighted-average life ranged from 5.4 years to 10.0 years. On a combined amortized cost
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weighted-average basis a discount rate of 4.72% and a weighted-average life of 6.9 years were utilized to determine the fair value of these securities at June 30, 2021. At December 31, 2020, the combined weighted-average discount rate and combined weighted-average life utilized were 4.36% and 7.5 years, respectively.
Loans held for sale
The fair value of loans held for sale using Level 3 inputs include loans that cannot be sold through normal sale channels and thus require significant management judgment or estimation when determining the fair value. The fair value of such loans is generally based upon quoted prices of comparable loans with a liquidity discount applied. At June 30, 2021, the fair value of these loans was calculated using a weighted-average discounted price of 99.2%, compared to 97.2% at December 31, 2020.
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 $908,000 fair value of loans held for investment at June 30, 2021 reported above includes loans with carrying values that, based on collateral valuations utilizing Level 3 inputs, equate to their fair value. The $21.2 million fair value of loans held for investment at December 31, 2020 reported above includes loans with a carrying value of $25.3 million that were reduced by specific allowance allocations totaling $4.1 million based on collateral valuations utilizing Level 3 inputs.
Fair Value of Financial Instruments
A summary of the carrying amounts and estimated fair values of financial instruments is as follows:
June 30, 2021 December 31, 2020
(in thousands) Carrying
Amount 		Estimated
Fair Value 		Carrying
Amount 		Estimated
Fair Value
Financial assets:
   Level 1 inputs:
Cash and cash equivalents $ 6,971,199  $ 6,971,199  $ 9,206,380  $ 9,206,380 
Investment securities 33,906  33,906  26,593  26,593 
   Level 2 inputs:
Investment securities 3,566,702  3,566,702  2,959,784  2,959,784 
Loans held for sale 55,520  55,520  232,147  232,147 
Derivative assets 64,349  64,349  102,720  102,720 
   Level 3 inputs:
Investment securities 197,667  197,667  210,593  210,593 
Loans held for sale 8,227  8,227  6,933  6,933 
Loans held for investment, net 23,719,853  23,775,475  24,176,245  24,233,185 
Financial liabilities:
   Level 2 inputs:
Federal funds purchased and repurchase agreements 14,481  14,481  111,751  111,751 
Other borrowings 2,000,000  2,000,000  3,000,000  3,000,000 
Long-term debt 927,386  952,792  395,896  405,110 
Derivative liabilities 64,347  64,347  99,255  99,255 
   Level 3 inputs:
Deposits 28,839,563  28,839,971  30,996,589  30,997,980 
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(11) Derivative Financial Instruments
The notional amounts and estimated fair values of derivative positions outstanding are presented in the following table:
  June 30, 2021 December 31, 2020
Estimated Fair Value Estimated Fair Value
(in thousands) Notional
Amount 		Asset Derivative Liability Derivative Notional
Amount 		Asset Derivative Liability Derivative
Non-hedging derivatives:
Financial institution counterparties:
Commercial loan/lease interest rate swaps
$ 1,902,259  $ 948  $ 64,195  $ 1,922,956  $ 71  $ 96,246 
Commercial loan/lease interest rate caps
217,739  65  —  565,634  34  — 
Foreign currency forward contracts
5,015  31  —  6,667  214  78 
Customer counterparties:
Commercial loan/lease interest rate swaps
1,902,259  64,195  948  1,922,956  96,246  71 
Commercial loan/lease interest rate caps
217,739  —  65  565,634  —  34 
Foreign currency forward contracts
5,015  —  31  6,667  78  214 
Economic hedging derivatives to hedge:
Residential MSRs:
Interest rate swap futures 3,000  19  4  320,000  474  — 
Forward sale commitments 1,000  3  —  155,000  551  — 
Loans held for sale:
Loan purchase commitments 2,800  36  —  332,145  5,123  8 
Forward sale commitments 20,000  —  52  485,326  —  2,675 
Gross derivatives 65,297  65,295  102,791  99,326 
Offsetting derivative assets/liabilities (948) (948) (71) (71)
Net derivatives included in the consolidated balance sheets
$ 64,349  $ 64,347  $ 102,720  $ 99,255 
The weighted-average received and paid interest rates for interest rate swaps outstanding were as follows:
   June 30, 2021
Weighted-Average Interest  Rate 		December 31, 2020 Weighted-Average Interest Rate
   Received Paid Received Paid
Non-hedging interest rate swaps 2.83  % 1.20  % 3.14  % 1.38  %
The weighted-average strike rate for outstanding interest rate caps was 2.68% at June 30, 2021 and 3.41% at December 31, 2020.
Our credit exposure on derivative instruments is limited to the net favorable value and interest payments by each counterparty. In some cases collateral may be required from the counterparties involved if the net value of the derivative instruments exceeds a nominal amount. Our credit exposure associated with these instruments, net of any collateral pledged, was approximately $64.3 million at June 30, 2021, and approximately $102.7 million at December 31, 2020. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap and cap values, as well as for changes in the value of forward sale commitments. At June 30, 2021, we had $72.4 million in cash collateral pledged for these derivatives, of which $70.2 million was included in interest-bearing deposits in other banks and $2.2 million was included in accrued interest receivable and other assets. At December 31, 2020, we had $108.3 million in cash collateral pledged for these derivatives, of which $104.4 million was included in interest-bearing deposits in other banks and $3.9 million was included in accrued interest receivable and other assets.
We also enter into credit risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are either a participant or a lead bank. The risk participation agreements entered into by us as a participant bank provide credit protection to the financial institution counterparty should the borrower fail to perform on its interest rate derivative contract with that financial institution. We are party to nine risk participation agreements where we are a participant bank with a notional amount of $118.1 million at June 30, 2021, compared to nine risk participation agreements having a notional amount of $119.5 million at December 31, 2020. The maximum estimated exposure to these agreements, assuming 100% default by all obligors, was approximately $4.3 million at June 30, 2021 and $6.0 million at December 31, 2020. The fair value of these exposures was insignificant to the consolidated financial statements at both June 30, 2021 and December 31, 2020. Risk participation agreements entered into by us as the lead bank provide credit protection to us should the borrower fail to perform on its interest rate derivative contract with us. We are party to 15 risk participation agreements where we are the lead
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bank having a notional amount of $160.1 million at June 30, 2021, compared to 16 agreements having a notional amount of $165.9 million at December 31, 2020.
(12) Material Transactions Affecting Stockholders' Equity
On March 3, 2021, we completed an issuance of 5.75% fixed rate non-cumulative perpetual preferred stock, Series B, with a liquidation preference of $1,000 per share (equivalent to $25 per depositary share) (the “Series B Preferred Stock”) and an issuance and sale of 12,000,000 depositary shares, each representing a 1/40th interest in a share of the Series B Preferred Stock. Dividends on the Series B Preferred Stock are not cumulative and will be paid when declared by our board of directors to the extent that we have legally available funds to pay dividends. If declared, dividends will accrue and be payable quarterly, in arrears, on the liquidation preference amount, on a non-cumulative basis, at a rate of 5.75% per annum. Holders of preferred stock will not have voting rights, except with respect to certain changes in the terms of the preferred stock, certain dividend non-payments and as otherwise required by applicable law. Net proceeds from the sale totaled $289.7 million, providing additional capital to be used for general corporate purposes. A portion of the proceeds were also used to redeem, in whole, our 6.50% non-cumulative perpetual preferred stock Series A, par value $0.01 per share, in accordance with its terms.
On June 15, 2021 we redeemed all 6,000,000 outstanding shares of our 6.50% non-cumulative perpetual preferred stock, Series A.
(13) New Accounting Standards
ASU 2020-04, “Reference Rate Reform (Topic 848)” (“ASU 2020-04”) provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered “minor” so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. We anticipate this ASU will simplify any modifications we execute between the selected start date (yet to be determined) and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than extinguishment of the old contract resulting in writing off unamortized fees/costs. We are evaluating the impacts of this ASU and have not yet determined whether LIBOR transition and this ASU will have material effects on our business operations and consolidated financial statements.
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ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition as of June 30, 2021 and December 31, 2020 and results of operations for the three and six month periods ended June 30, 2021 and June 30, 2020 should be read in conjunction with our consolidated financial statements and the related notes to the consolidated financial statements for the year ended December 31, 2020, and the other information included in our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”). Certain risks, uncertainties and other factors, including those set forth under “Risk Factors” in Part I, Item 1A of the 2020 Form 10-K may cause actual results to differ materially from the results discussed in the forward-looking statements appearing in this discussion and analysis.
Forward-Looking Statements
Certain statements and financial analysis contained in this report that are not historical facts may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our beliefs, assumptions and expectations of our future performance taking into account all information available to us at the time such statements are made. Forward-looking statements may often be identified by the use of words such as “expects,” “estimates,” “anticipates,” “plans,” “goals,” “objectives,” “intends,” “seeks,” “likely,” “should,” “may” “could” and other similar expressions.
Forward-looking statements may include, among other things and without limitation, statements about the credit quality of our loan portfolio, general economic conditions in the United States and in our markets, including the continued impact on our customers from volatility in oil and gas prices, the material risks and uncertainties for the U.S. and world economies and for our business, resulting from the COVID-19 pandemic, expectations regarding rates of default and loan losses, volatility in the mortgage industry, our business strategies and our expectations about future financial performance, future growth and earnings, the appropriateness of our allowance for credit losses and provision for credit losses, the impact of changing regulatory requirements and legislative changes on our business, increased competition, interest rate risk, new lines of business, new product or service offerings and new technologies.
Forward-looking statements are subject to various risks and uncertainties, which 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. Important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, the following:
•Deterioration of the credit quality of our loan portfolio or declines in the value of collateral related to external factors such as commodity prices, real estate values or interest rates, increased default rates and loan losses or adverse changes in the industry concentrations of our loan portfolio attributed to changes in the U.S. economy in general or the Texas economy specifically.
•The adverse effect of the COVID-19 pandemic on us and our customers, employees and third-party service providers; the material adverse impacts of the COVID-19 pandemic on our business, financial position, operations and prospects. It is not possible to accurately predict the extent, severity or duration of the COVID-19 pandemic or to what level and when normal economic and operational conditions will return. This also includes the incurrence of material costs and liabilities associated with legal and regulatory proceedings, investigations, inquiries and related matters with respect to the financial services industry, including those directly involving us or our Bank and arising from our participation in government stimulus programs responding to the economic impact of the COVID-19 pandemic.
•Operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent. This also includes the failure to manage information systems risk or to prevent cyber-incidents against us, our customers or our third-party vendors, or to manage risks from failures, disruptions or security breaches affecting us, our customers or our third-party vendors, which risks have been materially enhanced by our increased reliance on technology to support associates working outside our offices.
•The costs and effects of cyber-incidents or other failures, disruptions or security breaches of our systems or those our third-party providers.
•Changes in interest rates, which may affect our net income and other future cash flows, or the market value of our assets, including the market value of investment securities.
•Changes in the value of commercial and residential real estate securing our loans or in the demand for credit to support the purchase and ownership of such assets.
•Changing economic conditions or other developments adversely affecting our commercial, entrepreneurial and professional customers.
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•Adverse economic or market conditions and other factors in Texas, the United States or internationally that could affect the credit quality of our loan portfolio or our operating performance, including any conditions or factors affecting our middle market customers and their ability to continue to meet their loan obligations.
•The failure to correctly assess and model the assumptions supporting our allowance for credit losses, causing it to become inadequate in the event of deteriorations in loan quality and increases in charge-offs, or increases or decreases to our allowance for credit losses as a result of the implementation of CECL.
•Changes in the U.S. economy in general or the Texas economy specifically resulting in deterioration of credit quality, increases in non-performing assets or charge-offs or reduced demand for credit or other financial services we offer, including the effects from declines in the level of drilling and production related to volatility in oil and gas prices and the effects of the COVID-19 pandemic.
•Adverse changes in economic or market conditions, in Texas, the United States or internationally, that could affect the credit quality of our loan portfolio or our operating performance.
•Unexpected market conditions, regulatory changes or changes in our credit ratings that could, among other things, cause access to capital market transactions and other sources of funding to become more difficult to obtain on terms and conditions that are acceptable to us.
•The inadequacy of our available funds to meet our deposit, debt and other obligations as they become due, or our failure to maintain our capital ratios as a result of adverse changes in our operating performance or financial condition, or changes in applicable regulations or regulator interpretation of regulations impacting our business or the characterization or risk weight of our assets.
•The failure to effectively balance our funding sources with cash demands by depositors and borrowers.
•Material failures of our accounting estimates and risk management processes based on management judgment, or the supporting analytical and forecasting models.
•Failure of our risk management strategies and procedures, including failure or circumvention of our controls.
•The failure to effectively manage our interest rate risk resulting from unexpectedly large or sudden changes in interest rates, maturity imbalances in our assets and liabilities, potential adverse effects to our borrowers including their inability to repay loans with increased interest rates and the impact to our net interest income from the increasing cost of interest-bearing deposits.
•The failure of our enterprise risk management framework, our compliance program, or our corporate governance and supervisory oversight functions to timely identify and address emerging risks adequately, which may result in unexpected losses.
•Uncertainty regarding the upcoming transition away from the London Interbank Offered Rate, or LIBOR, toward new interest rate benchmarks and our ability to successfully implement any new interest rate benchmarks.
•Legislative and regulatory changes imposing further restrictions and costs on our business, a failure to maintain well capitalized or well managed status or any regulatory enforcement actions brought against us and uncertainty related to future implementation and enforcement of regulatory requirements resulting from the current political environment.
•The effect of changes in laws, regulations, policies and guidelines (including, among others, laws, regulations, policies and guidelines concerning taxes, banking, accounting, securities and monetary and fiscal policies) with which we and our subsidiaries must generally comply, including those promulgated by the U.S. government, U.S. Department of Treasury and the Federal Reserve and any changes made by the new Biden Administration and the effects of any such changes on our business and results of operations.
•The failure to successfully execute our business strategy, which may include expanding into new markets, developing and launching new lines of business or new products and services within the expected timeframes and budgets, completing planned merger, acquisition or sale transactions or to successfully manage the risks related to the development and implementation of these new businesses, products or services.
•The failure to identify, attract and retain key personnel or the loss of key individuals or groups of employees.
•Increased or more effective competition from banks and other financial service providers in our markets.
•Structural changes in the markets for origination, sale and servicing of residential mortgages.
•Uncertainty in the pricing of mortgage loans that we purchase, and later sell or securitize, as well as competition for the mortgage servicing rights related to these loans and related interest rate risk or price risk resulting from retaining mortgage servicing rights, and the potential effects of higher interest rates on our Mortgage Correspondent Aggregation loan volumes.
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•Credit risk resulting from our exposure to counterparties.
•An increase in the incidence or severity of fraud, illegal payments, security breaches and other illegal acts impacting our subsidiary, Texas Capital Bank, National Association (the “Bank”) and our customers.
•The failure to maintain adequate regulatory capital to support our business, including the unavailability of funds obtained from borrowing or capital transactions or from our Bank to fund our obligations.
•Environmental liability associated with properties related to our lending activities.
•Severe weather, natural disasters, acts of war or terrorism and other external events.
Actual outcomes and results may differ materially from what is expressed in our forward-looking statements and from our historical financial results due to the factors discussed above or elsewhere in this report or disclosed in our other U.S. Securities and Exchange Commission (“SEC”) filings. Forward-looking statements included herein speak only as of the date hereof and should not be relied upon as representing our expectations or beliefs as of any date subsequent to the date of this report. Except as required by law, we undertake no obligation to revise any forward-looking statements contained in this report, whether as a result of new information, future events or otherwise. The factors discussed herein are not intended to be a complete summary of all risks and uncertainties that may affect our businesses. Though we strive to monitor and mitigate risk, we cannot anticipate all potential economic, operational and financial developments that may adversely impact our operations and our financial results. Forward-looking statements should not be viewed as predictions and should not be the primary basis upon which investors evaluate an investment in our securities.
Overview of Our Business Operations
We commenced our banking operations in December 1998. An important aspect of our growth strategy has been our ability to effectively service and manage a large number of loans and deposit accounts in multiple markets in Texas, as well as several lines of business serving a regional or national clientele of commercial borrowers. Accordingly, we have created an operations infrastructure sufficient to support our lending and banking operations that we continue to supplement and optimize as needed to serve a larger customer base and specialized industries.
Significant transactions affecting our financial statements during the three months ended June 30, 2021 included:
•Sale of our portfolio of mortgage servicing rights (“MSRs”) and transition of the Mortgage Correspondent Aggregation (“MCA”) program to a third-party. For additional information, see Note 5 - Certain Transfers of Financial Assets in the accompanying notes to the consolidated financial statements included elsewhere in this report;
•Issuance and sale of $375.0 million of 4.00% fixed-to-fixed rate subordinated notes due 2031. For additional information, see Note 6 - Long-Term Debt in the accompanying notes to the consolidated financial statements included elsewhere in this report;
•Redemption of our 6.50% non-cumulative perpetual preferred stock, Series A (the “Series A Preferred Stock”). For additional information, see Note 12 - Material Transactions Affecting Stockholders' Equity in the accompanying notes to the consolidated financial statements included elsewhere in this report;
•Redemption of our 6.50% subordinated notes due 2042. For additional information, see Note 6 - Long-Term Debt in the accompanying notes to the consolidated financial statements included elsewhere in this report; and
•In May 2021 the Bank, applied to the Texas Department of Banking to convert from a national association to a Texas state-chartered bank. If approved and the conversion is completed, the Texas Department of Banking will be the Bank's primary regulator, the Federal Deposit Insurance Corporation will be the Bank's primary federal regulator and the Federal Reserve will continue to be the Company's primary federal regulator. The application is currently being reviewed.
Impact of COVID-19 Pandemic
The COVID-19 pandemic and related restrictive measures taken by governments, businesses and individuals have caused and continue to cause unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve. As the restrictive measures began to be eased during the latter part of 2020 and continue to be eased during 2021, the U.S. economy has begun to improve from 2020, and with the availability and distribution of COVID-19 vaccines, we anticipate continued improvements in commercial and consumer activity and the U.S. economy. During the first quarter of 2021, the governor of Texas removed all restrictions initially set in place which has allowed businesses, including ours as well as our clients' businesses, to reopen at full capacities.
While positive headwinds exist, we recognize that our business and consumer customers are continuing to experience varying degrees of financial distress, which we expect to continue, though to a lesser degree, throughout 2021. Commercial activity has improved, but has not returned to the levels existing prior to the outbreak of the COVID-19 pandemic, which may result in our
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customers’ inability to meet their loan obligations to us. In addition, the economic pressures and uncertainties related to the COVID-19 pandemic have seemingly resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer. Our borrowing base includes customers in industries such as energy, hotel/lodging, restaurants, entertainment, retail and commercial real estate, which have been significantly impacted by the COVID-19 pandemic. We recognize that these industries may take longer to recover as consumers may be hesitant to return to full social interaction or may change their spending habits on a more permanent basis as a result of the COVID-19 pandemic. We continue to monitor these customers closely.
We have taken deliberate actions to meet our goal of ensuring that we have the balance sheet strength to serve our clients and communities, including by seeking to increase our liquidity and manage our assets and liabilities in order to maintain a strong capital position; however, future economic conditions are subject to significant uncertainty. Uncertainties associated with the COVID-19 pandemic include the duration of any COVID-19 outbreaks and any related variants, the availability and effectiveness of COVID-19 vaccines, the impact to our customers, employees and vendors and the impact to the economy as a whole. COVID-19 had a significant adverse impact on our business, financial position and operating results for the year ended December 31, 2020 and while uncertainty still exists, we believe we are well-positioned to operate effectively through the present economic environment.
Effective June 1, 2021, we returned to pre-pandemic business operations and brought 100% of our workforce back into the office. Our branch locations are currently open and operating during normal business hours. We continue to take additional precautions within our branch locations, including enhanced cleaning procedures, to ensure the safety of our customers and our employees.
Results of Operations
Summary of Performance
We reported net income of $73.5 million and net income available to common stockholders of $67.2 million for the second quarter of 2021 compared to a net loss of $34.3 million and net loss available to common stockholders of $36.8 million for the second quarter of 2020. On a fully diluted basis, earnings per common share were $1.31 for the second quarter of 2021, compared to a loss per common share of $0.73 for the second quarter of 2020. Return on average common equity (“ROE”) was 9.74% and return on average assets (“ROA”) was 0.76% for the second quarter of 2021, compared to a negative 5.48% and negative 0.36%, respectively, for the second quarter of 2020. The increase in net income, ROE and ROA for the second quarter of 2021 resulted primarily from a $119.0 million decrease in provision for credit losses.
Net income and net income available to common stockholders for the six months ended June 30, 2021 totaled $145.4 million and $135.3 million, respectively, compared to net loss and net loss available to common stockholders of $51.0 million and $55.9 million, respectively, for the same period in 2020. On a fully diluted basis, earnings per common share were $2.65 for the six months ended June 30, 2021, compared to a loss per common share of $1.11 for the same period in 2020. ROE was 9.91% and ROA was 0.75% for the six months ended June 30, 2021, compared to a negative 4.16% and $0.28%, respectively, for the same period in 2020.
Details of the changes in the various components of net income are discussed below.
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QUARTERLY FINANCIAL SUMMARIES - UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates

Three months ended June 30, 2021 Three months ended June 30, 2020
(in thousands except percentages) Average
Balance 		Revenue/
Expense 		Yield/
Rate 		Average
Balance 		Revenue/
Expense 		Yield/
Rate
Assets
Investment securities – taxable $ 3,361,696  $ 9,222  1.10  % $ 38,829  $ 185  1.92  %
Investment securities – non-taxable(2)
181,574  2,147  4.74  % 195,806  2,327  4.78  %
Federal funds sold and securities purchased under resale agreements
713  —  0.18  % 245,434  77  0.13  %
Interest-bearing deposits in other banks
11,583,046  2,961  0.10  % 10,521,240  2,314  0.09  %
Loans held for sale 93,164  781  3.36  % 380,624  2,547  2.69  %
Loans held for investment, mortgage finance
7,462,223  57,401  3.09  % 8,676,521  74,518  3.45  %
Loans held for investment(1)(2) 15,242,975  152,515  4.01  % 17,015,041  170,970  4.04  %
Less reserve for credit losses on loans 241,676  —  —  236,823  —  — 
Loans held for investment, net 22,463,522  209,916  3.75  % 25,454,739  245,488  3.88  %
Total earning assets 37,683,715  225,027  2.40  % 36,836,672  252,938  2.76  %
Cash and other assets 996,946  1,075,864 
Total assets $ 38,680,661  $ 37,912,536 
Liabilities and Stockholders’ Equity
Transaction deposits $ 3,795,152  $ 5,395  0.57  % $ 3,923,966  $ 5,998  0.61  %
Savings deposits 11,296,382  8,990  0.32  % 12,537,467  13,510  0.43  %
Time deposits 1,755,993  1,886  0.43  % 3,434,388  12,786  1.50  %
Total interest-bearing deposits 16,847,527  16,271  0.39  % 19,895,821  32,294  0.65  %
Other borrowings 2,349,718  502  0.09  % 3,612,263  4,745  0.53  %
Long-term debt 881,309  10,723  4.88  % 395,658  5,043  5.13  %
Total interest-bearing liabilities 20,078,554  27,496  0.55  % 23,903,742  42,082  0.71  %
Demand deposits 15,139,546  10,865,896 
Other liabilities 274,401  293,698 
Stockholders’ equity 3,188,160  2,849,200 
Total liabilities and stockholders’ equity
$ 38,680,661  $ 37,912,536 
Net interest income(2) $ 197,531  $ 210,856 
Net interest margin 2.10  % 2.30  %
Net interest spread 1.85  % 2.05  %
Loan spread(3) 3.55  % 3.43  %
 
(1)The loan averages include non-accrual loans and are stated net of unearned income.
(2)Taxable equivalent rates used where applicable.
(3)Yield on loans, net of reserves, less funding cost including all deposits and borrowed funds.

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Six months ended June 30, 2021 Six months ended June 30, 2020
(in thousands except percentages) Average
Balance 		Revenue/
Expense 		Yield/
Rate 		Average
Balance 		Revenue/
Expense 		Yield/
Rate
Assets
Investment securities – taxable $ 3,294,117  $ 17,334  1.06  % $ 40,814  $ 459  2.26  %
Investment securities – non-taxable(2) 189,137  4,394  4.69  % 195,692  4,744  4.88  %
Federal funds sold and securities purchased under resale agreements 2,649  1  0.08  % 222,580  691  0.62  %
Interest-bearing deposits in other banks 11,711,282  5,893  0.10  % 8,373,594  21,900  0.53  %
Loans held for sale 167,830  2,376  2.85  % 1,758,502  30,027  3.43  %
Loans held for investment, mortgage finance 7,818,014  122,343  3.16  % 7,865,602  129,842  3.32  %
Loans held for investment(1)(2) 15,349,838  301,711  3.96  % 16,806,908  372,751  4.46  %
Less reserve for loan losses 248,151  —  —  219,330  —  — 
Loans held for investment, net 22,919,701  424,054  3.73  % 24,453,180  502,593  4.13  %
Total earning assets 38,284,716  454,052  2.39  % 35,044,362  560,414  3.22  %
Cash and other assets 1,030,625  1,026,193 
Total assets $ 39,315,341  $ 36,070,555 
Liabilities and Stockholders’ Equity
Transaction deposits $ 3,893,015  $ 11,256  0.58  % $ 3,848,517  $ 19,580  1.02  %
Savings deposits 12,088,776  19,778  0.33  % 11,803,448  49,471  0.84  %
Time deposits 1,978,879  5,241  0.53  % 3,138,461  25,417  1.63  %
Total interest-bearing deposits 17,960,670  36,275  0.41  % 18,790,426  94,468  1.01  %
Other borrowings 2,517,128  3,094  0.25  % 3,316,259  14,996  0.91  %
Long-term debt 674,171  16,466  4.93  % 395,614  10,307  5.24  %
Total interest-bearing liabilities 21,151,969  55,835  0.53  % 22,502,299  119,771  1.07  %
Demand deposits 14,782,509  10,434,696 
Other liabilities 291,925  282,283 
Stockholders’ equity 3,088,938  2,851,277 
Total liabilities and stockholders’ equity $ 39,315,341  $ 36,070,555 
Net interest income(2) $ 398,217  $ 440,643 
Net interest margin 2.10  % 2.53  %
Net interest spread 1.86  % 2.15  %
Loan spread(3) 3.49  % 3.41  %

(1)The loan averages include non-accrual loans and are stated net of unearned income.
(2)Taxable equivalent rates used where applicable.
(3)Yield on loans, net of reserves, less funding cost including all deposits and borrowed funds.

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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, 2021/2020 Six months ended June 30, 2021/2020
  Net
Change 		Change due to(1) Net
Change 		Change Due To(1)
(in thousands) Volume Yield/Rate(2) Volume Yield/Rate(2)
Interest income:
Investment securities $ 8,857  $ 35,456  $ (26,599) $ 16,525  $ 71,399  $ (54,874)
Loans held for sale (1,766) (1,923) 157  (27,651) (27,243) (408)
Loans held for investment, mortgage finance loans (17,117) (10,416) (6,701) (7,499) (1,620) (5,879)
Loans held for investment (18,455) (17,800) (655) (71,040) (31,671) (39,369)
Federal funds sold and securities purchased under resale agreements (77) (79) 2  (690) (681) (9)
Interest-bearing deposits in other banks 647  238  409  (16,007) 17,968  (33,975)
Total (27,911) 5,476  (33,387) (106,362) 28,152  (134,514)
Interest expense:
Transaction deposits (603) (195) (408) (8,324) 594  (8,918)
Savings deposits (4,520) (1,327) (3,193) (29,693) 4,603  (34,296)
Time deposits (10,900) (6,260) (4,640) (20,176) (9,101) (11,075)
Other borrowings (4,243) (1,664) (2,579) (11,902) (2,801) (9,101)
Long-term debt 5,680  6,194  (514) 6,159  7,114  (955)
Total (14,586) (3,252) (11,334) (63,936) 409  (64,345)
Net interest income $ (13,325) $ 8,728  $ (22,053) $ (42,426) $ 27,743  $ (70,169)
(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 $197.0 million for the three months ended June 30, 2021, compared to $209.9 million for the same period in 2020. The decrease was primarily due to declines in total average loans and earning asset yields, partially offset by an increase in loan fees and declining cost of funds.
Average earning assets for the three months ended June 30, 2021 increased $847.0 million compared to the same period in 2020, and included a $3.3 billion increase in average total investment securities, reflecting the deployment of excess liquidity into higher-yielding investment securities, and an $817.1 million increase in average liquidity assets, partially offset by a $3.3 billion decrease in average total loans. Throughout 2020, management took deliberate actions to increase liquidity balances to ensure we had the balance sheet strength to serve our clients during the COVID-19 pandemic. Through the first six months of 2021 these balances have remained elevated, although they are beginning to run off as we have purchased investment securities and proactively exited certain high-cost indexed deposit products. The decrease in average loans held for sale compared to the second quarter of 2020 resulted from the transition of the MCA program to a third-party. Average interest-bearing liabilities for the three months ended June 30, 2021 decreased $3.8 billion compared to the same period in 2020, primarily due to a $3.0 billion decrease in average interest-bearing deposits and a $1.3 billion decrease in average other borrowings, partially offset by a $485.7 million increase in average long-term debt. Average demand deposits for the three months ended June 30, 2021 increased to $15.1 billion from $10.9 billion for the three months ended June 30, 2020.
Net interest margin for the three months ended June 30, 2021 was 2.10% compared to 2.30% for the same period in 2020. The decrease was primarily due to the effect of declining interest rates on earning asset yields and a shift in earning asset composition, primarily increases in lower-yielding investment securities and liquidity assets, partially offset by increases in loan fees and lower funding costs compared to the second quarter of 2020.
The yield on total loans held for investment decreased to 3.75% for the three months ended June 30, 2021 compared to 3.88% for the same period in 2020, and the yield on earning assets decreased to 2.40% for the three months ended June 30, 2021 compared to 2.76% for the same period in 2020. The average cost of total deposits decreased to 0.20% for the second quarter of 2021 from 0.42% for the second quarter of 2020 and total funding costs, including all deposits, long-term debt and stockholders' equity, decreased to 0.29% for the second quarter of 2021 compared to 0.45% for the second quarter of 2020.
Net interest income was $397.1 million for the six months ended June 30, 2021 compared to $438.2 million for the same period in 2020. The decrease was primarily due to a decrease in earning asset yields, partially offset by declining cost of funds.
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Average earning assets increased $3.2 billion for the six months ended June 30, 2021, compared to the same period in 2020, and included a $3.2 billion increase in average total investment securities, reflecting the deployment of excess liquidity into higher-yielding investment securities and a $3.1 billion increase in average liquidity assets, partially offset by a $3.1 billion decrease in average total loans. The increases in average total investment securities and liquidity assets were the result of deliberate actions taken by management to enhance the strength of our balance sheet as described above. Average interest-bearing liabilities decreased $1.4 billion for the six months ended June 30, 2021, compared to the same period in 2020, primarily due to a $829.8 million decrease in average interest-bearing deposits and a $799.1 million decrease in average other borrowings, partially offset by a $278.6 million increase in average long-term debt. Average demand deposits for the six months ended June 30, 2021 increased to $14.8 billion from $10.4 billion for the same period in 2020.
Net interest margin for the six months ended June 30, 2021 was 2.10% compared to 2.53% for the same period of 2020. The decrease was primarily due to the effect of declining interest rates on earning asset yields and a shift in earning asset composition, primarily the increases in lower-yielding investment securities and liquidity assets, partially offset by lower funding costs compared to the same period in 2020.
The yield on total loans held for investment decreased to 3.73% for the six months ended June 30, 2021, compared to 4.13% for the same period in 2020, and the yield on earning assets decreased to 2.39% for the six months ended June 30, 2021, compared to 3.22% for the same period in 2020. The average cost of total deposits decreased to 0.22% for the six months ended June 30, 2021 from 0.65% for the same period in 2020 and total funding costs, including all deposits, long-term debt and stockholders' equity, decreased to 0.29% for the six months ended June 30, 2021, compared to 0.67% for the same period in 2020.
Non-interest Income 
  Three months ended June 30, Six months ended June 30,
(in thousands) 2021 2020 2021 2020
Service charges on deposit accounts $ 4,634  $ 2,459  $ 9,350  $ 5,752 
Wealth management and trust fee income 3,143  2,348  5,998  4,815 
Brokered loan fees 6,933  10,764  16,244  18,779 
Servicing income 5,935  6,120  14,944  10,866 
Swap fees 534  1,468  1,060  4,225 
Net gain/(loss) on sale of loans held for sale (3,070) 39,023  2,502  26,023 
Other 11,993  8,303  19,096  11,805 
Total non-interest income $ 30,102  $ 70,485  $ 69,194  $ 82,265 
Non-interest income decreased by $40.4 million during the three months ended June 30, 2021 compared to the same period in 2020. This decrease was primarily due to decreases in net gain/(loss) on sale of loans held for sale and brokered loan fees, partially offset by increases in service charges and other non-interest income. The decrease in net gain/(loss) on sale of loans held for sale and brokered loan fees was primarily due to the second quarter 2021 sale of our portfolio of MSRs and transition of the MCA program to a third-party.
Non-interest income decreased by $13.1 million during the six months ended June 30, 2021 compared to the same period in 2020. This decrease was primarily due to a decrease in net gain/(loss) on sale of loans held for sale, partially offset by an increase in other non-interest income. The decrease in net gain/(loss) on sale of loans held for sale was primarily due to the second quarter 2021 sale of our portfolio of MSRs and transition of the MCA program to a third-party.
Non-interest Expense 
  Three months ended June 30, Six months ended June 30,
(in thousands) 2021 2020 2021 2020
Salaries and employee benefits $ 86,830  $ 100,791  $ 174,352  $ 177,984 
Net occupancy expense 7,865  9,134  16,139  17,846 
Marketing 1,900  7,988  3,597  16,510 
Legal and professional 9,147  11,330  17,424  28,796 
Communications and technology 14,352  42,760  30,321  56,551 
FDIC insurance assessment 5,226  7,140  11,839  12,989 
Servicing-related expenses 12,355  20,100  25,344  36,454 
Merger-related expenses —  10,486  —  17,756 
Other 11,385  12,606  20,360  22,866 
Total non-interest expense $ 149,060  $ 222,335  $ 299,376  $ 387,752 
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Non-interest expense for the three months ended June 30, 2021 decreased $73.3 million compared to the same period in 2020. The decrease was primarily due to decreases in salaries and employee benefits, communications and technology expense, servicing-related expenses and merger-related expenses.
Non-interest expense for the six months ended June 30, 2021 decreased $88.4 million compared to the same period in 2020. The decrease was primarily due to decreases in marketing expense, legal and professional expense, communications and technology expense, servicing-related expenses and merger-related expenses.

Analysis of Financial Condition
Loans Held for Investment
The following table summarizes our loans held for investment on a gross basis by portfolio segment: 
  June 30, 2021 December 31, 2020
(in thousands)
Commercial $ 9,054,764  $ 8,861,580 
Energy 618,371  766,217 
Mortgage finance 8,772,799  9,079,409 
Real estate 5,564,623  5,794,624 
Gross loans held for investment $ 24,010,557  $ 24,501,830 
Deferred income (net of direct origination costs) (69,193) (70,970)
Allowance for credit losses on loans (221,511) (254,615)
Total loans held for investment, net $ 23,719,853  $ 24,176,245 
Total gross loans held for investment were $24.0 billion at June 30, 2021, a decline of $491.3 million from December 31, 2020 primarily due to declines in energy, mortgage finance and real estate loans, partially offset by an increase in commercial loans. The decline in the energy portfolio is consistent with our strategy of planned reductions in this portfolio as it has experienced higher historic losses. Mortgage finance loans relate to our mortgage warehouse lending operations in which we purchase mortgage loan ownership interests that are typically sold within 10 to 20 days. 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. Despite the decline in the first half of 2021, balances in this portfolio remain elevated related to increases in volumes driven by continued lower long-term interest rates.
We originate a substantial majority of all loans held for investment. We also participate in syndicated loan relationships, both as a participant and as an agent. As of June 30, 2021, we had $2.0 billion in syndicated loans, $550.4 million of which we administer as agent. All syndicated loans, whether we act as agent or participant, are underwritten to the same standards as all other loans we originate. As of June 30, 2021, $12.8 million of our syndicated loans were on non-accrual.
Portfolio Geographic and Industry Concentrations
Although more than 50% of our total loan exposure is outside of Texas and more than 50% of our deposits are sourced outside of Texas, our Texas concentration remains significant. As of June 30, 2021, a majority of our loans held for investment, excluding mortgage finance loans and other national lines of business, were to businesses with headquarters or operations in Texas. This geographic concentration subjects the loan portfolio to the general economic conditions within this state. The risks created by this concentration have been considered by management in the determination of the appropriateness of the allowance for credit losses.
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Non-performing Assets
Non-performing assets include non-accrual loans and leases and repossessed assets. The table below summarizes our non-performing assets by type and by type of property securing the credit: 
(in thousands) June 30, 2021 December 31, 2020 June 30, 2020
Non-accrual loans(1)
Commercial
Assets of the borrowers $ 16,715  $ 18,776  $ 27,164 
Inventory 8,497  3,547  13,325 
Other 10,144  9,773  10,717 
Total commercial 35,356  32,096  51,206 
Energy
Oil and gas properties 32,866  51,724  103,874 
Total energy 32,866  51,724  103,874 
Real estate
Assets of the borrowers 14,098  14,496  14,883 
Commercial property 2,639  13,569  1,096 
Hotel/motel —  4,619  — 
Single family residences 1,677  218  218 
Other —  5,267  2,754 
Total real estate 18,413  38,169  18,951 
Total non-performing assets $ 86,635  $ 121,989  $ 174,031 
Restructured loans - accruing $ —  $ —  $ — 
Loans held for investment past due 90 days and accruing(2) 7,671  12,541  21,079 
Loans held for sale non-accrual(3) —  6,966  — 
Loans held for sale past due 90 days and accruing(4) 2,695  16,667  10,152 
(1)As of June 30, 2021, December 31, 2020 and June 30, 2020, non-accrual loans included $24.4 million, $45.4 million and $23.7 million, respectively, in loans that met the criteria for restructured.
(2)At June 30, 2021, December 31, 2020 and June 30, 2020, loans past due 90 days and still accruing includes premium finance loans of $3.0 million, $6.4 million and $14.8 million, respectively.
(3)Includes one non-accrual loan previously reported in loans HFI that was transferred to loans HFS as of December 31, 2020 and subsequently sold at carrying value.
(4)Includes loans guaranteed by U.S. government agencies that were repurchased out of Ginnie Mae securities. Loans are recorded as loans held for sale and carried at fair value on the balance sheet. Interest on these past due loans accrues at the debenture rate guaranteed by the U.S. government. Also includes loans that, pursuant to Ginnie Mae servicing guidelines, we have the unilateral right, but not the obligation, to repurchase if defined delinquent loan criteria are met and therefore must record as loans held for sale on our balance sheet regardless of whether the repurchase option has been exercised.
Total non-performing assets at June 30, 2021 decreased $35.4 million from December 31, 2020 and decreased $87.4 million compared to June 30, 2020. The decrease from December 31, 2020 was primarily due to declines in energy and real estate non-accrual loans, and the decrease from June 30, 2020 was primarily due to declines in commercial and energy non-accrual loans.
Potential problem loans consist of loans that are performing in accordance with contractual terms, but for which we have concerns about the borrower’s ability to comply with repayment terms because of the borrower’s potential financial difficulties. We monitor these loans closely and review their performance on a regular basis. At June 30, 2021, we had $22.0 million in loans of this type, compared to $193.2 million at December 31, 2020 and $132.0 million at June 30, 2020. The decline in potential problem loans is consistent with the continued economic recovery from the impacts of the COVID-19 pandemic.
Summary of Credit Loss Experience
The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the allowance for credit losses at a level consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date. We recorded a $25.0 million negative provision for credit losses for the six months ended June 30, 2021, compared to a provision of $196.0 million in the same period of 2020. The year-over-year decrease resulted primarily from decreases in charge-offs and non-accrual loans, as well as improvement in the economic outlook as the economy continues to recover from the impacts of the COVID-19 pandemic. We recorded $8.8 million in net charge-offs during the six months ended June 30, 2021, compared to $131.8 million during the same period of 2020. Criticized loans totaled $891.6 million at June 30, 2021, compared to $918.4 million at December 31, 2020 and $1.0 billion at June 30, 2020.
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The table below presents a summary of our loan loss experience: 
  Six months ended June 30, 2021 Year ended December 31, 2020 Six months ended June 30, 2020
(in thousands except percentage and multiple data)  
Allowance for credit losses on loans:
Beginning balance $ 254,615     $ 195,047     $ 195,047 
Impact of CECL adoption —  8,585  8,585 
Loans charged-off:
Commercial 3,863     73,360     32,940 
Energy 6,418     133,522     100,098 
Real estate 1,192     180     — 
Total charge-offs 11,473     207,062     133,038 
Recoveries:
Commercial 1,358     1,277     770 
Energy 1,324     6,999     423 
Total recoveries 2,682     8,276     1,193 
Net charge-offs 8,791     198,786     131,845 
Provision for credit losses on loans (24,313)    249,769     192,935 
Ending balance $ 221,511     $ 254,615     $ 264,722 
Allowance for off-balance sheet credit losses:
Beginning balance $ 17,434     8,640     $ 8,640 
Impact of CECL adoption —  563  563 
Provision for off-balance sheet credit losses (687)    8,231     3,065 
Ending balance $ 16,747     $ 17,434     $ 12,268 
Total allowance for credit losses $ 238,258  $ 272,049  $ 276,990 
Total provision for credit losses $ (25,000)    $ 258,000     $ 196,000 
Allowance for credit losses on loans to LHI 0.93  %  1.04  %  1.04  % 
Net charge-offs to average LHI 0.08  %  0.80  %  1.07  % 
Total provision for credit losses to average LHI (0.22) %  1.03  %  1.60  % 
Recoveries to total charge-offs 23.38  %  4.00  %  0.90  % 
Allowance for off-balance sheet credit losses to off-balance sheet credit commitments
0.20  %  0.20  %  0.15  % 
Total allowance for credit losses to LHI 1.00  %  1.11  %  1.09  % 
Allowance for credit losses on loans as a multiple of non-performing loans 2.6  x  2.1  x  1.5  x 
The allowance for credit losses, including the allowance for losses on unfunded commitments reported on the consolidated balance sheets in other liabilities, totaled $238.3 million at June 30, 2021, $272.0 million at December 31, 2020 and $277.0 million at June 30, 2020. The total allowance for credit losses as a percentage of loans held for investment was 1.00% at June 30, 2021, compared to 1.11% at December 31, 2020 and 1.09% at June 30, 2020. The total allowance for credit losses as a percentage of loans held for investment, excluding mortgage finance, was 1.57% at June 30, 2021, compared to 1.77% at December 31, 2020 and 1.67% at June 30, 2020. The decrease in the total allowance as a percentage of loans held for investment at June 30, 2021, compared to June 30, 2020, is due primarily to a decrease in the allowance for credit losses, resulting from reserve releases during the first half of 2021 driven by a decrease in charge-offs and improvement in the economic outlook as the economy continues to recover from the impacts of the COVID-19 pandemic.
Loans Held for Sale
Through the MCA program we commit to purchase residential mortgage loans from independent correspondent lenders and deliver those loans into the secondary market via whole loan sales to independent third parties or in securitization transactions to Ginnie Mae and Government Sponsored Enterprises (“GSEs”) such as Fannie Mae and Freddie Mac. For additional information on our loans held for sale, see Note 5 - Certain Transfers of Financial Assets in the accompanying notes to the consolidated financial statements included elsewhere in this report.
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Liquidity and Capital Resources
In general terms, liquidity is a measurement of our ability to meet our cash needs. Our objectives in managing our liquidity are to maintain our ability to meet loan commitments, repurchase investment securities and repay deposits and other liabilities in accordance with their terms, without an adverse impact on our current or future earnings. Our liquidity strategy is guided by policies, formulated and monitored by our senior management and our Asset and Liability Management Committee (“ALCO”), which take into account the demonstrated marketability of our assets, the sources and stability of our funding and the level of unfunded commitments. We regularly evaluate all of our various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness. Our principal source of funding is customer deposits, supplemented by short-term and long-term borrowings, primarily from federal funds purchased and Federal Home Loan Bank (“FHLB”) borrowings, which are generally used to fund mortgage finance assets. We also rely on the availability of the mortgage secondary market provided by Ginnie Mae and the GSEs to support the liquidity of our mortgage finance assets.
Throughout 2020 we significantly increased our liquidity assets to ensure that we had the balance sheet strength to serve our clients during the COVID-19 pandemic. Through the first six months of 2021 these balances have remained elevated, although they are beginning to run off as we have purchased investment securities and proactively exited certain high-cost indexed deposit products. The following table summarizes the composition of liquidity assets:
(in thousands except percentage data) June 30, 2021 December 31, 2020 June 30, 2020
Federal funds sold and securities purchased under resale agreements $ —  $ —  $ 50,000 
Interest-bearing deposits 6,768,650  9,032,807  9,490,044 
Total liquidity assets $ 6,768,650  $ 9,032,807  $ 9,540,044 
Total liquidity assets as a percent of:
Total loans held for investment 28.3  % 37.0  % 37.4  %
Total earning assets 19.7  % 24.6  % 26.9  %
Total deposits 23.5  % 29.1  % 31.6  %
Our liquidity needs to support growth in loans held for investment have been fulfilled primarily through growth in our core customer deposits. Our goal is to obtain as much of our funding for loans held for investment and other earning assets as possible from deposits of these core customers. These deposits are generated principally through development of long-term customer relationships, with a significant focus on treasury management products. In addition to deposits from our core customers, we also have access to deposits through brokered customer relationships.
We also have access to incremental deposits through brokered retail certificates of deposit, or CDs. These traditional brokered deposits are generally of short maturities and are used to fund temporary differences in the growth in loan balances, including growth in loans held for sale or other specific categories of loans as compared to customer deposits. The following table summarizes our period-end and average core customer deposits, relationship brokered deposits and traditional brokered deposits:
(in thousands) June 30, 2021 December 31, 2020 June 30, 2020
Deposits from core customers $ 26,309,504  $ 27,581,532  $ 25,636,902 
Deposits from core customers as a percent of total deposits 91.2  % 89.0  % 84.9  %
Relationship brokered deposits $ 1,373,763  $ 1,771,883  $ 2,236,028 
Relationship brokered deposits as a percent of average total deposits 4.8  % 5.7  % 7.4  %
Traditional brokered deposits $ 1,156,296  $ 1,643,174  $ 2,314,765 
Traditional brokered deposits as a percent of total deposits 4.0  % 5.3  % 7.7  %
Average deposits from core customers(1) $ 29,545,933  $ 26,537,612  $ 24,640,460 
Average deposits from core customers as a percent of average total deposits 90.2  % 86.0  % 84.3  %
Average relationship brokered deposits(1) $ 1,804,015  $ 2,099,652  $ 1,961,338 
Average relationship brokered deposits as a percent of average total deposits 5.5  % 6.8  % 6.7  %
Average traditional brokered deposits(1) $ 1,393,231  $ 2,235,359  $ 2,623,324 
Average traditional brokered deposits as a percent of average total deposits 4.3  % 7.2  % 9.0  %
(1)    Annual averages presented for December 31, 2020.
We have access to sources of traditional brokered deposits that we estimate to be $7.5 billion. Based on our internal guidelines, we have currently chosen to limit our use of these sources to a lesser amount.
We have short-term borrowing sources available to supplement deposits and meet our funding needs. Such borrowings are generally used to fund our mortgage finance loans, due to their liquidity, short duration and interest spreads available. These
37

borrowing sources include federal funds purchased from our downstream correspondent bank relationships (which consist of banks that are smaller than our Bank) and from our upstream correspondent bank relationships (which consist of banks that are larger than our Bank), customer repurchase agreements and advances from the FHLB and the Federal Reserve. The following table summarizes our short-term and other borrowings:
(in thousands) June 30, 2021
Federal funds purchased $ 10,000 
Repurchase agreements 4,481 
FHLB borrowings 2,000,000 
Line of credit — 
Total short-term borrowings $ 2,014,481 
Maximum short-term borrowings outstanding at any month-end during 2021 $ 2,907,202 
The following table summarizes our other borrowing capacities net of balances outstanding. As of June 30, 2021, all are scheduled to mature within one year.
(in thousands) June 30, 2021
FHLB borrowing capacity relating to loans $ 6,680,417 
FHLB borrowing capacity relating to securities 3,553,721 
Total FHLB borrowing capacity(1) $ 10,234,138 
Unused federal funds lines available from commercial banks $ 1,235,000 
Unused Federal Reserve borrowings capacity $ 2,003,114 
Unused revolving line of credit(2) $ 130,000 
(1)    FHLB borrowings are collateralized by a blanket floating lien on certain real estate secured loans, mortgage finance assets and also certain pledged securities.
(2)    Unsecured revolving, non-amortizing line of credit with maturity date of December 14, 2021. 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, 2021.
Periodically, based on market conditions and other factors, and subject to compliance with applicable laws and regulations and the terms of our existing indebtedness, we or the Bank may repay, repurchase, exchange or redeem outstanding indebtedness, or otherwise enter into transactions regarding our debt or capital structure. For example, we and the Bank periodically evaluate and may engage in liability management transactions, including repurchases or redemptions of outstanding subordinated notes, which may be funded by the issuance of, or exchanges of, newly issued unsecured borrowings, as we seek to actively manage our debt maturity profile and interest cost.
For additional information regarding our borrowings and our capital and stockholders' equity, see Note 6 – Long-Term Debt and Note 8 – Regulatory Restrictions, respectively, in the accompanying notes to the consolidated financial statements included elsewhere in this report.
Commitments and Contractual Obligations
The following table presents, as of June 30, 2021, significant fixed and determinable contractual obligations to third parties by payment date. Amounts in the table do not include accrued or accruing interest.
(in thousands) Less than 1
Year 		1-3
Years 		3-5 Years More than 5
Years 		Total
Deposits without a stated maturity $ 27,123,020  $ —  $ —  $ —  $ 27,123,020 
Time deposits 1,113,324  599,274  3,940  5  1,716,543 
Federal funds purchased and customer repurchase agreements 14,481  —  —  —  14,481 
FHLB borrowings 2,000,000  —  —  —  2,000,000 
Operating lease obligations 17,211  32,286  12,989  20,154  82,640 
Long-term debt —  —  443,288  484,098  927,386 
Total contractual obligations $ 30,268,036  $ 631,560  $ 460,217  $ 504,257  $ 31,864,070 
Off-Balance Sheet Arrangements
We enter into commitments to extend credit and standby letters of credit in the ordinary course of business, details of which are described in Note 1 – Operations and Summary of Significant Accounting Policies in our 2020 Form 10-K. For additional information, see Note 7 – Financial Instruments with Off-Balance Sheet Risk in the accompanying notes to the consolidated financial statements included elsewhere in this report.
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Critical Accounting Policies
SEC guidance requires disclosure of “critical accounting policies.” The SEC defines “critical accounting policies” as those that are most important to the presentation of a company’s financial condition and results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
We follow financial accounting and reporting policies that are in accordance with accounting principles generally accepted in the United States (“GAAP”). Certain significant 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 our 2020 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 (“ASC”) 326, Credit Losses. The allowance for credit losses is established through a provision for credit losses charged to current earnings. The amount maintained in the allowance reflects management’s continuing evaluation of the credit losses expected to be recognized over the life of the loans in our portfolio. The allowance for credit losses on loans is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. For purposes of determining the allowance for credit losses, the loan portfolio is segregated by product types in order to recognize differing risk profiles among categories, and then further segregated by credit grades. Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. Management estimates the allowance balance using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts. Adjustments to historical loss information are made to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments using a Portfolio Level Qualitative Factor (“PLQF”) and/or a Portfolio Segment Level Qualitative Factor (“SLQF”). The PLQF and SLQF are utilized to address factors that are not present in historical loss rates and are otherwise unaccounted for in the quantitative process. A reserve is recorded upon origination or purchase of a loan. See “Summary of Credit Loss Experience” above and Note 4 – Loans Held for Investment 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.
Impact of Inflation and Changing Prices
The preparation of financial statements in conformity with GAAP requires management to measure the company’s financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due to inflation or recession are generally not considered. The primary effect of inflation on our operations is reflected in increased operating expenses. Management considers changes in interest rates to impact our financial condition and results of operations to a far greater degree than changes in prices due to inflation. Although interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. We manage our interest rate risk in several ways. Refer to “Interest Rate Risk Management” in Item 3 for further discussion. There can be no assurance that we will not be materially adversely affected by future changes in interest rates, as interest rates are highly sensitive to many factors that are beyond our control.
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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange rates, commodity prices, or equity prices. Additionally, the financial instruments subject to market risk can be classified either as held for trading purposes or held for other than trading.
We are subject to market risk primarily through the effect of changes in interest rates on our portfolio of assets held for purposes other than trading. Additionally, we have some market risk relative to commodity prices through our energy lending activities. Declines and volatility in commodity prices negatively impacted our energy clients' ability to perform on their loan obligations in recent years, and further uncertainty and volatility could have a negative impact on our customers and our loan portfolio in future periods. Foreign exchange rates, commodity prices (other than energy) and equity prices are not expected to pose significant market risk to us.
The responsibility for managing market risk rests with the ALCO, which operates under policy guidelines established by our board of directors. The acceptable negative variation in net interest revenue due to a 100 basis point increase or decrease in interest rates is generally limited by these guidelines to plus or minus 10-12%. These guidelines establish maximum levels for short-term borrowings, short-term assets and public and brokered deposits and minimum levels for liquidity, among other things. Oversight of our compliance with these guidelines is the ongoing responsibility of the ALCO, with exceptions reported to the Executive Risk Committee, and to our board of directors if necessary, on a quarterly basis. Additionally, the Credit Policy Committee (“CPC”) specifically manages risk relative to commodity price market risks. The CPC establishes maximum portfolio concentration levels for energy loans as well as maximum advance rates for energy collateral.
Interest Rate Risk Management
Our interest rate sensitivity is illustrated in the following table. The table reflects rate-sensitive positions as of June 30, 2021, and is not necessarily indicative of positions on other dates. The balances of interest rate sensitive assets and liabilities are presented in the periods in which they next reprice to market rates or mature and are aggregated to show the interest rate sensitivity gap. The mismatch between repricings or maturities within a time period is commonly referred to as the “gap” for that period. A positive gap (asset sensitive), where interest rate-sensitive assets exceed interest rate sensitive liabilities, generally will result in the net interest margin increasing in a rising rate environment and decreasing in a falling rate environment. A negative gap (liability sensitive) will generally have the opposite results on the net interest margin. To reflect anticipated prepayments, certain asset and liability categories are shown in the table using estimated cash flows rather than contractual cash flows. The Company employs interest rate floors in certain variable rate loans to enhance the yield on those loans at times when market interest rates are extraordinarily low. The degree of asset sensitivity, spreads on loans and net interest margin may be reduced until rates increase by an amount sufficient to eliminate the effects of floors. The adverse effect of floors as market rates increase may also be offset by the positive gap, the extent to which rates on deposits and other funding sources lag increasing market rates for loans and changes in composition of funding.
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Interest Rate Sensitivity Gap Analysis
June 30, 2021
(in thousands) 0-3 mo
Balance 		4-12 mo
Balance 		1-3 yr
Balance 		3+ yr
Balance 		Total
Balance
Assets:
Interest-bearing deposits in other banks, federal funds sold and securities purchased under resale agreements
$ 6,971,199  $ —  $ —  $ —  $ 6,971,199 
Investment securities(1) 53,241  1,920  47,821  3,695,293  3,798,275 
Total variable loans $ 20,587,256  $ 165,989  $ 18,454  $ 262,401  $ 21,034,100 
Total fixed loans 208,968  1,621,497  232,906  976,833  3,040,204 
Total loans(2) 20,796,224  1,787,486  251,360  1,239,234  24,074,304 
Total interest sensitive assets $ 27,820,664  $ 1,789,406  $ 299,181  $ 4,934,527  $ 34,843,778 
Liabilities:
Interest-bearing customer deposits $ 12,894,982  $ —  $ —  $ —  $ 12,894,982 
CDs & IRAs 258,235  244,203  53,864  3,945  560,247 
Traditional brokered deposits 169,765  441,121  545,410  —  1,156,296 
Total interest-bearing deposits 13,322,982  685,324  599,274  3,945  14,611,525 
Repurchase agreements, federal funds purchased, FHLB borrowings
2,014,481  —  —  —  2,014,481 
Long-term debt 269,483  —  —  657,903  927,386 
Total borrowings 2,283,964  —  —  657,903  2,941,867 
Total interest sensitive liabilities $ 15,606,946  $ 685,324  $ 599,274  $ 661,848  $ 17,553,392 
GAP $ 12,213,718  $ 1,104,082  $ (300,093) $ 4,272,679  $ — 
Cumulative GAP $ 12,213,718  $ 13,317,800  $ 13,017,707  $ 17,290,386  $ 17,290,386 
Demand deposits 14,228,038 
Stockholders’ equity 3,114,957 
Total $ 17,342,995 
(1)Investment securities based on fair market value.
(2)Total loans includes loans held for investments, stated at gross, and loans held for sale.
While a gap interest table is useful in analyzing interest rate sensitivity, an interest rate sensitivity simulation provides a better illustration of the sensitivity of earnings to changes in interest rates. Earnings are also affected by the effects of changing interest rates on the value of funding derived from demand deposits and stockholders’ equity. We perform a sensitivity analysis to identify interest rate risk exposure on net interest income. We quantify and measure interest rate risk exposure using a model to dynamically simulate the effect of changes in net interest income relative to changes in interest rates over the next twelve months based on three interest rate scenarios. These are a static rate scenario and two “shock test” scenarios.
These scenarios are based on interest rates as of the last day of a reporting period published by independent sources and incorporate relevant spreads of instruments that are actively traded in the open market. The Federal Reserve’s federal funds target affects short-term borrowing; the prime lending rate and LIBOR are the basis for most of our variable-rate loan pricing. The 10-year treasury rate is also monitored because of its effect on prepayment speeds for mortgage-backed securities and MSRs. These are our primary interest rate exposures. We are currently not using derivatives to manage our interest rate exposure, except for MSRs, although we may do so in the future if that appears advisable.
For modeling purposes, the “shock test” scenarios as of June 30, 2021 and 2020 assume immediate, sustained 100 and 200 basis point increases in interest rates. As short-term rates declined during 2020 and remain low through the first six months of 2021, we do not believe that analysis of an assumed decrease in interest rates would provide meaningful results. We will continue to evaluate these scenarios as interest rates change, until short-term rates rise above 3.0%, at which point we will resume evaluations of shock scenarios in which interest rates decrease.
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Our interest rate risk exposure model incorporates assumptions regarding the level of interest rate on indeterminable maturity deposits (demand deposits, interest-bearing transaction accounts and savings accounts) for a given level of market rate change. In the current environment of decreasing short-term rates, deposit pricing can vary by product and customer. These assumptions have been developed through a combination of historical analysis and projection of future expected pricing behavior. Changes in prepayment behavior of mortgage-backed securities, residential and commercial mortgage loans in each rate environment are captured using industry estimates of prepayment speeds for various coupon segments of the portfolio. The impact of these changes is factored into the simulation model. This modeling indicated interest rate sensitivity as follows:
  Anticipated Impact Over the Next
Twelve Months as Compared to Most Likely Scenario
   June 30, 2021 June 30, 2020
(in thousands) 100 bps Increase 200 bps Increase 100 bps Increase 200 bps Increase
Change in net interest income $ 24,267  $ 79,342  $ 70,160  $ 152,756 
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.
Our business relies upon a large volume of loans, derivative contracts and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR to establish their interest rate and/or value. In 2017, the U.K. Financial Conduct Authority announced that it would no longer compel banks to submit rates for the calculation of LIBOR after 2021. The administrator of LIBOR has proposed to extend publication of the most commonly used U.S. Dollar LIBOR settings to June 30, 2023 and to cease publishing other LIBOR settings on December 31, 2021. The U.S. federal banking agencies issued guidance strongly encouraging banking organizations to cease using U.S. dollar LIBOR as a reference rate in new contracts as soon as practicable and in any event by December 31, 2021. At this time, it is not possible to predict what rate or rates may become accepted alternatives to LIBOR or what the effect of any such changes in views or alternatives may have on the financial markets for LIBOR-linked financial instruments. The full impact of alternatives to LIBOR on the valuations, pricing and operation of our financial instruments is not yet known; however, the primary instruments that may be impacted include loans, securities, borrowings and derivatives indexed to LIBOR that mature after December 31, 2021. We have established a working group, consisting of key stakeholders from throughout the company, to monitor developments relating to LIBOR uncertainty and changes and to guide the Bank's response. This team is currently working to ensure that our technology systems are prepared for the transition, our loan documents that reference LIBOR-based rates have been appropriately amended to reference other methods of interest rate determinations and internal and external stakeholders are apprised of the transition.
42

ITEM 4.    CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the supervision and participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, we have concluded that, as of the end of such period, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to the Company's management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1.     LEGAL PROCEEDINGS
The Company is subject to various claims and legal actions that may arise in the ordinary course of conducting its business. Management does not expect the disposition of any of these matters to have a material adverse impact on the Company’s financial statements or results of operations. 
ITEM 1A.     RISK FACTORS
There have been no material changes in the risk factors previously disclosed in the December 31, 2020 Form 10-K.
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ITEM 6.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Exhibits

4
31.1
31.2
32.1
32.2
101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH XBRL Taxonomy Extension Schema Document*
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB XBRL Taxonomy Extension Label Linkbase Document*
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document*
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)

*    Filed herewith
**    Furnished herewith

44

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 22, 2021
/s/ Julie L. Anderson
Julie L. Anderson
Chief Financial Officer
(Duly authorized officer and principal financial officer)

45
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