# TEXAS CAPITAL BANCSHARES INC/TX (TCBI) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from TEXAS CAPITAL BANCSHARES INC/TX's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1077428/000107742824000040/tcbi-20231231.htm
Accession: 0001077428-24-000040
Filing date: 2024-02-13
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/TCBI/
All MD&A years: /company/TCBI/mda/
Previous year: /company/TCBI/mda/fy2022/ (FY 2022)
Next year: /company/TCBI/mda/fy2024/ (FY 2024)

ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Recent Industry Developments

During 2023, the banking industry experienced significant volatility with multiple high-profile bank failures and industry wide concerns related to liquidity, deposit outflows, unrealized securities losses, eroding consumer confidence and increased regulatory scrutiny. Despite these negative industry developments, the Company’s liquidity position and balance sheet remains robust. Furthermore, the Company’s capital remains at historically high levels with CET1 and total capital ratios of 12.6% and 17.1%, respectively, as of December 31, 2023. The Company’s total deposits decreased by 2% as compared to December 31, 2022, to $22.4 billion at December 31, 2023. In response to the industry-wide concerns, the Company took a number of preemptive actions, which included pro-active outreach to clients and an enhanced review of its borrowing and liquidity positions to ensure that the Company’s liquidity and capital positions remain strong and that the Company is positioned to best serve its clients.

Results of Operations

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

[[GREPCENT_TABLE]]
[["","","","","For the Year Ended December 31,"],["(dollars in thousands except per share data)","","","","","2023","","2022","","2021"],["Net interest income","","","","","$","914,123","","","$","875,765","","","$","768,781"],["Provision for credit losses","","","","","72,000","","","66,000","","","(30,000)"],["Non-interest income","","","","","161,419","","","349,522","","","138,286"],["Non-interest expense","","","","","756,947","","","727,532","","","599,012"],["Income before income taxes","","","","","246,595","","","431,755","","","338,055"],["Income tax expense","","","","","57,454","","","99,277","","","84,116"],["Net income","","","","","189,141","","","332,478","","","253,939"],["Preferred stock dividends","","","","","17,250","","","17,250","","","18,721"],["Net income available to common stockholders","","","","","$","171,891","","","$","315,228","","","$","235,218"],["Basic earnings per common share","","","","","$","3.58","","","$","6.25","","","$","4.65"],["Diluted earnings per common share","","","","","$","3.54","","","$","6.18","","","$","4.60"],["Net interest margin","","","","","3.17","%","","2.79","%","","2.07","%"],["Return on average assets (\u201cROA\u201d)","","","","","0.64","%","","1.04","%","","0.67","%"],["Return on average common equity (\u201cROE\u201d)","","","","","6.15","%","","11.33","%","","8.35","%"],["Efficiency ratio(1)","","","","","70.4","%","","59.4","%","","66.0","%"],["Non-interest income to average earning assets","","","","","0.57","%","","1.12","%","","0.37","%"],["Non-interest expense to average earning assets","","","","","2.66","%","","2.34","%","","1.61","%"]]
[[/GREPCENT_TABLE]]

(1)    Non-interest expense divided by the sum of net interest income and non-interest income.

Year ended December 31, 2023 compared to year ended December 31, 2022

The Company reported net income of $189.1 million and net income available to common stockholders of $171.9 million for the year ended December 31, 2023, compared to net income of $332.5 million and net income available to common stockholders of $315.2 million for the same period in 2022. On a fully diluted basis, earnings per common share were $3.54 for the year ended December 31, 2023, compared to $6.18 for the same period in 2022. ROE was 6.15% and ROA was 0.64% for the twelve months ended December 31, 2023, compared to 11.33% and 1.04%, respectively, for the same period in 2022. The decrease in net income for the year ended December 31, 2023 compared to the same period in 2022 resulted primarily from a decrease in non-interest income.

Details of the changes in the various components of net income are discussed below.

35

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

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["","2023","","2022","","2021"],["(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)","$","4,162,931","","$","108,294","","2.37","%","","$","3,525,986","","$","64,021","","1.69","%","","$","3,588,565","","$","44,636","","1.24","%"],["Interest bearing cash and cash equivalents","4,353,911","","220,976","","5.08","%","","5,967,329","","97,271","","1.63","%","","10,549,153","","13,233","","0.13","%"],["Loans held for sale","33,166","","2,856","","8.61","%","","528,973","","23,555","","4.45","%","","90,066","","2,481","","2.75","%"],["Loans held for investment, mortgage finance","4,080,263","","107,111","","2.63","%","","5,285,612","","189,843","","3.59","%","","7,881,791","","239,205","","3.03","%"],["Loans held for investment(3)","16,076,646","","1,191,098","","7.41","%","","16,063,437","","770,802","","4.80","%","","15,328,390","","579,157","","3.78","%"],["Less: Allowance for credit losses on loans","249,180","","\u2014","","\u2014","","","221,639","","\u2014","","\u2014","","","234,973","","\u2014","","\u2014"],["Loans held for investment, net","19,907,729","","1,298,209","","6.52","%","","21,127,410","","960,645","","4.55","%","","22,975,208","","818,362","","3.56","%"],["Total earning assets","28,457,737","","1,630,335","","5.65","%","","31,149,698","","1,145,492","","3.65","%","","37,202,992","","878,712","","2.36","%"],["Cash and other assets","1,079,607","","","","","900,121","","","","","937,264"],["Total assets","$","29,537,344","","","","","$","32,049,819","","","","","$","38,140,256"],["Liabilities and Stockholders\u2019 Equity"],["Transaction deposits","$","1,466,583","","$","42,561","","2.90","%","","$","1,659,476","","$","18,099","","1.09","%","","$","3,447,849","","$","20,657","","0.60","%"],["Savings deposits","10,921,264","","480,106","","4.40","%","","9,983,571","","151,400","","1.52","%","","11,180,645","","36,459","","0.33","%"],["Time deposits","1,573,294","","65,108","","4.14","%","","1,313,483","","21,164","","1.61","%","","1,716,642","","8,391","","0.49","%"],["Total interest bearing deposits","13,961,141","","587,775","","4.21","%","","12,956,530","","190,663","","1.47","%","","16,345,136","","65,507","","0.40","%"],["Short-term borrowings","1,323,039","","70,642","","5.34","%","","1,829,751","","29,077","","1.59","%","","2,399,280","","4,613","","0.19","%"],["Long-term debt","882,904","","57,383","","6.50","%","","927,847","","48,739","","5.25","%","","802,112","","37,628","","4.69","%"],["Total interest bearing liabilities","16,167,084","","715,800","","4.43","%","","15,714,128","","268,479","","1.71","%","","19,546,528","","107,748","","0.55","%"],["Non-interest bearing deposits","9,814,517","","","","","12,951,134","","","","","15,186,455"],["Other liabilities","460,779","","","","","301,251","","","","","274,357"],["Stockholders\u2019 equity","3,094,964","","","","","3,083,306","","","","","3,132,916"],["Total liabilities and stockholders\u2019 equity","$","29,537,344","","","","","$","32,049,819","","","","","$","38,140,256"],["Net interest income","","$","914,535","","","","","$","877,013","","","","","$","770,964"],["Net interest margin","","","3.17","%","","","","2.79","%","","","","2.07","%"]]
[[/GREPCENT_TABLE]]

(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 $47.2 million, $37.2 million and $47.8 million for the years ended December 31, 2023, 2022 and 2021, respectively.

36

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.

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2023/2022","","2022/2021"],["","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","$","44,273","","","$","10,764","","","$","33,509","","","$","19,385","","","$","(752)","","","$","20,137"],["Interest bearing cash and cash equivalents","123,705","","","(26,299)","","","150,004","","","84,038","","","(5,731)","","","89,769"],["Loans held for sale","(20,699)","","","(22,063)","","","1,364","","","21,074","","","6,995","","","14,079"],["Loans held for investment, mortgage finance","(82,732)","","","(43,272)","","","(39,460)","","","(49,362)","","","(78,274)","","","28,912"],["Loans held for investment","420,296","","","634","","","419,662","","","191,645","","","27,721","","","163,924"],["Total interest income","484,843","","","(80,236)","","","565,079","","","266,780","","","(50,041)","","","316,821"],["Interest expense"],["Transaction deposits","24,462","","","(2,103)","","","26,565","","","(2,558)","","","(10,747)","","","8,189"],["Savings deposits","328,706","","","14,253","","","314,453","","","114,941","","","(3,947)","","","118,888"],["Time deposits","43,944","","","4,183","","","39,761","","","12,773","","","(2,273)","","","15,046"],["Short-term borrowings","41,565","","","(8,057)","","","49,622","","","24,464","","","(1,315)","","","25,779"],["Long-term debt","8,644","","","(2,360)","","","11,004","","","11,111","","","6,287","","","4,824"],["Total interest expense","447,321","","","5,916","","","441,405","","","160,731","","","(11,995)","","","172,726"],["Net interest income","$","37,522","","","$","(86,152)","","","$","123,674","","","$","106,049","","","$","(38,046)","","","$","144,095"]]
[[/GREPCENT_TABLE]]

(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 $914.1 million for the year ended December 31, 2023 compared to $875.8 million for 2022. The increase was primarily due to an increase in yields on average earning assets, partially offset by an increase in funding costs and a decrease in average earning assets.

Average earning assets for the year ended December 31, 2023 decreased $2.7 billion compared to the same period in 2022, which included a $1.6 billion decrease in average interest bearing cash and cash equivalents and a $1.7 billion decrease in average total loans, partially offset by a $636.9 million increase in investment securities. Average interest bearing liabilities increased $453.0 million for the year ended December 31, 2023 compared to the same period in 2022, primarily due to a $1.0 billion increase in average interest bearing deposits, partially offset by a $506.7 million decrease in average short-term borrowings and a $44.9 million decrease in average long-term debt. Average non-interest bearing deposits for the year ended December 31, 2023 decreased to $9.8 billion from $13.0 billion for the same period in 2022.

Net interest margin for the year ended December 31, 2023 was 3.17% compared to 2.79% for 2022. The increase was primarily due to the effect of rising interest rates on earning asset yields and a shift in earning asset composition, partially offset by higher funding costs, also as a result of rising interest rates, compared to the same period in 2022.

The yield on total loans held for investment, net, increased to 6.52% for the year ended December 31, 2023 compared to 4.55% for the same period in 2022 and the yield on earning assets increased to 5.65% for the year ended December 31, 2023 compared to 3.65% for the same period in 2022. The average cost of total deposits increased to 2.47% for 2023 from 0.74% for the same period in 2022 and total funding costs, including all deposits, long-term debt and stockholders' equity, increased to 2.46% for 2023 compared to 0.85% for the same period 2022.

37

Non-interest Income 

[[GREPCENT_TABLE]]
[["","","","","","Year Ended December 31,"],["(in thousands)","","","","","2023","","2022","","2021"],["Service charges on deposit accounts","","","","","$","20,874","","","$","23,266","","","$","19,054"],["Wealth management and trust fee income","","","","","13,955","","","15,036","","","13,173"],["Brokered loan fees","","","","","8,918","","","14,159","","","27,954"],["Investment banking and trading income","","","","","86,182","","","35,054","","","24,441"],["Gain on disposal of subsidiary","","","","","\u2014","","","248,526","","","\u2014"],["Other","","","","","31,490","","","13,481","","","53,664"],["Total non-interest income","","","","","$","161,419","","","$","349,522","","","$","138,286"]]
[[/GREPCENT_TABLE]]

Non-interest income decreased by $188.1 million during the year ended December 31, 2023 to $161.4 million, compared to $349.5 million for the same period in 2022. The decrease was primarily due to a non-recurring $248.5 million gain related to the sale of our premium finance subsidiary recorded in 2022, partially offset by increases in investment banking and trading income and other non-interest income.

Non-interest Expense 

[[GREPCENT_TABLE]]
[["","","","","","Year ended December 31,"],["(in thousands)","","","","","2023","","2022","","2021"],["Salaries and benefits","","","","","$","459,700","","","$","434,906","","","$","350,197"],["Occupancy expense","","","","","38,494","","","44,222","","","33,232"],["Marketing","","","","","25,854","","","32,388","","","10,006"],["Legal and professional","","","","","64,924","","","75,858","","","41,152"],["Communications and technology","","","","","81,262","","","69,253","","","75,185"],["Federal Deposit Insurance Corporation (\u201cFDIC\u201d) insurance assessment","","","","","36,775","","","14,344","","","21,027"],["Servicing-related expenses","","","","","\u2014","","","\u2014","","","27,765"],["Other","","","","","49,938","","","56,561","","","40,448"],["Total non-interest expense","","","","","$","756,947","","","$","727,532","","","$","599,012"]]
[[/GREPCENT_TABLE]]

Non-interest expense for the year ended December 31, 2023 increased $29.4 million compared to the same period in 2022 primarily due to an increase in salaries and benefits, communications and technology and FDIC insurance assessment, which included $19.9 million in special assessment expense in 2023, partially offset by a decrease in legal and professional expense. Full-year 2022 legal and professional expense included $15.9 million in expenses related to the sale of our premium finance subsidiary.

Analysis of Financial Condition

Loans Held for Investment

As discussed in Note 1 - Operations and Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this report, in the second quarter of 2023, changes were made to certain estimates used in the Company’s current expected credit loss model which resulted in adjustments being made to the Company’s portfolio segments. As a result, certain prior period balances below have been reclassified to conform to the current period presentation of portfolio segments.

The following table summarizes the Company’s loans held for investment by portfolio segment. See Note 1 - Operations and Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this report for details of these portfolio segments.

[[GREPCENT_TABLE]]
[["(in thousands)","December 31, 2023","","December 31, 2022"],["Commercial","$","10,410,766","","","$","9,832,676"],["Mortgage finance","3,978,328","","","4,090,033"],["Commercial real estate","5,500,774","","","4,875,363"],["Consumer","530,948","","","552,848"],["Gross loans held for investment","20,420,816","","","19,350,920"],["Unearned income (net of direct origination costs)","(80,258)","","","(63,580)"],["Total loans held for investment","$","20,340,558","","","$","19,287,340"]]
[[/GREPCENT_TABLE]]

38

Total loans held for investment were $20.3 billion at December 31, 2023, an increase of $1.1 billion from December 31, 2022. The Company experienced loan growth in the commercial and commercial real estate categories as it has continued to execute on its long-term strategy. Mortgage finance loans relate to the mortgage warehouse lending operations in which the Company purchases mortgage loan ownership interests that are typically sold within 10 to 20 days and represent 19% and 21% of gross loans held for investment at December 31, 2023 and December 31, 2022, respectively. Volumes fluctuate based on the level of market demand for the product and the number of days between purchase and sale of the loans, which can be affected by changes in overall market interest rates, and tend to peak at the end of each month.

The Company originates a substantial majority of all loans held for investment. The Company also participates in shared national credits, both as a participant and as an agent. As of December 31, 2023, the Company had $5.3 billion in shared national credits, $1.2 billion of which the Company administered as agent. All syndicated loans, whether the Company acts as agent or participant, are underwritten to the same standards as all other loans the Company originates. As of December 31, 2023, approximately $6.5 million of the Company’s shared national credits 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, 2023, a majority of the loans held for investment, excluding mortgage finance and other national lines of business, were to businesses with headquarters or operations in Texas. This geographic concentration subjects the Company’s loan portfolio to the general economic conditions within this state. The risks created by this concentration have been considered by management in the determination of the appropriateness of the allowance for credit losses.

The table below summarizes the industry concentrations of loans held for investment on a gross basis at December 31, 2023:

[[GREPCENT_TABLE]]
[["(dollars in thousands)","Amount","","Percent of Total"],["Commercial:"],["Financials (excluding banks)","$","3,950,879","","","19.4","%"],["Oil and gas and pipelines","1,205,100","","","5.9","%"],["Technology, telecom and media","1,004,186","","","4.9","%"],["Real estate related services (not secured by real estate)","947,494","","","4.6","%"],["Commercial services","419,065","","","2.1","%"],["Retail","410,162","","","2.0","%"],["Machinery, equipment and parts manufacturing","300,606","","","1.5","%"],["Entertainment and recreation","291,146","","","1.4","%"],["Transportation services","236,100","","","1.2","%"],["Healthcare and pharmaceuticals","217,558","","","1.1","%"],["Government and education","208,828","","","1.0","%"],["Food and beverage manufacturing and wholesale","179,673","","","0.9","%"],["Materials and commodities","173,574","","","0.8","%"],["Utilities","146,923","","","0.7","%"],["Consumer services","137,823","","","0.7","%"],["Diversified or miscellaneous","581,649","","","2.8","%"],["Total commercial","10,410,766","","","51.0","%"],["Mortgage finance","3,978,328","","","19.5","%"],["Commercial real estate","5,500,774","","","26.9","%"],["Consumer","530,948","","","2.6","%"],["Total","$","20,420,816","","","100.0","%"]]
[[/GREPCENT_TABLE]]

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.

39

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, 2023:

[[GREPCENT_TABLE]]
[["(dollars in thousands)","Amount","","Percent of Total"],["Commercial:"],["Business assets","$","8,848,736","","","43.4","%"],["Other assets","337,444","","","1.7","%"],["Highly liquid assets","330,767","","","1.6","%"],["Municipal tax- and revenue-secured","89,079","","","0.4","%"],["Rolling stock","30,415","","","0.1","%"],["U. S. Government guaranty","1,261","","","\u2014","%"],["Unsecured","773,064","","","3.8","%"],["Total commercial","10,410,766","","","51.0","%"],["Mortgage finance","3,978,328","","","19.5","%"],["Commercial real estate","5,500,774","","","26.9","%"],["Consumer","530,948","","","2.6","%"],["Total","$","20,420,816","","","100.0","%"]]
[[/GREPCENT_TABLE]]

As noted in the tables above, approximately 27% of loans held for investment as of December 31, 2023 are commercial real estate loans that are generally secured by real property. The commercial real estate portfolio is comprised primarily of non-owner occupied construction/development financing and limited term financing provided to professional real estate developers, owners/managers of commercial real estate projects and properties, and residential builders/developers. Collateral properties include office buildings, warehouse/distribution buildings, shopping centers, hotels/motels, senior living, apartment buildings, residential and commercial tract developments, and raw land or lots to be developed into single-family homes. The primary source of repayment on these loans is generally expected to come from the sale, permanent financing or lease of the real property collateral. As a result, the performance of these loans is generally impacted by fluctuations in collateral values, the ability of the borrower to obtain permanent financing, and, in the case of loans to residential builder/developers, volatility in consumer demand. Commercial real estate net charge-offs totaled $5.5 million in 2023, primarily related to a single hospitality loan that was significantly impacted by the COVID-19 pandemic, as compared to $350,000 in 2022.

The table below summarizes the commercial real estate loan portfolio, by property type as of December 31, 2023:

[[GREPCENT_TABLE]]
[["(dollars in thousands)","Amount","","Percent of Total"],["Apartment/condominium buildings","$","2,196,299","","","39.9","%"],["Industrial buildings","1,032,647","","","18.8","%"],["Office buildings","451,660","","","8.2","%"],["1-4 Family dwellings (other than condominium)","340,632","","","6.2","%"],["Shopping center/mall buildings","265,938","","","4.8","%"],["Senior housing buildings","260,656","","","4.7","%"],["Self-storage buildings","212,571","","","3.9","%"],["Commercial buildings","166,405","","","3.0","%"],["Hotel/motel buildings","162,585","","","3.0","%"],["Residential lots","92,037","","","1.7","%"],["Student housing","84,003","","","1.5","%"],["Commercial lots","78,192","","","1.4","%"],["Other","157,149","","","2.9","%"],["Total commercial real estate loans","$","5,500,774","","","100.0","%"]]
[[/GREPCENT_TABLE]]

40

The table below summarizes the Company’s commercial real estate portfolio at December 31, 2023 as segregated by the geographic region in which the property is located. Approximately 59% of the commercial real estate collateral is located in Texas.

[[GREPCENT_TABLE]]
[["(dollars in thousands)","Amount","","Percent of Total"],["Texas geographic region:"],["Dallas/Fort Worth","$","1,140,779","","","20.7","%"],["Houston","881,487","","","16.0","%"],["San Antonio","515,875","","","9.4","%"],["Austin","503,052","","","9.2","%"],["Other Texas cities","181,278","","","3.3","%"],["Total Texas","3,222,471","","","58.6","%"],["Other states","2,278,303","","","41.4","%"],["Total commercial real estate loans","$","5,500,774","","","100.0","%"]]
[[/GREPCENT_TABLE]]

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 determines 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.

Interest Reserve Loans

As of December 31, 2023 and December 31, 2022, the Company had $788.9 million and $854.5 million, respectively, in loans held for investment that included interest reserve arrangements, representing approximately 14% and 18%, respectively, of outstanding commercial real estate loans. The use of interest reserves is common in construction loans and 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 condition precedents 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

41

retains the right to stop the use of interest reserves. As of December 31, 2023 and December 31, 2022, none of the loans with interest reserves were on non-accrual.

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 $593.9 million. The Company, however, 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:

[[GREPCENT_TABLE]]
[["","December 31, 2023","","December 31, 2022"],["","","","Period End Balances","","","","Period End Balances"],["(dollars in thousands)","Number of Relationships","","Committed","","Outstanding","","Number of Relationships","","Committed","","Outstanding"],["$30.0 million and greater","344","","","$","18,053,123","","","$","11,794,216","","","315","","","$","16,287,723","","","$","10,515,253"],["$20.0 million to $29.9 million","215","","","5,245,658","","","3,493,601","","","216","","","5,262,032","","","3,485,755"]]
[[/GREPCENT_TABLE]]

Loan Maturities and Interest Rate Sensitivity

[[GREPCENT_TABLE]]
[["","December 31, 2023"],["(in thousands)","Total","","Within 1 Year","","1-5 Years","","5-15 Years","","After 15 Years"],["Loan maturity:"],["Commercial","$","10,410,766","","","$","1,897,320","","","$","7,870,372","","","$","635,042","","","$","8,032"],["Mortgage finance","3,978,328","","","3,978,328","","","\u2014","","","\u2014","","","\u2014"],["Commercial real estate","5,500,774","","","1,516,284","","","3,643,612","","","303,895","","","36,983"],["Consumer","530,948","","","207,616","","","19,220","","","4,242","","","299,870"],["Total loans held for investment","$","20,420,816","","","$","7,599,548","","","$","11,533,204","","","$","943,179","","","$","344,885"],["Interest rate sensitivity for selected loans with:"],["Fixed interest rates","$","1,133,129","","","$","72,272","","","$","506,292","","","$","536,237","","","$","18,328"],["Floating or adjustable interest rates","19,287,687","","","7,527,276","","","11,026,912","","","406,942","","","326,557"],["Total loans held for investment","$","20,420,816","","","$","7,599,548","","","$","11,533,204","","","$","943,179","","","$","344,885"]]
[[/GREPCENT_TABLE]]

42

Non-performing Assets

Non-performing assets include non-accrual loans and leases and repossessed assets. The table below summarizes non-accrual loans by portfolio segment and by type of property securing the credit.

[[GREPCENT_TABLE]]
[["(dollars in thousands)","December 31, 2023","","December 31, 2022"],["Non-accrual loans held for investment"],["Commercial:"],["Business assets","$","63,094","","","$","41,448"],["Oil and gas properties","2,543","","","3,658"],["Machinery and equipment","3,332","","","\u2014"],["Accounts receivable and inventory","\u2014","","","1,405"],["Other","79","","","531"],["Total commercial","69,048","","","47,042"],["Commercial real estate:"],["Hotel/motel","12,350","","","\u2014"],["Commercial property","\u2014","","","1,263"],["Total commercial real estate","12,350","","","1,263"],["Consumer"],["Other","\u2014","","","33"],["Total consumer","\u2014","","","33"],["Total non-accrual loans held for investment","81,398","","","48,338"],["Non-accrual loans held for sale","\u2014","","","\u2014"],["Other real estate owned (\u201cOREO\u201d)","\u2014","","","\u2014"],["Total non-performing assets","$","81,398","","","$","48,338"],["Non-accrual loans held for investment to total loans held for investment","0.40","%","","0.25","%"],["Total non-performing assets to total assets","0.29","%","","0.17","%"],["Allowance for credit losses on loans to non-accrual loans held for investment","3.1x","","5.2x"],["Loans held for investment past due 90 days and accruing","$","19,523","","","$","131"],["Loans held for investment past due 90 days to total loans held for investment","0.10","%","","\u2014","%"],["Loans held for sale past due 90 days and accruing","$","\u2014","","","$","\u2014"]]
[[/GREPCENT_TABLE]]

Summary of Credit Loss Experience

The provision for credit losses, comprised of a provision for loans and off-balance sheet credit losses, is a charge to earnings to maintain the allowance for credit losses at a level consistent with management’s assessment of expected losses at each balance sheet date. Below is a discussion of provision for credit losses on loans. The changes made to the Company’s current expected credit loss model, as discussed in Note 1 - Operations and Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this report, resulted in a reallocation of the allowance for credit losses between loan portfolio segments and allowance balances allocated to off-balance sheet financial instruments. The changes made result in a higher allocation of losses to off-balance sheet financial statements. See Note 9 - Financial Instruments with Off-Balance Sheet Risk in the accompanying notes to the consolidated financial statements included elsewhere in this report for presentation of the activity in the allowance for credit losses for off-balance asset credit losses.

The Company recorded a provision for credit losses on loans of $47.4 million for the year ended December 31, 2023 compared to a provision of $61.5 million for the year ended December 31, 2022. The provision for credit losses on loans for the year ended December 31, 2023 reflects increases in total loans held for investment, criticized and non-accrual loans and net charge-offs during the year ended December 31, 2023. The Company recorded $50.9 million in net charge-offs during the year ended December 31, 2023 compared to $19.9 million in net charge-offs during the same period in 2022. Criticized loans totaled $738.2 million at December 31, 2023, compared to $513.2 million at December 31, 2022.

43

The table below presents key metrics related to the Company’s credit loss experience: 

[[GREPCENT_TABLE]]
[["","","December 31, 2023","","December 31, 2022"],["Allowance for credit losses on loans to total loans held for investment","","1.23","%","","1.31","%"],["Allowance for credit losses on loans to average total loans held for investment","","1.24","%","","1.19","%"],["Total allowance for credit losses to total loans held for investment","","1.46","%","","1.43","%"],["Total provision for credit losses to average total loans held for investment","","0.36","%","","0.31","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","2023","","2022"],["(dollars in thousands)","","Net Charge-offs","","Net Charge-offs to Average Loans(1)","","Net Charge-offs","","Net Charge-offs to Average Loans(1)"],["Commercial","","$","45,395","","","0.44","%","","$","19,542","","","0.18","%"],["Mortgage finance","","\u2014","","","\u2014","%","","\u2014","","","\u2014","%"],["Commercial real estate","","5,496","","","0.10","%","","350","","","0.01","%"],["Consumer","","36","","","0.01","%","","(23)","","","\u2014","%"],["Total","","$","50,927","","","0.25","%","","$","19,869","","","0.09","%"]]
[[/GREPCENT_TABLE]]

The allowance for credit losses on loans totaled $250.0 million at December 31, 2023 and $253.5 million at December 31, 2022. The following table presents a summary of the Company’s allowance for credit losses on loans by portfolio segment for the past two years:

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2023","","2022"],["(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","","$","171,437","","","51","%","","$","185,303","","","51","%"],["Mortgage finance","","4,173","","","19","%","","10,745","","","21","%"],["Commercial real estate","","71,829","","","27","%","","54,268","","","25","%"],["Consumer","","2,534","","","3","%","","3,153","","","3","%"],["Total","","$","249,973","","","100","%","","$","253,469","","","100","%"]]
[[/GREPCENT_TABLE]]

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.

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, 2023 decreased $2.1 billion compared to 2022. Average non-interest bearing deposits for the year ended December 31, 2023 decreased $3.1 billion compared to 2022 and average interest bearing deposits increased $1.0 billion. The average cost of total deposits increased to 2.47% in 2023 from 0.74% in 2022 primarily due to rising interest rates.

The following table discloses average deposits and weighted-average cost of deposits by type:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["(dollars in thousands)","Average Balance","","Average Rate Paid","","Average Balance","","Average Rate Paid"],["Non-interest bearing","$","9,814,517","","","\u2014","%","","$","12,951,134","","","\u2014","%"],["Interest bearing transaction","1,466,583","","","2.90","%","","1,659,476","","","1.09","%"],["Savings","10,921,264","","","4.40","%","","9,983,571","","","1.52","%"],["Time deposits","1,573,294","","","4.14","%","","1,313,483","","","1.61","%"],["Total","$","23,775,658","","","2.47","%","","$","25,907,664","","","0.74","%"]]
[[/GREPCENT_TABLE]]

44

Estimated uninsured deposits at December 31, 2023 were $9.7 billion (43% of total deposits), compared to $12.4 billion (54% of total deposits) at December 31, 2022. The uninsured amounts are estimated based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements.

The following table shows scheduled maturities of time deposits greater than $250,000:

[[GREPCENT_TABLE]]
[["(in thousands)","December 31, 2023","","December 31, 2022"],["Months to maturity:"],["Three or less","$","79,162","","","$","70,008"],["Over three through six","127,289","","","50,282"],["Over six through twelve","150,382","","","117,435"],["Over twelve","19,535","","","20,715"],["Total","$","376,368","","","$","258,440"]]
[[/GREPCENT_TABLE]]

Liquidity and Capital Resources

Liquidity

In general terms, liquidity is a measurement of the Company’s ability to meet its cash needs. The Company’s objectives in managing its liquidity are to maintain the ability to meet loan commitments, repurchase investment securities and repay deposits and other liabilities in accordance with their terms, without an adverse impact on current or future earnings. The Company’s liquidity strategy is guided by policies, formulated and monitored by senior management and the Asset and Liability Management Committee (“ALCO”), which take into account the demonstrated marketability of the Company’s assets, the sources and stability of its funding and the level of unfunded commitments. The Company regularly evaluates all of its various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness. The Company’s principal source of funding is customer deposits, supplemented by short-term borrowings, primarily from federal funds purchased and Federal Home Loan Bank (“FHLB”) borrowings, which are generally used to fund mortgage finance assets, and long-term debt. The Company also relies on the availability of the mortgage secondary market provided by Ginnie Mae and government sponsored entities to support the liquidity of mortgage finance assets.

The following table summarizes the Company’s interest bearing cash and cash equivalents:

[[GREPCENT_TABLE]]
[["(dollars in thousands)","","December 31, 2023","","December 31, 2022"],["Interest bearing cash and cash equivalents","","$","3,042,357","","","$","4,778,623"],["Interest bearing cash and cash equivalents as a percent of:"],["Total loans held for investment","","15.0","%","","24.8","%"],["Total earning assets","","11.1","%","","17.4","%"],["Total deposits","","13.6","%","","20.9","%"]]
[[/GREPCENT_TABLE]]

The Company’s goal is to obtain as much of its funding for loans held for investment and other earning assets as possible from customer deposits, which are generated principally through development of long-term customer relationships, with a significant focus on treasury management products. In addition, the Company also has access to deposits through brokered channels. The following table summarizes period-end total deposits:

[[GREPCENT_TABLE]]
[["","December 31, 2023","","December 31, 2022"],["(dollars in thousands)","Balance","","% of Total","","Balance","","% of Total"],["Customer deposits","$","21,454,568","","","95.9","%","","$","21,247,999","","","93.0","%"],["Brokered deposits","917,271","","","4.1","%","","1,608,881","","","7.0","%"],["Total deposits","$","22,371,839","","","100.0","%","","$","22,856,880","","","100.0","%"]]
[[/GREPCENT_TABLE]]

45

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:

[[GREPCENT_TABLE]]
[["(in thousands)","","December 31, 2023","","December 31, 2022"],["Repurchase agreements","","$","\u2014","","","$","1,142"],["FHLB borrowings","","1,500,000","","","1,200,000"],["Total short-term and other borrowings","","$","1,500,000","","","$","1,201,142"]]
[[/GREPCENT_TABLE]]

The following table summarizes the Company’s short-term borrowing capacities net of balances outstanding:

[[GREPCENT_TABLE]]
[["(in thousands)","December 31, 2023","","December 31, 2022"],["FHLB borrowing capacity relating to loans and pledged securities","$","2,602,092","","","$","2,621,218"],["FHLB borrowing capacity relating to unencumbered securities","3,737,615","","","3,539,297"],["Total FHLB borrowing capacity(1)","$","6,339,707","","","$","6,160,515"],["Unused federal funds lines available from commercial banks","$","1,188,000","","","$","1,479,000"],["Unused Federal Reserve borrowings capacity","$","4,094,801","","","$","3,574,762"],["Unused revolving line of credit(2)","$","100,000","","","$","75,000"]]
[[/GREPCENT_TABLE]]

(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, 2025. 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 twelve months ended December 31, 2023 or 2022. The line of credit was reduced to $75.0 million in the first quarter of 2024.

The Company has long-term debt outstanding of $859.1 million as of December 31, 2023, comprised of trust preferred securities, subordinated notes and senior unsecured credit linked notes with maturity dates ranging from September 2024 to December 2036. In the second quarter of 2023, the Company partially paid down $75.0 million of the senior unsecured credit-linked notes in accordance with the terms of the notes. See Note 8 - Short-Term Borrowings and Long-Term Debt in the accompanying notes to the consolidated financial statements included elsewhere in this report for additional information. The Company may consider raising additional capital, if needed, in public or private offerings of debt or equity securities to supplement deposits and meet its long-term funding needs.

As the Company is a holding company and is a separate operating entity from the Bank, the Company’s primary sources of liquidity are dividends received from the Bank and borrowings from outside sources. Banking regulations may limit the amount of dividends that may be paid by the Bank. See Note 10 - Regulatory Ratios and Capital in the accompanying notes to the consolidated financial statements included elsewhere in this report for additional information regarding dividend restrictions and “Liquidity Risks” included in Part I, Item 1A of the 2022 Form 10-K.

Periodically, based on market conditions and other factors, and subject to compliance with applicable laws and regulations and the terms of its existing indebtedness, the Company may repay, repurchase, exchange or redeem outstanding indebtedness, or otherwise enter into transactions regarding debt or capital structure. For example, the Company periodically evaluates and may engage in liability management transactions, including repurchases or redemptions of outstanding subordinated notes, which may be funded by the issuance of, or exchanges of, newly issued unsecured borrowings to actively manage the debt maturity profile and interest cost.

Capital Resources

The Company’s equity capital averaged $3.1 billion for the year ended December 31, 2023 compared to $3.1 billion for the same period in 2022. The Company has not paid any cash dividends on common stock since operations commenced and has no plans to do so in the foreseeable future.

On April 19, 2022, the Company’s board of directors authorized a share repurchase program under which the Company could repurchase up to $150.0 million in shares of its outstanding common stock. In January 2023, the Company repurchased 564,206 shares of common stock at a weighted average price of $61.50, completing the full $150.0 million of repurchases authorized under this plan. A new share repurchase program was approved on January 18, 2023 under which the Company could repurchase up to $150.0 million in shares of outstanding common stock. From March 2023 through December 2023, the Company repurchased 1,257,326 shares of its common stock for an aggregate purchase price of $69.4 million, at a weighted average price of $55.22 per share under this plan. The aggregate purchase price and weighted average price per share does not include the effect of excise tax expense incurred on net stock repurchases.

46

On January 17, 2024, the Company’s board of directors authorized a new share repurchase program under which the Company may repurchase up to $150.0 million in shares of its outstanding common stock. Any repurchases under the repurchase program will be made in accordance with applicable securities laws from time to time in open market or private transactions. The extent to which the Company repurchases shares, and the timing of such repurchases, will be at management’s discretion and will depend upon a variety of factors, including market conditions, our capital position and amount of retained earnings, regulatory requirements and other considerations. The share repurchase program is set to expire on January 31, 2025, and the program may be suspended or discontinued at any time. Remaining repurchase authorization under the January 18, 2023 share repurchase program was terminated upon authorization of this new program.

For additional information on the Company’s capital and stockholders’ equity, see Note 10 - Regulatory Ratios and Capital, in the accompanying notes to the consolidated financial statements included elsewhere in this report.

Critical Accounting Estimates

SEC guidance requires disclosure of “critical accounting estimates.” The SEC defines “critical accounting estimates” as those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant.

The Company follows financial accounting and reporting policies that are in accordance with accounting principles generally accepted in the United States. The more significant of these policies are summarized in Note 1 - Operations and Summary of Significant Accounting Policies in the notes to the consolidated financial statements included elsewhere in this report. Not all significant accounting policies require management to make difficult, subjective or complex judgments. However, the policy noted below could be deemed to meet the SEC’s definition of a critical accounting policy.

Allowance for Credit Losses

Management considers the policies related to the allowance for credit losses as the most critical to the financial statement presentation. The total allowance for credit losses includes activity related to allowances calculated in accordance with Accounting Standards Codification 326, Credit Losses. The allowance for credit losses is established through a provision for credit losses charged to current earnings. The amount maintained in the allowance reflects management’s continuing evaluation of the credit losses expected to be recognized over the life of the loans in the Company’s portfolio. The allowance for credit losses on loans is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. The allowance for credit losses on off-balance sheet financial instruments is recorded in other liabilities on the consolidated balance sheets. For purposes of determining the allowance for credit losses, the loan portfolio is segregated into pools first by portfolio segment and then by past due status or credit grade. Each pool is assigned a loss estimate, reflecting historical loss rates that incorporate probability of default and severity of losses over the estimated remaining life of the loans. Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective (pool) evaluation. Management estimates the allowance balance using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts. Modifications to loss estimates are made to incorporate a reasonable and supportable forecast of future losses at the pool level, as well as any necessary qualitative adjustments using a Portfolio Level Qualitative Factor (“PLQF”) and/or a Portfolio Segment Level Qualitative Factor (“SLQF”). A similar process is employed to calculate a reserve assigned to off-balance sheet financial instruments, specifically unfunded loan commitments and letters of credit. Modified loss estimates are assigned based on the balance of the commitments estimated to be outstanding at the time of default. The PLQF and SLQF are utilized to address factors that are not present in historical loss rates and are otherwise unaccounted for in the quantitative process. A reserve is recorded upon origination or purchase of a loan. See “Summary of Credit Loss Experience” above and Note 4 - Loans and Allowance for Credit Losses on Loans in the accompanying notes to the consolidated financial statements included elsewhere in this report for further discussion of the risk factors considered by management in establishing the allowance for credit losses.

Management considers a range of macroeconomic scenarios in connection with the allowance estimation process. Within the various economic scenarios considered as of December 31, 2023, the quantitative estimate of the allowance for credit loss would increase by approximately $220.4 million under sole consideration of the most severe downside scenario. The quoted sensitivity calculation reflects the sensitivity of the modeled allowance estimate to macroeconomic forecast data, but is absent of qualitative overlays and other qualitative adjustments that are part of the quarterly reserving process and does not necessarily reflect the nature and extent of future changes in the allowance for reasons including increases or decreases in qualitative adjustments, changes in the risk profile and size of the portfolio, changes in the severity of the macroeconomic scenario and the range of scenarios under management consideration.

47