TEXAS CAPITAL BANCSHARES INC/TX (TCBI) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company’s financial condition and results of operations for the years ended December 31, 2022 and 2021 should be read in conjunction with its audited consolidated financial statements and the related notes to the consolidated financial statements included in this Annual Report on Form 10-K. Certain risks, uncertainties and other factors, including those set forth under “Risk Factors” in Part I, Item 1A, and elsewhere in this Annual Report on 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. Refer to “Management's Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2021 Annual Report on Form 10K filed with the SEC on February 9, 2022, for discussion of the Company’s results of operations for the years ended December 31, 2021 and 2020.
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 beliefs, assumptions and expectations of 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 “believes,” “projects,” “expects,” “may,” “estimates,” “should,” “plans,” “targets,” “intends,” “could,” “would,” “anticipates,” “potential,” “confident,” “optimistic” or the negative thereof, or other variations thereon, or comparable terminology, or by discussions of strategy, objectives, estimates, guidance, expectations and future plans.
Forward-looking statements may include, among other things and without limitation, statements about the credit quality of loan portfolio, liquidity, general economic conditions in the United States and in the Company’s markets, including with respect to interest rates and the market generally, the continued impact on customers from volatility in oil and gas prices, the material risks and uncertainties for the U.S. and world economies, and for the business, resulting from the COVID-19 pandemic, expectations regarding rates of default and loan losses, volatility in the mortgage industry, business strategies (including new lines of business, products and services) and expectations about future financial performance, future growth and earnings, the appropriateness of the allowance for credit losses and provision for credit losses, the impact of changing regulatory requirements and legislative changes on the business, increased competition, and technologies (including new technologies and information security risks).
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 the loan portfolio or declines in the value of collateral due to external factors or otherwise.
•The unpredictability of economic and business conditions that may impact us or customers.
•The impact of COVID-19 pandemic on us and customers, employees and third-party service providers. This includes related 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 the Bank and arising from the participation in government stimulus programs responding to the economic impact of the COVID-19 pandemic.
•The ability to effectively manage liquidity risk and any growth plans and the availability of capital and funding.
•The ability to effectively manage the information technology systems (including external vendors), on which the Company is highly dependent. This also includes the ability to, among other things, manage such risks and to prevent cyber-incidents against us, the customers or third-party vendors, or to manage risks from failures, disruptions or security breaches affecting us, customers or third-party vendors.
•The costs and effects of cyber-incidents or other failures, disruptions or security breaches of systems or those of the third-party providers.
•Changes in interest rates.
•Changes in market risk associated primarily with the Company’s sales and trading activities.
•Changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate.
•Adverse or unexpected economic or market conditions and other factors in Texas, the United States or internationally that could affect the credit quality of the loan portfolio, operating performance or the ability to access the capital markets or other sources of funding to become less advantageous.
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•The failure to effectively balance funding sources with cash demands by depositors and borrowers, the failure to maintain capital ratios as a result of adverse changes in operating performance or financial condition or changes in applicable regulations or interpretations of regulations that impact the business or the characterization or risk weight of assets.
•Material failures of accounting estimates and risk management processes based on management judgment, or the supporting assumptions or models.
•The failure to effectively manage interest rate risk.
•The failure of enterprise risk management framework (including risk management strategies and procedures and related controls), the compliance program, or corporate governance and supervisory oversight functions to timely identify and address emerging risks adequately.
•Uncertainty regarding the upcoming transition away from the London Interbank Offered Rate, or LIBOR, toward new interest rate benchmarks and the ability to successfully implement any new interest rate benchmarks.
•The ability to comply with applicable governmental regulations, including legislative and regulatory changes that may impose further restrictions and costs on the business, any regulatory enforcement actions that may be brought against us and the effect of changes in laws, regulations, policies and guidelines (including, among others, those concerning taxes, banking, accounting, securities and monetary and fiscal policies) with which the Company must generally comply.
•Risks related to the U.S. federal government actions impacting us, such as the impact of the Tax Cuts and Jobs Act.
•Claims and litigation that may arise in the ordinary course of business, including those that may not be covered by insurers.
•The failure to successfully execute business strategy, which may include expanding into new markets, developing and launching new lines of business or new products and services, completing planned transactions or to successfully manage the risks related to certain aspects of the business strategy.
•The failure to identify, attract and retain key personnel.
•Increased or more effective competition from banks and other financial service providers in Company markets.
•The susceptibility of fraud on the business.
•The failure to maintain adequate regulatory capital to support the business.
•Environmental liability associated with properties related to lending activities.
•Severe weather, natural disasters, acts of war or terrorism and other external events.
•Climate change and related legislative and regulatory initiatives.
•Risks relating to securities, including the volatility of stock price, trading volume, rights of holders of the indebtedness and preferred stock, the decision to not currently pay dividends on common stock, and other related factors.
Actual outcomes and results may differ materially from what is expressed in the Company’s forward-looking statements and from its historical financial results due to the factors discussed elsewhere in this report or disclosed in the Company’s other SEC filings. Forward-looking statements included herein speak only as of the date hereof and should not be relied upon as representing the Company’s expectations or beliefs as of any date subsequent to the date of this report. Except as required by law, the Company undertakes 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 the Company’s businesses. Though management strives to monitor and mitigate risk, the Company cannot anticipate all potential economic, operational and financial developments that may adversely impact its operations and the 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 the Company’s securities.
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Overview of Business Operations
Early in 2021, the Company embarked on an enterprise-wide transformation which included detailed reviews of the Company’s business lines, operating model, investment spend and overall strategy. On September 1, 2021 management announced key updates to the Company’s long-term strategy, focused on building a Texas-based full-service financial services firm positioned to serve clients in its markets through the entirety of their life cycle. This new plan included focusing on building an operating model organized around client delivery and investing in technology. 2022 was a year focused on strategic alignment, including reorganizing the Company’s operating model around client delivery emphasizing client experience; realigning the expense base and investing in technology; expanding coverage, products and services; and enhancing accountability while maintaining financial resiliency.
On September 6, 2022, the Company announced the sale of BankDirect Capital Finance, LLC (“BDCF”), its insurance premium finance subsidiary, to AFCO Credit Corporation, an indirect wholly-owned subsidiary of Truist Financial Corporation. The sale of BDCF included its business operations and loan portfolio of approximately $3.1 billion. The sale was an all-cash transaction for a purchase price of $3.4 billion, representing a pre-tax gain of $248.5 million. This sale was completed on November 1, 2022.
Results of Operations
Year ended December 31, 2022 compared to year ended December 31, 2021
Selected income statement data and key performance indicators are presented in the table below:
| For the Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in thousands except per share data) | 2022 | 2021 | 2020 | |||||||
| Net interest income | $ | 875,758 | $ | 768,837 | $ | 851,321 | ||||
| Provision for credit losses | 66,000 | (30,000) | 258,000 | |||||||
| Non-interest income | 349,529 | 138,230 | 202,981 | |||||||
| Non-interest expense | 727,532 | 599,012 | 704,356 | |||||||
| Income before income taxes | 431,755 | 338,055 | 91,946 | |||||||
| Income tax expense | 99,277 | 84,116 | 25,657 | |||||||
| Net income | 332,478 | 253,939 | 66,289 | |||||||
| Preferred stock dividends | 17,250 | 18,721 | 9,750 | |||||||
| Net income available to common stockholders | $ | 315,228 | $ | 235,218 | $ | 56,539 | ||||
| Basic earnings per common share | $ | 6.25 | $ | 4.65 | $ | 1.12 | ||||
| Diluted earnings per common share | $ | 6.18 | $ | 4.60 | $ | 1.12 | ||||
| Net interest margin | 2.79 | % | 2.07 | % | 2.34 | % | ||||
| Return on average assets (“ROA”) | 1.04 | % | 0.67 | % | 0.18 | % | ||||
| Return on average common equity (“ROE”) | 11.33 | % | 8.35 | % | 2.10 | % | ||||
| Non-interest income to average earning assets | 1.12 | % | 0.37 | % | 0.56 | % | ||||
| Efficiency ratio(1) | 59.4 | % | 66.0 | % | 66.8 | % | ||||
| Non-interest expense to average earning assets | 2.34 | % | 1.61 | % | 1.93 | % |
(1) Non-interest expense divided by the sum of net interest income and non-interest income.
The Company reported net income of $332.5 million and net income available to common stockholders of $315.2 million, or $6.18 per diluted common share, for the year ended December 31, 2022, compared to net income of $253.9 million and net income available to common stockholders of $235.2 million, or $4.60 per diluted common share, for 2021. ROE was 11.33% and ROA was 1.04% for the year ended December 31, 2022, compared to 8.35% and 0.67%, respectively, for 2021. The increase in net income, ROE and ROA for the year ended December 31, 2022 resulted primarily from a $106.9 million increase in net interest income and a $211.3 million increase in non-interest income, partially offset by a $96.0 million increase in the provision for credit losses and a $128.5 million increase in non-interest expense and a $15.2 million increase in income tax expense.
Details of the changes in the various components of net income are discussed in detail below.
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Taxable Equivalent Net Interest Income Analysis(1)
| Year ended December 31, | ||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||||||||||||||||
| (dollars in thousands) | Average Balance | Revenue / Expense | Yield / Rate | Average Balance | Revenue / Expense | Yield / Rate | Average Balance | Revenue / Expense | Yield / Rate | |||||||||||||||||
| Assets | ||||||||||||||||||||||||||
| Investment securities(2) | $ | 3,525,986 | $ | 64,021 | 1.69 | % | $ | 3,588,565 | $ | 44,636 | 1.24 | % | $ | 885,331 | $ | 19,432 | 2.19 | % | ||||||||
| Interest bearing cash and cash equivalents | 5,967,329 | 97,271 | 1.63 | % | 10,549,153 | 13,233 | 0.13 | % | 9,767,270 | 28,262 | 0.29 | % | ||||||||||||||
| Loans held for sale | 528,973 | 23,555 | 4.45 | % | 90,066 | 2,481 | 2.75 | % | 1,114,311 | 36,369 | 3.26 | % | ||||||||||||||
| Loans held for investment, mortgage finance | 5,285,612 | 189,843 | 3.59 | % | 7,881,791 | 239,205 | 3.03 | % | 8,589,762 | 285,212 | 3.32 | % | ||||||||||||||
| Loans held for investment(3) | 16,063,437 | 770,795 | 4.80 | % | 15,328,390 | 579,213 | 3.78 | % | 16,377,733 | 674,226 | 4.12 | % | ||||||||||||||
| Less: Allowance for credit losses on loans | 221,639 | — | — | 234,973 | — | — | 248,563 | — | — | |||||||||||||||||
| Loans held for investment, net | 21,127,410 | 960,638 | 4.55 | % | 22,975,208 | 818,418 | 3.56 | % | 24,718,932 | 959,438 | 3.88 | % | ||||||||||||||
| Total earning assets | 31,149,698 | 1,145,485 | 3.65 | % | 37,202,992 | 878,768 | 2.36 | % | 36,485,844 | 1,043,501 | 2.86 | % | ||||||||||||||
| Cash and other assets | 900,121 | 937,264 | 1,030,357 | |||||||||||||||||||||||
| Total assets | $ | 32,049,819 | $ | 38,140,256 | $ | 37,516,201 | ||||||||||||||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||||
| Transaction deposits | $ | 1,659,476 | $ | 18,099 | 1.09 | % | $ | 3,447,849 | $ | 20,657 | 0.60 | % | $ | 4,090,591 | $ | 32,836 | 0.80 | % | ||||||||
| Savings deposits | 9,983,571 | 151,400 | 1.52 | % | 11,180,645 | 36,459 | 0.33 | % | 12,346,904 | 74,950 | 0.61 | % | ||||||||||||||
| Time deposits | 1,313,483 | 21,164 | 1.61 | % | 1,716,642 | 8,391 | 0.49 | % | 2,867,579 | 38,331 | 1.34 | % | ||||||||||||||
| Total interest bearing deposits | 12,956,530 | 190,663 | 1.47 | % | 16,345,136 | 65,507 | 0.40 | % | 19,305,074 | 146,117 | 0.76 | % | ||||||||||||||
| Short-term borrowings | 1,829,751 | 29,077 | 1.59 | % | 2,399,280 | 4,613 | 0.19 | % | 3,115,416 | 22,006 | 0.71 | % | ||||||||||||||
| Long-term debt | 927,847 | 48,739 | 5.25 | % | 802,112 | 37,628 | 4.69 | % | 395,705 | 19,963 | 5.05 | % | ||||||||||||||
| Total interest bearing liabilities | 15,714,128 | 268,479 | 1.71 | % | 19,546,528 | 107,748 | 0.55 | % | 22,816,195 | 188,086 | 0.82 | % | ||||||||||||||
| Non-interest bearing deposits | 12,951,134 | 15,186,455 | 11,567,549 | |||||||||||||||||||||||
| Other liabilities | 301,251 | 274,357 | 295,710 | |||||||||||||||||||||||
| Stockholders’ equity | 3,083,306 | 3,132,916 | 2,836,747 | |||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 32,049,819 | $ | 38,140,256 | $ | 37,516,201 | ||||||||||||||||||||
| Net interest income | $ | 877,006 | $ | 771,020 | $ | 855,415 | ||||||||||||||||||||
| Net interest margin | 2.79 | % | 2.07 | % | 2.34 | % | ||||||||||||||||||||
| Net interest spread | 1.94 | % | 1.81 | % | 2.04 | % |
(1)Taxable equivalent rates used where applicable.
(2)Yields on investment securities are calculated using available-for-sale securities at amortized cost.
(3)Average balances include non-accrual loans. Loan interest income includes loan fees totaling $37.2 million, $47.8 million and $43.8 million for the years ended December 31, 2022, 2021 and 2020, respectively.
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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.
| Years Ended December 31, | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022/2021 | 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 | $ | 19,385 | $ | (752) | $ | 20,137 | $ | 25,204 | $ | 94,581 | $ | (69,377) | ||||||||||
| Interest bearing cash and cash equivalents | 84,038 | (5,731) | 89,769 | (15,029) | 16,523 | (31,552) | ||||||||||||||||
| Loans held for sale | 21,074 | 6,995 | 14,079 | (33,888) | (33,403) | (485) | ||||||||||||||||
| Loans held for investment, mortgage finance | (49,362) | (78,274) | 28,912 | (46,007) | (24,329) | (21,678) | ||||||||||||||||
| Loans held for investment | 191,582 | 27,721 | 163,861 | (95,013) | (43,539) | (51,474) | ||||||||||||||||
| Total interest income | 266,717 | (50,041) | 316,758 | (164,733) | 9,833 | (174,566) | ||||||||||||||||
| Interest expense: | ||||||||||||||||||||||
| Transaction deposits | (2,558) | (10,747) | 8,189 | (12,179) | (3,451) | (8,728) | ||||||||||||||||
| Savings deposits | 114,941 | (3,947) | 118,888 | (38,491) | (558) | (37,933) | ||||||||||||||||
| Time deposits | 12,773 | (2,273) | 15,046 | (29,940) | (14,728) | (15,212) | ||||||||||||||||
| Short-term borrowings | 24,464 | (1,315) | 25,779 | (17,393) | (4,304) | (13,089) | ||||||||||||||||
| Long-term debt | 11,111 | 6,287 | 4,824 | 17,665 | 20,103 | (2,438) | ||||||||||||||||
| Total interest expense | 160,731 | (11,995) | 172,726 | (80,338) | (2,938) | (77,400) | ||||||||||||||||
| Net interest income | $ | 105,986 | $ | (38,046) | $ | 144,032 | $ | (84,395) | $ | 12,771 | $ | (97,166) |
(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 $875.8 million for the year ended December 31, 2022 compared to $768.8 million for 2021. The increase was primarily due to an increase in yields on average earning assets, partially offset by an increase in funding costs.
Average earning assets for the year ended December 31, 2022 decreased $6.1 billion compared to the same period in 2021, which included a $4.6 billion decrease in average interest bearing cash and cash equivalents and a $1.4 billion decrease in average total loans. The decrease in average interest bearing cash and cash equivalents resulted primarily from the Company’s proactive exit of certain high-cost indexed deposit products beginning in the second half of 2021 and continuing throughout 2022. The decrease in average total loans resulted from declines in loans held for investment, mortgage finance. Average interest bearing liabilities decreased $3.8 billion for the year ended December 31, 2022 compared to the same period in 2021, primarily due to a $3.4 billion decrease in average interest bearing deposits and a $569.5 million decrease in average short-term borrowings, partially offset by a $125.7 million increase in average long-term debt. Average non-interest bearing deposits for the year ended December 31, 2022 decreased to $13.0 billion from $15.2 billion for 2021.
Net interest margin for the year ended December 31, 2022 was 2.79% compared to 2.07% for 2021. The increase was primarily due to an increase in yields on average earning assets and a shift in earning asset composition, partially offset by an increase in funding costs. The increases in yields on earning assets and funding costs are attributed to the impact of rising interest rates during 2022.
The yield on total loans held for investment, net, increased to 4.55% for the year ended December 31, 2022 compared to 3.56% for 2021 and the yield on earning assets increased to 3.65% for the year ended December 31, 2022 compared to 2.36% for 2021. The average cost of total deposits increased to 0.74% for 2022 from 0.21% for 2021 and total funding costs, including all deposits, long-term debt and stockholders' equity, increased to 0.85% for 2022 compared to 0.28% for 2021. The increases in yields on earning assets and cost of funds are attributed to the impact of rising interest rates.
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Non-interest Income
| Year ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2022 | 2021 | 2020 | |||||||
| Service charges on deposit accounts | $ | 22,876 | $ | 18,674 | $ | 11,620 | ||||
| Wealth management and trust fee income | 15,036 | 13,173 | 9,998 | |||||||
| Brokered loan fees | 14,159 | 27,954 | 46,423 | |||||||
| Servicing income | 857 | 15,513 | 27,029 | |||||||
| Investment banking and trading income | 35,054 | 24,441 | 22,687 | |||||||
| Net gain/(loss) on sale of loans held for sale | (990) | 1,317 | 58,026 | |||||||
| Gain on disposal of subsidiary | 248,526 | — | — | |||||||
| Other | 14,011 | 37,158 | 27,198 | |||||||
| Total non-interest income | $ | 349,529 | $ | 138,230 | $ | 202,981 |
Non-interest income increased by $211.3 million during the year ended December 31, 2022 to $349.5 million, compared to $138.2 million for 2021. The increase was primarily due to a $248.5 million gain recognized on the sale of BDCF and an increase in investment banking and trading income. Offsetting these increases were decreases in brokered loan fees and servicing income as a result of the sale of the Company’s mortgage servicing rights portfolio and transition of the mortgage correspondent aggregation program in 2021, as well as a decrease in other non-interest income.
Non-interest Expense
| Year ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2022 | 2021 | 2019 | |||||||
| Salaries and benefits | $ | 436,809 | $ | 350,930 | $ | 340,529 | ||||
| Occupancy expense | 44,222 | 33,232 | 34,955 | |||||||
| Marketing | 32,388 | 10,006 | 23,581 | |||||||
| Legal and professional | 75,858 | 41,152 | 52,132 | |||||||
| Communications and technology | 69,253 | 75,185 | 103,054 | |||||||
| FDIC insurance assessment | 14,344 | 21,027 | 25,955 | |||||||
| Servicing-related expenses | — | 27,765 | 64,585 | |||||||
| Merger-related expenses | — | — | 17,756 | |||||||
| Other | 54,658 | 39,715 | 41,809 | |||||||
| Total non-interest expense | $ | 727,532 | $ | 599,012 | $ | 704,356 |
Non-interest expense for the year ended December 31, 2022 increased $128.5 million compared to 2021. Full-year 2022 included $13.7 million in salaries and benefits expense and $15.9 million in legal and professional expense related to the sale of BDCF. Also contributing to the increase in non-interest expense were increases in salaries and benefits expense, resulting from an increase in headcount, marketing expense and other non-interest expense, which included an $8.0 million charitable contribution to the newly formed Texas Capital Bank Foundation. Offsetting these increases was a decrease in servicing-related expenses related to the 2021 sale of the Company’s MSR portfolio and transition of the mortgage correspondent aggregation (“MCA”) program to a third-party.
Analysis of Financial Condition
Loans Held for Investment
The following table summarizes the Company’s loans held for investment on a gross basis by portfolio segment. See Note 1 - Operations and Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this report for details of these portfolio segments.
| December 31, | ||||||
|---|---|---|---|---|---|---|
| (in thousands) | 2022 | 2021 | ||||
| Commercial | $ | 8,902,948 | $ | 9,897,561 | ||
| Energy | 1,159,296 | 721,373 | ||||
| Mortgage finance | 4,090,033 | 7,475,497 | ||||
| Real estate | 5,198,643 | 4,777,530 | ||||
| Gross loans held for investment | $ | 19,350,920 | $ | 22,871,961 |
Gross loans held for investment were $19.4 billion at December 31, 2022, a decline of $3.5 billion from 2021. The decline in commercial loans in 2022 was impacted by the sale of BDCF and its related $3.1 billion commercial loan portfolio, as well as
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declines in mortgage finance loans. Excluding the sale of BDCF and its impact on the loan portfolio, the Company experienced loan growth across all loan categories, except for mortgage finance loans, as the Company executed on its long-term strategy. Mortgage finance loans relate to the mortgage warehouse lending operations in which the Company purchases mortgage loan ownership interests that are typically sold within 10 to 20 days and represent 21% of total loans held for investment at December 31, 2022 compared to 33% at December 31, 2021. Volumes fluctuate based on the level of market demand for the product and the number of days between purchase and sale of the loans, which can be affected by changes in overall market interest rates, and tend to peak at the end of each month. Mortgage finance loan balances have declined as compared to December 31, 2021 as interest rates have continued to rise during 2022.
The Company originates a substantial majority of all loans held for investment. The Company also participates in syndicated loan relationships, both as a participant and as an agent. As of December 31, 2022, the Company had $3.8 billion in syndicated loans, $903.0 million of which the Company administered as agent. All syndicated loans, whether the Company acts as agent or participant, are underwritten to the same standards as all other loans the Company originates. As of December 31, 2022, none of syndicated loans were on non-accrual.
Portfolio Concentrations
Although more than 50% of the Company’s total loan exposure is outside of Texas and more than 50% of deposits are sourced outside of Texas, Texas concentration remains significant. As of December 31, 2022, a majority of the loans held for investment, excluding mortgage finance and other national lines of business, were to businesses with headquarters or operations in Texas. This geographic concentration subjects the Company’s loan portfolio to the general economic conditions within this state. The risks created by this concentration have been considered by management in the determination of the appropriateness of the allowance for credit losses.
The table below summarizes the industry concentrations of loans held for investment on a gross basis at December 31, 2022:
| (dollars in thousands) | Amount | Percent of Total | ||||
|---|---|---|---|---|---|---|
| Commercial: | ||||||
| Financials (excluding banks) | $ | 3,961,002 | 20.5 | % | ||
| Real estate related services (not secured by real estate) | 1,032,180 | 5.3 | % | |||
| Technology, telecom and media | 718,203 | 3.7 | % | |||
| Retail | 498,632 | 2.6 | % | |||
| Machinery, equipment and parts manufacturing | 363,696 | 1.9 | % | |||
| Commercial services | 326,659 | 1.7 | % | |||
| Oil & gas support services | 265,119 | 1.4 | % | |||
| Materials and commodities | 253,259 | 1.3 | % | |||
| Transportation services | 259,213 | 1.3 | % | |||
| Entertainment and recreation | 178,284 | 0.9 | % | |||
| Food and beverage manufacturing and wholesale | 177,549 | 0.9 | % | |||
| Healthcare and pharmaceuticals | 133,622 | 0.7 | % | |||
| Government and education | 100,176 | 0.5 | % | |||
| Consumer services | 95,002 | 0.5 | % | |||
| Diversified or miscellaneous | 540,352 | 2.8 | % | |||
| Total commercial | 8,902,948 | 46.0 | % | |||
| Energy | 1,159,296 | 6.0 | % | |||
| Mortgage finance | 4,090,033 | 21.1 | % | |||
| Real estate | 5,198,643 | 26.9 | % | |||
| Total | $ | 19,350,920 | 100.0 | % |
The Company’s largest concentration of commercial loans held for investment in any single industry is in financials excluding banks. Loans extended to borrowers in the financials excluding banks category are comprised largely of loans to companies who loan money to businesses and consumers for various purposes including, but not limited to, insurance, consumer goods and real estate. This category also includes loans to companies involved in investment management and securities and commodities trading. The next largest industry concentration of commercial loans held for investment is to commercial borrowers providing services to the real estate industry. Loans in this category are not secured by real property and are generally made to commercial borrowers that operate within the real estate industry, which include developers, contractors, professional service providers (such as architectural and interior design services), leasing, management, and other support type services.
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The Company believes the loans it originates are appropriately collateralized under its credit standards. Approximately 96% of the Company’s loans held for investment are secured by collateral. The table below sets forth information regarding the distribution of loans held for investment on a gross basis among various types of collateral at December 31, 2022:
| (dollars in thousands) | Amount | Percent of Total | ||||
|---|---|---|---|---|---|---|
| Commercial: | ||||||
| Business assets | $ | 6,888,901 | 35.6 | % | ||
| Other assets | 561,575 | 2.9 | % | |||
| Highly liquid assets | 505,505 | 2.6 | % | |||
| U. S. Government guaranty | 1,826 | — | % | |||
| Municipal tax- and revenue-secured | 61,416 | 0.3 | % | |||
| Rolling stock | 20,614 | 0.1 | % | |||
| Unsecured | 863,111 | 4.5 | % | |||
| Total commercial | 8,902,948 | 46.0 | % | |||
| Energy | 1,159,296 | 6.0 | % | |||
| Mortgage finance | 4,090,033 | 21.1 | % | |||
| Real estate | 5,198,643 | 26.9 | % | |||
| Total | $ | 19,350,920 | 100.0 | % |
As noted in the tables above, approximately 27% of loans held for investment as of December 31, 2022 are real estate loans that are generally secured by real property. This portfolio primarily includes market risk real estate loans, consisting of commercial real estate loans and loans made to residential builders and developers. Loan amounts are determined in part from an analysis of pro forma cash flows. Loans are also underwritten to comply with product-type specific advance rates against both cost and market value. The Company extends commercial real estate loans, including both construction/development financing and limited term financing, to professional real estate developers and owners/managers of commercial real estate projects and properties who have a demonstrated record of past success with similar properties. Collateral properties generally include office buildings, warehouse/distribution buildings, shopping centers, hotels/motels, senior living, apartment buildings and residential and commercial tract development. The primary source of repayment on these loans is expected to come from the sale, permanent financing or lease of the real property collateral. Loans to residential builders are typically in the form of uncommitted guidance lines and are for the purpose of developing lots into single-family homes, while loans to developers are typically in the form of borrowing base lines extended for the purpose of acquiring and developing raw land into lots that can be further sold to home builders. The table below summarizes the total real estate loan portfolio, which includes real estate loans and construction loans, as segregated by the type of property securing the credit. Property type concentrations are stated as a percentage of year-end total real estate loans as of December 31, 2022:
| (dollars in thousands) | Amount | Percent of Total | ||||
|---|---|---|---|---|---|---|
| Property type: | ||||||
| Market risk | ||||||
| Apartment/condominium buildings | $ | 1,701,936 | 32.7 | % | ||
| Commercial buildings | 463,224 | 8.9 | % | |||
| Industrial buildings | 447,593 | 8.6 | % | |||
| 1-4 Family dwellings (other than condominium) | 385,422 | 7.4 | % | |||
| Self-storage building | 220,204 | 4.2 | % | |||
| Shopping center/mall buildings | 200,587 | 3.9 | % | |||
| Senior housing buildings | 181,527 | 3.5 | % | |||
| Residential lots | 152,233 | 2.9 | % | |||
| Hotel/motel buildings | 140,825 | 2.7 | % | |||
| Commercial lots | 61,499 | 1.2 | % | |||
| Other | 117,192 | 2.3 | % | |||
| Other than market risk | ||||||
| Industrial buildings | 393,465 | 7.6 | % | |||
| 1-4 Family dwellings (other than condominium) | 323,280 | 6.2 | % | |||
| Commercial buildings | 215,856 | 4.2 | % | |||
| Other | 193,800 | 3.7 | % | |||
| Total real estate loans | $ | 5,198,643 | 100.0 | % |
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The table below summarizes the Company’s market risk real estate portfolio at December 31, 2022 as segregated by the geographic region in which the property is located. Approximately 58% of the market risk real estate collateral is located in Texas.
| (dollars in thousands) | Amount | Percent of Total | ||||
|---|---|---|---|---|---|---|
| Texas geographic region: | ||||||
| Dallas/Fort Worth | $ | 823,670 | 20.2 | % | ||
| Houston | 598,010 | 14.7 | % | |||
| San Antonio | 371,028 | 9.1 | % | |||
| Austin | 459,681 | 11.3 | % | |||
| Other Texas cities | 94,596 | 2.3 | % | |||
| Total Texas | 2,346,985 | 57.6 | % | |||
| Other states | 1,725,257 | 42.4 | % | |||
| Total market risk real estate loans | $ | 4,072,242 | 100.0 | % |
The determination of collateral value is critically important when financing real estate. As a result, obtaining current and objectively prepared appraisals is a major part of the underwriting and monitoring processes. The Company engages a variety of professional firms to supply appraisals, market studies and feasibility reports, environmental assessments and project site inspections to complement its internal resources to underwrite and monitor these credit exposures. Generally, the credit policy requires a new appraisal every three years. However, in periods of economic uncertainty where real estate market conditions may change rapidly, more current appraisals are obtained when warranted by conditions such as a borrower’s deteriorating financial condition, their possible inability to perform on the loan or other indicators of increasing risk of reliance on collateral value as the sole source of repayment of the loan. Annual appraisals are generally obtained for loans graded substandard or worse where real estate is a material portion of the collateral value and/or the income from the real estate or sale of the real estate is the primary source of debt service.
Appraisals are, in substantially all cases, reviewed by a third party to determine the reasonableness of the appraised value. The third-party reviewer will challenge whether or not the data used is appropriate and relevant, form an opinion as to the appropriateness of the appraisal methods and techniques used, and determine if overall the analysis and conclusions of the appraiser can be relied upon. Additionally, the third-party reviewer provides a detailed report of that analysis. Further review may be conducted by credit officers, including the Bank’s managed asset committee as conditions warrant. These additional steps of review are undertaken to confirm that the underlying appraisal and the third-party analysis can be relied upon. If differences arise, management addresses those with the reviewer and determine an appropriate resolution. Both the appraisal process and the appraisal review process can be less reliable in establishing accurate collateral values during and following periods of economic weakness due to the lack of comparable sales and the limited availability of financing to support an active market of potential purchasers.
Large Credit Relationships
The Company originates and maintains large credit relationships with numerous customers in the ordinary course of business. The legal lending limit of the Bank is approximately $598.2 million. The Company, however and generally, employs lower house limits which vary by assigned risk grade, product and collateral type. Such house limits, which generally range from $20 million to $60 million, may be exceeded with appropriate authorization for exceptionally strong borrowers and otherwise where business opportunity and assessed credit risk warrant a somewhat larger investment. The Company considers large credit relationships to be those with commitments equal to or in excess of $20.0 million. The following table provides additional information on large held for investment credit relationships outstanding at year-end:
| December 31, 2022 | December 31, 2021 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Period End Balances | Period End Balances | |||||||||||||||||||
| (dollars in thousands) | Number of Relationships | Committed | Outstanding | Number of Relationships | Committed | Outstanding | ||||||||||||||
| $30.0 million and greater | 315 | $ | 16,287,723 | $ | 10,515,253 | 263 | $ | 15,602,603 | $ | 11,469,402 | ||||||||||
| $20.0 million to $29.9 million | 216 | 5,262,032 | 3,485,755 | 189 | 4,546,986 | 2,755,013 |
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Loan Maturities and Interest Rate Sensitivity
| December 31, 2022 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | Total | Within 1 Year | 1-5 Years | 5-15 Years | After 15 Years | |||||||||||||
| Loan maturity: | ||||||||||||||||||
| Commercial | $ | 8,902,948 | $ | 2,011,152 | $ | 6,180,529 | $ | 697,516 | $ | 13,751 | ||||||||
| Energy | 1,159,296 | 47,437 | 1,111,859 | — | — | |||||||||||||
| Mortgage finance | 4,090,033 | 4,090,033 | — | — | — | |||||||||||||
| Real estate | 5,198,643 | 1,115,349 | 3,367,345 | 370,795 | 345,154 | |||||||||||||
| Total loans held for investment | $ | 19,350,920 | $ | 7,263,971 | $ | 10,659,733 | $ | 1,068,311 | $ | 358,905 | ||||||||
| Interest rate sensitivity for selected loans with: | ||||||||||||||||||
| Fixed interest rates | $ | 1,116,060 | $ | 74,586 | $ | 407,802 | $ | 613,330 | $ | 20,342 | ||||||||
| Floating or adjustable interest rates | 18,234,860 | 7,189,385 | 10,251,931 | 454,981 | 338,563 | |||||||||||||
| Total loans held for investment | $ | 19,350,920 | $ | 7,263,971 | $ | 10,659,733 | $ | 1,068,311 | $ | 358,905 |
Interest Reserve Loans
As of December 31, 2022 and December 31, 2021, the Company had $854.5 million and $456.1 million, respectively, in loans held for investment that included interest reserve arrangements, representing approximately 46% and 25%, respectively, of outstanding construction loans, which are a component of real estate loans. Interest reserve provisions are common in construction loans. The use of interest reserves is carefully controlled by underwriting standards, which consider the feasibility of the project, the creditworthiness of the borrower and guarantors and the loan-to-value coverage of the collateral. The interest reserve allows the borrower to draw loan funds to pay interest charges on the outstanding balance of the loan when financial conditions precedent are met. When drawn, the interest is capitalized and added to the loan balance, subject to conditions specified during the initial underwriting and at the time the credit is approved. The Company has ongoing controls for monitoring compliance with loan covenants, advancing funds and determining default conditions.
When the Company finances land on which improvements will be constructed, construction funds are generally not advanced until the borrower has received lease or purchase commitments which will meet cash flow coverage requirements and/or an analysis of market conditions and project feasibility indicates to management’s satisfaction that such lease or purchase commitments are forthcoming or other sources of repayment have been identified to repay the loan. It is the general policy to require a substantial equity investment by the borrower to complement the Bank's credit commitment. Any such required borrower investment is first contributed and invested in the project before any draws are allowed under the Bank's credit commitment. The Company requires current financial statements of the borrowing entity and guarantors, as well as conduct periodic inspections of the project and analysis of whether the project is on schedule or delayed. Updated appraisals are ordered when necessary to validate the collateral values to support advances, including reserve interest. Advances of interest reserves are discontinued if collateral values do not support the advances or if the borrower does not comply with other terms and conditions in the loan agreements. If at any time management believes that the collateral position is jeopardized, the Company retains the right to stop the use of interest reserves. As of December 31, 2022 and December 31, 2021, none of the loans with interest reserves were on non-accrual.
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Non-performing Assets
Non-performing assets include non-accrual loans and leases and repossessed assets. The table below summarizes non-accrual loans by type and by type of property securing the credit.
| As of December 31, | ||||||
|---|---|---|---|---|---|---|
| (dollars in thousands) | 2022 | 2021 | ||||
| Non-accrual loans held for investment(1) | ||||||
| Commercial: | ||||||
| Assets of the borrowers | $ | 41,448 | $ | 18,366 | ||
| Accounts receivable and inventory | 1,405 | 5,501 | ||||
| Other | 564 | 2,045 | ||||
| Total commercial | 43,417 | 25,912 | ||||
| Energy: | ||||||
| Oil and gas properties | 3,658 | 28,380 | ||||
| Total energy | 3,658 | 28,380 | ||||
| Real estate: | ||||||
| Assets of the borrowers | — | 13,741 | ||||
| Commercial property | 1,263 | 2,840 | ||||
| Single family residences | — | 1,629 | ||||
| Total real estate | 1,263 | 18,210 | ||||
| Total non-accrual loans held for investment | $ | 48,338 | $ | 72,502 | ||
| Non-accrual loans held for sale | — | — | ||||
| Other real estate owned (“OREO”) | — | — | ||||
| Total non-performing assets | $ | 48,338 | $ | 72,502 | ||
| Non-accrual loans held for investment to total loans held for investment | 0.25 | % | 0.32 | % | ||
| Total non-performing assets to total assets | 0.17 | % | 0.21 | % | ||
| Allowance for credit losses on loans to non-accrual loans held for investment | 5.2x | 2.9x | ||||
| Loans held for investment past due 90 days and accruing | $ | 131 | $ | 3,467 | ||
| Loans held for investment past due 90 days to total loans held for investment | — | % | 0.02 | % | ||
| Loans held for sale past due 90 days and accruing(2) | $ | — | $ | 3,986 |
(1)As of December 31, 2022 and 2021, non-accrual loans held for investment included $531,000 and $19.4 million, respectively, in loans that met the criteria for restructured.
(2)Includes loans guaranteed by U.S. government agencies that were repurchased out of Ginnie Mae securities. Loans are recorded as loans held for sale and carried at fair value on the balance sheet. Interest on these past due loans accrues at the debenture rate guaranteed by the U.S. government.
Summary of Credit Loss Experience
The provision for credit losses, comprised of a provision for loans and off-balance sheet credit losses, is a charge to earnings to maintain the allowance for credit losses at a level consistent with management’s assessment of expected losses at each balance sheet date. Below is a discussion of provision for credit losses on loans. See Note 10 - Financial Instruments with Off-Balance Sheet Risk in the accompanying notes to the consolidated financial statements included elsewhere in this report for presentation of the activity in the allowance for credit losses for off-balance asset credit losses.
The Company recorded a $66.0 million provision for credit losses on loans for the year ended December 31, 2022 compared to a negative provision of $30.0 million for the year ended December 31, 2021. The $66.0 million provision for credit losses resulted from updated views on the downside risks to the economic forecast and an increase in net charge-offs. The Company recorded $19.9 million in net charge-offs during the year ended December 31, 2022 compared to $12.9 million during 2021. Criticized loans totaled $513.2 million at December 31, 2022, compared to $582.9 million at December 31, 2021.
The table below presents key metrics related to the Company’s credit loss experience:
| December 31, 2022 | December 31, 2021 | |||||
|---|---|---|---|---|---|---|
| Allowance for credit losses on loans to total loans held for investment | 1.31 | % | 0.93 | % | ||
| Allowance for credit losses on loans to average total loans held for investment | 1.19 | % | 0.91 | % | ||
| Total allowance for credit losses to total loans held for investment | 1.43 | % | 1.00 | % | ||
| Total provision for credit losses to average total loans held for investment | 0.31 | % | (0.13) | % |
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The table below details net charge-offs/(recoveries) as a percentage of average total loans by loan category:
| 2022 | 2021 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net Charge-offs | Net Charge-offs to Average Loans | Net Charge-offs | Net Charge-offs to Average Loans | |||||||||||
| Commercial | $ | 16,932 | 0.17 | % | $ | 7,592 | 0.08 | % | ||||||
| Energy | 2,587 | 0.27 | % | 4,451 | 0.65 | % | ||||||||
| Mortgage finance | — | — | % | — | — | % | ||||||||
| Real Estate | 350 | 0.01 | % | 875 | 0.02 | % | ||||||||
| Total | $ | 19,869 | 0.09 | % | $ | 12,918 | 0.06 | % |
The allowance for credit losses on loans totaled $253.5 million at December 31, 2022 and $211.9 million at December 31, 2021. The following table presents a summary of the Company’s allowance for credit losses on loans by portfolio segment for the past two years:
| December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||||||||
| (dollars in thousands) | Allowance for Credit Losses on Loans | % of Loans in each Category to Total Loans | Allowance for Credit Losses on Loans | % of Loans in each Category to Total Loans | ||||||||||
| Commercial | $ | 136,841 | 46 | % | $ | 102,202 | 43 | % | ||||||
| Energy | 49,000 | 6 | % | 52,568 | 3 | % | ||||||||
| Mortgage finance | 10,745 | 21 | % | 6,083 | 33 | % | ||||||||
| Real estate | 56,883 | 27 | % | 51,013 | 21 | % | ||||||||
| Total | $ | 253,469 | 100 | % | $ | 211,866 | 100 | % |
The overall increase in the allowance for credit losses on loans at December 31, 2022 compared to 2021 resulted primarily from management’s continued evaluation of changing market conditions and updated views on the downside risks to the economic forecast.
See Note 1 - Operations and Summary of Significant Accounting Policies and Note 4 - Loans and Allowance for Credit Losses on Loans in the accompanying notes to the consolidated financial statements included elsewhere in this report for details of the allowance for credit losses on loans.
Loans Held for Sale
On April 20, 2021, the Company entered into an agreement to sell its portfolio of MSRs and to transition the MCA program to a third-party. The sale was completed on June 1, 2021 and the transfer of servicing on the underlying mortgage loans was completed on August 1, 2021. Transition activities began immediately following the execution of the agreement and were complete prior to December 31, 2021. The Company sold the remaining MSR balance of $1.2 million, which represented MSRs from loans sold after the cut-off date for the initial sale mentioned above. The sale of this MSR portfolio and the transfer of servicing on the underlying mortgage loans were completed on October 1, 2021, at which time all remaining MSR hedge positions were closed. During the fourth quarter of 2022, the Company sold the remaining loans held for sale associated to the MCA program and recorded a $990,000 loss on sale of loans held for sale.
Deposits
The Company competes for deposits by offering a full suite of deposit products and services to its customers. While this includes offering competitive interest rates and fees, the primary means of competing for deposits is convenience and service to customers, tailored to the strategy of maintaining a branch-lite network. The Company offers banking centers, courier services and online and mobile banking. Bask Bank, the Company’s online banking division, serves customers on a 24 hours-a-day, 7 days-a-week basis solely through online banking.
Average total deposits for the year ended December 31, 2022 decreased $5.6 billion compared to 2021. Average non-interest bearing deposits for the year ended December 31, 2022 decreased $2.2 billion compared to 2021 and average interest bearing deposits decreased $3.4 billion. The average cost of total deposits increased to 0.74% in 2022 from 0.21% in 2021 primarily due to rising interest rates.
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The following table discloses average deposits and weighted-average cost of deposits by type:
| Year Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | ||||||||||||
| (dollars in thousands) | Average Balance | Average Rate Paid | Average Balance | Average Rate Paid | |||||||||
| Non-interest bearing | $ | 12,951,134 | — | % | $ | 15,186,455 | — | % | |||||
| Interest bearing transaction | 1,659,476 | 1.09 | % | 3,447,849 | 0.60 | % | |||||||
| Savings | 9,983,571 | 1.52 | % | 11,180,645 | 0.33 | % | |||||||
| Time deposits | 1,313,483 | 1.61 | % | 1,716,642 | 0.49 | % | |||||||
| Total | $ | 25,907,664 | 0.74 | % | $ | 31,531,591 | 0.21 | % |
Estimated uninsured deposits at December 31, 2022 were $13.6 billion (59% of total deposits), compared to $16.1 billion (56% of total deposits) at December 31, 2021. The insured deposit data for 2022 and 2021 reflect the deposit insurance impact of “combined ownership segregation” of escrow and other accounts at an aggregate level but do not reflect an evaluation of all of the account styling distinctions that would determine the availability of deposit insurance to individual accounts based on FDIC regulations.
The following table shows scheduled maturities of time deposits greater than $250,000:
| December 31, | ||||||
|---|---|---|---|---|---|---|
| (in thousands) | 2022 | 2021 | ||||
| Months to maturity: | ||||||
| Three or less | $ | 70,008 | $ | 70,736 | ||
| Over three through six | 50,282 | 18,013 | ||||
| Over six through twelve | 117,435 | 86,223 | ||||
| Over twelve | 20,715 | 11,059 | ||||
| Total | $ | 258,440 | $ | 186,031 |
Liquidity and Capital Resources
Liquidity
In general terms, liquidity is a measurement of the Company’s ability to meet its cash needs. The Company’s objectives in managing its liquidity are to maintain the ability to meet loan commitments, repurchase investment securities and repay deposits and other liabilities in accordance with their terms, without an adverse impact on current or future earnings. The Company’s liquidity strategy is guided by policies, formulated and monitored by senior management and the Asset and Liability Management Committee (“ALCO”), which take into account the demonstrated marketability of the Company’s assets, the sources and stability of its funding and the level of unfunded commitments. The Company regularly evaluates all of its various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness. The Company’s principal source of funding is customer deposits, supplemented by short-term borrowings, primarily from federal funds purchased and FHLB borrowings, which are generally used to fund mortgage finance assets and long-term debt. The Company also relies on the availability of the mortgage secondary market provided by Ginnie Mae and the GSEs to support the liquidity of mortgage finance assets.
During 2020 and into the first half of 2021, the Company significantly increased its interest bearing cash and cash equivalents to ensure that it had the balance sheet strength to serve its clients during the COVID-19 pandemic. In the second half of 2021 and throughout 2022, these balances have run off as the Company purchased investment securities and proactively exited certain high-cost indexed deposit products. The following table summarizes these balances:
| December 31, | |||||||
|---|---|---|---|---|---|---|---|
| (dollars in thousands) | 2022 | 2021 | |||||
| Interest bearing cash and cash equivalents | $ | 4,778,623 | $ | 7,765,996 | |||
| Interest bearing cash and cash equivalents as a percent of: | |||||||
| Total loans held for investment | 24.8 | % | 34.1 | % | |||
| Total earning assets | 17.4 | % | 22.9 | % | |||
| Total deposits | 20.9 | % | 27.6 | % |
Liquidity to support growth in loans held for investment has been fulfilled primarily through growth in customer deposits. The Company’s goal is to obtain as much of its funding for loans held for investment and other earning assets as possible from customer deposits, which are generated principally through development of long-term customer relationships, with a significant
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focus on treasury management products. In addition, the Company also has access to deposits through brokered channels. The following table summarizes period-end total deposits:
| December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in thousands) | 2022 | 2021 | |||||||||
| Balance | % of Total | Balance | % of Total | ||||||||
| Customer deposits | $ | 21,749,868 | 95.2 | % | $ | 25,409,180 | 90.4 | % | |||
| Brokered deposits | 1,107,012 | 4.8 | % | 2,700,185 | 9.6 | % | |||||
| Total deposits | $ | 22,856,880 | 100.0 | % | $ | 28,109,365 | 100.0 | % |
The Company has short-term borrowing sources available to supplement deposits and meet its funding needs. Such borrowings are generally used to fund mortgage finance loans, due to their liquidity, short duration and interest spreads available. These borrowing sources include federal funds purchased from downstream correspondent bank relationships (which consist of banks that are smaller than the Bank) and from upstream correspondent bank relationships (which consist of banks that are larger than the Bank), customer repurchase agreements and advances from the FHLB and the Federal Reserve. The following table summarizes short-term borrowings, all of which mature within one year:
| December 31, | ||||||
|---|---|---|---|---|---|---|
| (in thousands) | 2022 | 2021 | ||||
| Repurchase agreements | 1,142 | 2,832 | ||||
| FHLB borrowings | 1,200,000 | 2,200,000 | ||||
| Total short-term and other borrowings | $ | 1,201,142 | $ | 2,202,832 |
The following table summarizes the Company’s short-term borrowing capacities net of balances outstanding:
| December 31, | ||||||
|---|---|---|---|---|---|---|
| (in thousands) | 2022 | 2021 | ||||
| FHLB borrowing capacity relating to loans | $ | 2,621,218 | $ | 5,190,703 | ||
| FHLB borrowing capacity relating to securities | 3,539,297 | 3,352,111 | ||||
| Total FHLB borrowing capacity(1) | $ | 6,160,515 | $ | 8,542,814 | ||
| Unused federal funds lines available from commercial banks | $ | 1,479,000 | $ | 892,000 | ||
| Unused Federal Reserve borrowings capacity | $ | 3,574,762 | $ | 2,414,702 | ||
| Unused revolving line of credit(2) | $ | 75,000 | $ | 75,000 |
(1)FHLB borrowings are collateralized by a blanket floating lien on certain real estate secured loans, mortgage finance assets and certain pledged securities.
(2)Unsecured revolving, non-amortizing line of credit with maturity date of February 8, 2024. Proceeds may be used for general corporate purposes, including funding regulatory capital infusions into the Bank. The loan agreement contains customary financial covenants and restrictions. No borrowings were made against this line of credit during 2022 or 2021. The line of credit was increased to $100.0 million on February 8, 2023.
The Company has long-term debt outstanding of $931.4 million as of December 31, 2022, comprised of trust preferred securities, subordinated notes and senior unsecured credit linked notes with maturity dates ranging from September 2024 to December 2036. See Note 9 - Short-Term Borrowings and Long-Term Debt in the accompanying notes to the consolidated financial statements included elsewhere in this report for additional information. The Company may consider raising additional capital, if needed, in public or private offerings of debt or equity securities to supplement deposits and meet its long-term funding needs.
For additional information on short-term borrowings and long-term debt, see Note 9 - Short-Term Borrowings and Long-Term Debt in the accompanying notes to the consolidated financial statements included elsewhere in this report.
As the Company is a holding company and is a separate operating entity from the Bank, the Company’s primary sources of liquidity are dividends received from the Bank and borrowings from outside sources. Banking regulations may limit the amount of dividends that may be paid by the Bank. See Note 11 - Regulatory Ratios and Capital in the accompanying notes to the consolidated financial statements included elsewhere in this report for additional information regarding dividend restrictions and “Liquidity Risks” included in Part I, Item 1A of this report.
Periodically, based on market conditions and other factors, and subject to compliance with applicable laws and regulations and the terms of its existing indebtedness, the Company may repay, repurchase, exchange or redeem outstanding indebtedness, or otherwise enter into transactions regarding debt or capital structure. For example, the Company periodically evaluates and may engage in liability management transactions, including repurchases or redemptions of outstanding subordinated notes, which may be funded by the issuance of, or exchanges of, newly issued unsecured borrowings to actively manage the debt maturity profile and interest cost.
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As of December 31, 2022, management is not aware of any events that are reasonably likely to have a material adverse effect on liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect.
Capital Resources
The Company’s equity capital averaged $3.1 billion for the year ended December 31, 2022 compared to $3.1 billion in 2021. The Company has not paid any cash dividends on common stock since operations commenced and has no plans to do so in the foreseeable future.
On April 19, 2022, the Company’s board of directors authorized the Company to repurchase up to $150.0 million of its outstanding shares of common stock. Any repurchases under the repurchase program have been made in accordance with applicable securities laws in open market or private transactions. The extent to which the Company repurchases shares, and the timing of such repurchases, will be at management’s discretion and will depend upon a variety of factors, including market conditions, capital position and amount of retained earnings, regulatory requirements and other considerations. No time limit was set for the completion of the share repurchase program, and the program may be suspended or discontinued at any time. During 2022, the Company repurchased 2,083,118 shares of its common stock for an aggregate purchase price of $115.3 million, at a weighted average price of $55.35 per share. On January 18, 2023, the Company’s board of directors authorized a new share repurchase program under which the Company may repurchase up to $150.0 million in shares of outstanding common stock.
For additional information on the Company’s capital and stockholders’ equity, Note 11 - Regulatory Ratios and Capital and Note 19 - Material Transactions Affecting Stockholders' Equity, respectively, in the accompanying notes to the consolidated financial statements included elsewhere in this report.
Critical Accounting Estimates
SEC guidance requires disclosure of “critical accounting estimates.” The SEC defines “critical accounting estimates” as those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant.
The Company follows financial accounting and reporting policies that are in accordance with accounting principles generally accepted in the United States. The more significant of these policies are summarized in Note 1 - Operations and Summary of Significant Accounting Policies in the notes to the consolidated financial statements included elsewhere in this report. Not all significant accounting policies require management to make difficult, subjective or complex judgments. However, the policy noted below could be deemed to meet the SEC’s definition of a critical accounting policy.
Allowance for Credit Losses
Management considers the policies related to the allowance for credit losses as the most critical to the financial statement presentation. The total allowance for credit losses includes activity related to allowances calculated in accordance with Accounting Standards Codification 326, Credit Losses. The allowance for credit losses is established through a provision for credit losses charged to current earnings. The amount maintained in the allowance reflects management’s continuing evaluation of the credit losses expected to be recognized over the life of the loans in the Company’s portfolio. The allowance for credit losses on loans is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. 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 the reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments using a Portfolio Level Qualitative Factor (“PLQF”) and/or a Portfolio Segment Level Qualitative Factor (“SLQF”). The PLQF and SLQF are utilized to address factors that are not present in historical loss rates and are otherwise unaccounted for in the quantitative process. A reserve is recorded upon origination or purchase of a loan. See “Summary of Credit Loss Experience” above and Note 4 - Loans and Allowance for Credit Losses on Loans in the accompanying notes to the consolidated financial statements included elsewhere in this report for further discussion of the risk factors considered by management in establishing the allowance for credit losses.
Management considers a range of macroeconomic scenarios in connection with the allowance estimation process. Within the various economic scenarios considered as of December 31, 2022, the quantitative estimate of the allowance for credit loss would increase by approximately $118.0 million under sole consideration of the most severe downside scenario. The quoted sensitivity calculation reflects the sensitivity of the modeled allowance estimate to macroeconomic forecast data, but is absent of qualitative overlays and other qualitative adjustments that are part of the quarterly reserving process and does not necessarily
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reflect the nature and extent of future changes in the allowance for reasons including increases or decreases in qualitative adjustments, changes in the risk profile and size of the portfolio, changes in the severity of the macroeconomic scenario and the range of scenarios under management consideration.
See “Summary of Credit Loss Experience” above and Note 4 – Loans and Allowance for Credit Losses on Loans in the accompanying notes to the consolidated unaudited financial statements included elsewhere in this report for further discussion of the risk factors considered by management in establishing the allowance for credit losses.