What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-04-18 compared with 2023-10-19 · 92 added, 145 removed, 233 unchanged (50% of the section changed)

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 nine months ended September 30, 2023 and 2022 should be read in conjunction with its audited consolidated financial statements and the related notes to the consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”).

Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results for the year ending December 31, 2023 or any future period.

The following discussion and analysis of the Company’s financial condition and results of operations for the three months ended March 31, 2024 and 2023 should be read in conjunction with its audited consolidated financial statements and the related notes to the consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”).

Operating results for the three months ended March 31, 2024 are not necessarily indicative of the results for the year ending December 31, 2024 or any future period.

Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of and pursuant to the Private Securities Litigation Reform Act of 1995 regarding, among other things, the Company’s financial condition, results of operations, business plans, strategies, future performance and business and industry outlook.

These statements are not historical in nature and may often be identified by the use of words such as “believes,” “projects,” “expects,” “may,” “estimates,” “should,” “plans,” “targets,” “intends” “could,” “would,” “anticipates,” “potential,” “confident,” “optimistic” or the negative thereof, or other variations thereon, or comparable terminology, or by discussions of strategy, objectives, estimates, trends, guidance, expectations and future plans.

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Numerous risks and other factors, many of which are beyond management’s control, could cause actual results to differ materially from future results expressed or implied by such forward-looking statements.

While there can be no assurance that any list of risks is complete, important risk and other factors that could cause actual results to differ materially from those contemplated by forward-looking statements include, but are not limited to, economic or business conditions in Texas, the United States, or globally that impact TCBI or its customers;

While there can be no assurance that any list of risks is complete, important risks and other factors that could cause actual results to differ materially from those contemplated by forward-looking statements include, but are not limited to, economic or business conditions in Texas, the United States, or globally that impact TCBI or its customers;

negative credit quality developments arising from the foregoing or other factors;

recent adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, liquidity, and regulatory responses to these developments, including in the context of regulatory examinations and related findings and actions;

TCBI’s ability to effectively manage its liquidity risk;

TCBI’s ability to effectively manage its liquidity and maintain adequate regulatory capital to support it businesses;

TCBI’s ability to pursue and execute upon growth plans, whether as a function of capital, liquidity, or other limitations;

TCBI’s ability to successfully execute its business strategy, including developing and executing new lines of business and new products and services;

the extensive regulations to which TCBI is subject and its ability to comply with applicable governmental regulations, including legislative and regulatory changes;

TCBI’s ability to effectively manage information technology systems, including third party vendors, cyber or data privacy incidents, or other failures, disruptions or security breaches;

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fluctuations in commercial and residential real estate values, especially as they relate to the value of collateral supporting TCBI’s loans;

TCBI’s ability to successfully execute its business strategy, including developing and executing new lines of business and new products and services;

the failure to identify, attract, and retain key personnel and other employees;

increased or expanded competition from banks and other financial service providers in TCBI’s markets;

adverse developments in the banking industry and the potential impact of such developments on customer confidence, liquidity and regulatory responses to these developments, including the context of regulatory examinations and related findings and actions;

negative press and social media attention with respect to the banking industry or TCBI, in particular;

the transition away from the London Interbank Offered Rate (LIBOR);

legislative and regulatory changes;

claims, litigation or regulatory investigations and actions that TCBI may become subject to;

severe weather, natural disasters, climate change, acts of war, terrorism, global conflict (including those already reported by the media, as well as others that may arise), or other external events, as well as related legislative and regulatory initiatives;

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Except to the extent required by applicable law or regulation, we disclaim any obligation to update such factors or to publicly announce the results of any revisions to any of the forward-looking statements included herein to reflect future events or developments.

Recent Industry Developments

During the first nine months of 2023, the banking industry experienced significant volatility with multiple high-profile bank failures and industry wide concerns related to liquidity, deposit outflows, unrealized securities losses, 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 12.7% and 17.1%, respectively, as of September 30, 2023.

The Company’s total deposits increased by 4% as compared to December 31, 2022, to $23.9 billion at September 30, 2023.

In response to the industry-wide concerns, the Company took a number of preemptive actions, which included pro-active outreach to clients and a robust review of its borrowing and liquidity positions to ensure that the Company’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:

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

(dollars in thousands except per share data) 2024 2023

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

Three months ended September 30, 2023 compared to three months ended September 30, 2022

The Company reported net income of $61.7 million and net income available to common stockholders of $57.4 million for the third quarter of 2023, compared to net income of $41.4 million and net income available to common stockholders of $37.1 million for the third quarter of 2022.

On a fully diluted basis, earnings per common share were $1.18 for the third quarter of 2023, compared to $0.74 for the same period in 2022.

ROE was 8.08% and ROA was 0.81% for the third quarter of 2023, compared to 5.36% and 0.52%, respectively, for the same period in 2022.

The increase in net income for the third quarter of 2023 compared to the third quarter of 2022 resulted primarily from an increase in non-interest income and a decrease in non-interest expense, partially offset by a decrease in net interest income and an increase in the provision for credit losses.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022

The Company reported net income of $169.0 million and net income available to common stockholders of $156.1 million for the nine months ended September 30, 2023, compared to net income of $115.2 million and net income available to common stockholders of $102.3 million for the same period in 2022.

On a fully diluted basis, earnings per common share were $3.20 for the nine months ended September 30, 2023, compared to $2.00 for the same period in 2022.

ROE was 7.46% and ROA was 0.77% for the nine months ended September 30, 2023, compared to 4.90% and 0.47%, respectively, for the same period in 2022.

The increase in net income for the nine months ended September 30, 2023 compared to the same period in 2022 resulted primarily from increases in net interest income and non-interest income, partially offset by increases in the provision for credit losses and non-interest expense.

Three months ended March 31, 2024 compared to three months ended March 31, 2023

The Company reported net income of $26.1 million and net income available to common stockholders of $21.8 million for the three months ended March 31, 2024, compared to net income of $38.7 million and net income available to common stockholders of $34.3 million for the same period in 2023.

On a fully diluted basis, earnings per common share were $0.46 for the three months ended March 31, 2024, compared to $0.70 for the same period in 2023.

ROE was 3.03% and ROA was 0.36% for the three months ended March 31, 2024, compared to 5.06% and 0.53%, respectively, for the same period in 2023.

The decrease in net income for the three months ended March 31, 2024 compared to the same period in 2023 resulted primarily from a decrease in net interest income and an increase in non-interest expense, partially offset by a decrease in provision for credit losses and an increase in non-interest income.

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

Taxable Equivalent Net Interest Income Analysis - Quarterly(1)

Three Months Ended September 30, 2023 Three Months Ended September 30, 2022

(in thousands except percentages) Average

Balance Income/

Expense Yield/

Balance Income/

Expense Yield/

Investment securities(2) $ 4,204,749 $ 27,070 2.33 % $ 3,509,044 $ 15,002 1.58 %

Interest-bearing cash and cash equivalents 3,965,045 53,561 5.36 % 4,453,806 24,596 2.19 %

Loans held for sale 31,878 647 8.06 % 1,029,983 11,316 4.36 %

Loans held for investment, mortgage finance 4,697,702 31,217 2.64 % 5,287,531 52,756 3.96 %

Loans held for investment(3) 16,317,324 313,346 7.62 % 16,843,922 218,513 5.15 %

Allowance for credit losses on loans 238,883 — — 229,005 — —

Loans held for investment, net 20,776,143 344,563 6.58 % 21,902,448 271,269 4.91 %

Total earning assets 28,977,815 425,841 5.75 % 30,895,281 322,183 4.10 %

Cash and other assets 1,106,031 918,630

Total assets $ 30,083,846 $ 31,813,911

Liabilities and Stockholders’ Equity

Transaction deposits $ 1,755,451 $ 13,627 3.08 % $ 1,444,964 $ 5,239 1.44 %

Savings deposits 10,858,306 127,323 4.65 % 10,249,387 46,555 1.80 %

Time deposits 1,610,235 19,167 4.72 % 1,701,238 8,523 1.99 %

Total interest bearing deposits 14,223,992 160,117 4.47 % 13,395,589 60,317 1.79 %

Short-term borrowings 1,393,478 19,576 5.57 % 1,931,537 10,011 2.06 %

Long-term debt 858,167 14,005 6.47 % 921,707 12,663 5.45 %

Total interest bearing liabilities 16,475,637 193,698 4.66 % 16,248,833 82,991 2.03 %

Non-interest bearing deposits 10,016,579 12,214,531

Other liabilities 474,869 305,554

Stockholders’ equity 3,116,761 3,044,993

Total liabilities and stockholders’ equity $ 30,083,846 $ 31,813,911

Net interest income $ 232,143 $ 239,192

Net interest margin 3.13 % 3.05 %

(1) Taxable equivalent rates used where applicable.

(2) Yields on investment securities are calculated using available-for-sale securities at amortized cost.

(3) Average balances included non-accrual loans.

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

Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2022

Three Months Ended March 31, 2024 Three Months Ended March 31, 2023

(dollars in thousands) Average

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Loans held for investment(3)(4)

16,522,089 298,306 7.26 % 15,598,854 259,240 6.74 %

Allowance for credit losses on loans 249,936 — — 252,727 — —

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(2) Yields on investment securities are calculated using available-for-sale securities at amortized cost.

(3) Average balances include non-accrual loans.

(3) Average balances included non-accrual loans.

(4) In the first quarter of 2024, enhancements were made to our methodology for applying relationship pricing credits to mortgage client loans.

To conform to the current period presentation, certain prior period interest income amounts have been reclassified from loans held for investment, mortgage finance to loans held for investment and related yields have been adjusted accordingly.

Volume/Rate Analysis

The following table presents the changes in taxable equivalent net interest income and identifies the changes due to differences in the average volume of earning assets and interest bearing liabilities and the changes due to differences in the average interest rate on those assets and liabilities.

Three Months Ended September 30, 2023/2022 Nine Months Ended September 30, 2023/2022

Change Change Due To(1) Net

Three Months Ended March 31, 2024/2023

Change Change Due To(1)

(in thousands) Volume Yield/Rate(2) Volume Yield/Rate(2)

(in thousands) Volume Yield/Rate(2)

Interest income

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Net Interest Income

Net interest income was $232.1 million for the three months ended September 30, 2023, compared to $239.1 million for the same period in 2022.

The decrease was primarily due to an increase in funding costs and a decrease in average earning assets, partially offset by an increase in yields on average earning assets.

Average earning assets for the three months ended September 30, 2023 decreased $1.9 billion compared to the same period in 2022, which included a $2.1 billion decrease in average total loans and a $488.8 million decrease in average interest-bearing cash and cash equivalents, partially offset by a $695.7 million increase in average investment securities.

Average interest-bearing liabilities increased $226.8 million for the three months ended September 30, 2023 compared to the same period in 2022, primarily due to an $828.4 million increase in average interest-bearing deposits, partially offset by a $538.1 million decrease in average short-term borrowings.

Average non-interest bearing deposits for the three months ended September 30, 2023 decreased to $10.0 billion from $12.2 billion to the same period in 2022.

Net interest margin for the three months ended September 30, 2023 was 3.13%, compared to 3.05% for the same period in 2022.

The increase in net interest margin was primarily due to an increase in yields on average earnings assets and a shift in earning asset composition, partially offset by an increase in funding costs.

The increases in yields on earnings assets and cost of funds are attributed to the impact of rising interest rates.

The yield on total loans held for investment increased to 6.58% for the three months ended September 30, 2023, compared to 4.91% for the same period in 2022, and the yield on earning assets increased to 5.75% for the three months ended September 30, 2023, compared to 4.10% for the same period in 2022.

Total cost of deposits increased to 2.62% for the three months ended September 30, 2023 from 0.93% for the same period in 2022, and total funding costs, including non-interest bearing deposits and stockholders' equity, increased to 2.60% for the three months ended September 30, 2023, compared to 1.04% for the same period in 2022.

Net interest income was $699.4 million for the nine months ended September 30, 2023, compared to $628.2 million for the same period in 2022.

The increase was primarily due to an increase in yields on average earnings assets, partially offset by rising funding costs and a decrease in average earning assets.

Average earning assets decreased $3.2 billion for the nine months ended September 30, 2023, compared to the same period in 2022, which included decreases of $2.2 billion in average total loans and $1.6 billion in average interest-bearing cash and cash equivalents, partially offset by a $617.9 million increase in average investment securities.

Average interest-bearing liabilities increased $189.2 million for the nine months ended September 30, 2023, compared to the same period in 2022, primarily due to an $858.6 million increase in average interest-bearing deposits, partially offset by a $633.6 million decrease in average short-term borrowings.

Average non-interest bearing deposits for the nine months ended September 30, 2023 decreased to $10.0 billion from $13.4 billion for the same period in 2022.

Net interest margin for the nine months ended September 30, 2023 was 3.25%, compared to 2.64% for the same period of 2022.

The increase was primarily due to the effect of rising interest rates on earning asset yields and a shift in earning asset composition, partially offset by higher funding costs, also as a result of rising interest rates, compared to the same period in 2022.

The yield on total loans held for investment increased to 6.53% for the nine months ended September 30, 2023, compared to 4.15% for the same period in 2022, and the yield on earning assets increased to 5.63% for the nine months ended September 30, 2023, compared to 3.25% for the same period in 2022.

Total cost of deposits increased to 2.36% for the nine months ended September 30, 2023 from 0.48% for the same period in 2022 and total funding costs, including non-interest bearing deposits and stockholders' equity, increased to 2.36% for the nine months ended September 30, 2023, compared to 0.60% for the same period in 2022.

Net interest income was $215.0 million for the three months ended March 31, 2024, compared to $235.3 million for the same period in 2023.

The decrease was primarily due to rising funding costs, partially offset by an increase in yields on average earnings assets.

Average earning assets decreased $86.2 million for the three months ended March 31, 2024, compared to the same period in 2023, which included a decrease of $1.5 billion in average interest-bearing cash and cash equivalents, partially offset by increases of $1.2 billion in average total loans and $238.9 million in average investment securities.

Average interest-bearing liabilities increased $1.3 billion for the three months ended March 31, 2024, compared to the same period in 2023, primarily due to an increase of $1.7 billion in average interest-bearing deposits, partially offset by a $330.8 million decrease in average short-term borrowings.

Average non-interest bearing deposits for the three months ended March 31, 2024 decreased to $8.6 billion from $10.3 billion for the same period in 2023.

Net interest margin for the three months ended March 31, 2024 was 3.03%, compared to 3.33% for the same period of 2023.

The decrease was primarily due to the effect of rising interest rates on funding costs and a shift in earning asset composition, partially offset by higher earning asset yields, also as a result of rising interest rates, compared to the same period in 2023.

The yield on total loans held for investment increased to 6.70% for the three months ended March 31, 2024, compared to 6.46% for the same period in 2023, and the yield on earning assets increased to 5.88% for the three months ended March 31, 2024, compared to 5.45% for the same period in 2023.

Total cost of deposits increased to 2.97% for the three months ended March 31, 2024 from 2.06% for the same period in 2023 and total funding costs, including non-interest bearing deposits and stockholders' equity, increased to 2.83% for the three months ended March 31, 2024, compared to 2.10% for the same period in 2023.

Non-interest Income

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands) 2024 2023

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Brokered loan fees 1,911 1,895

Investment banking and trading income 29,191 7,812 75,457 23,117

Investment banking and advisory fees 18,424 14,564

Trading income 4,712 4,204

Other 6,366 8,289

Total non-interest income $ 41,319 $ 37,403

Non-interest income increased $21.5 million during the three months ended September 30, 2023, compared to the same period in 2022.

The increase was primarily due to an increase in investment banking and trading income

Non-interest income increased by $58.4 million during the nine months ended September 30, 2023 to $130.3 million, compared to $71.9 million for the same period in 2022.

The increase was primarily due to increases in investment banking and trading income and other non-interest income.

Non-interest income increased $3.9 million during the three months ended March 31, 2024 to $41.3 million, compared to $37.4 million for the same period in 2023.

The increase was primarily due to an increase in investment banking and advisory fees.

Non-interest Expense

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands) 2024 2023

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Total non-interest expense $ 202,393 $ 194,027

Non-interest expense decreased $17.2 million during the three months ended September 30, 2023, compared to the same period in 2022.

The decrease was primarily due to decreases in salaries and benefits and marketing expenses, partially offset by increases in communications and technology and FDIC insurance assessment expenses.

The third quarter of 2022 included $13.7 million in salaries and benefits expense related to the sale of our premium finance subsidiary.

Non-interest expense for the nine months ended September 30, 2023 increased $41.1 million compared to the same period in 2022, primarily due to increases in salaries and benefits, legal and professional and communications and technology expenses.

Non-interest expense for the three months ended March 31, 2024 increased $8.4 million, compared to the same period in 2023, primarily due to increases in legal and professional expense, communications and technology expense and FDIC insurance assessment resulting from an additional $3.0 million FDIC special assessment recorded in the first quarter of 2024, partially offset by a decrease in marketing expense.

The increase in legal and professional expense in the first quarter of 2024 resulted from a $5.0 million legal settlement expense, partially offset by declines in professional services.

Analysis of Financial Condition

Loans Held for Investment

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

As a result, certain prior period balances below have been reclassified to conform to the current period presentation of portfolio segments.

The following table summarizes the Company’s loans held for investment by portfolio segment.

See Note 1 - Operations and Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this report for details of these portfolio segments.

(in thousands) September 30, 2023 December 31, 2022

See Note 1 - Operations and Summary of Significant Accounting Policies in the 2023 Form 10-K for details of these portfolio segments.

(in thousands) March 31, 2024 December 31, 2023

Commercial $ 10,383,184 $ 10,410,766

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Commercial real estate 5,822,461 5,500,774

Consumer 537,229 552,848

549,963 530,948

Gross loans held for investment

20,908,921 20,420,816

Unearned income (net of direct origination costs)

(77,917) (80,258)

Total loans held for investment $ 20,831,004 $ 20,340,558

Total loans held for investment were $20.6 billion at September 30, 2023, an increase of $1.3 billion from December 31, 2022.

The Company experienced broad-based loan growth across all loan categories, except for consumer, as it has continued to execute on its long-term strategy.

Mortgage finance loans relate to the mortgage warehouse lending operations in which the Company purchases mortgage loan ownership interests that are typically sold within 10 to 20 days and represent 21% of total loans held for investment at both September 30, 2023 and December 31, 2022.

Total loans held for investment were $20.8 billion at March 31, 2024, an increase of $490.4 million from December 31, 2023.

The Company experienced loan growth in all loan categories, except for commercial, 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 20% and 19% of gross loans held for investment at March 31, 2024 and December 31, 2023, 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.

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The Company also participates in shared national credits, both as a participant and as an agent.

As of September 30, 2023, the Company had $4.8 billion in shared national credits, $1.4 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 September 30, 2023, approximately $407,000 of the Company’s shared national credits were on non-accrual.

As of March 31, 2024, the Company had $5.2 billion in shared national credits, $1.1 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 March 31, 2024, approximately $3.1 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 September 30, 2023, a majority of the loans held for investment, excluding mortgage finance and other national lines of business, were to businesses with headquarters or operations in Texas.

As of March 31, 2024, 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.

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The table below summarizes non-accrual loans by portfolio segment and by type of property securing the credit.

(dollars in thousands) September 30, 2023 December 31, 2022

(dollars in thousands) March 31, 2024 December 31, 2023

Non-accrual loans held for investment

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Accounts receivable and inventory 6,952 —

Machinery and equipment

Unsecured 1,743 —

Other 1,234 79

Total commercial 80,516 69,048

Commercial real estate:

Commercial property — 1,263

Hotel/motel 11,349 12,350

Total commercial real estate 11,349 12,350

Single family residences 984 —

Total consumer 984 —

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Loans held for sale past due 90 days and accruing $ 147 $ —

(1) March 31, 2024 includes one non-accrual loan previously reported in loans held for investment that was transferred at fair value to held for sale as of March 31, 2024.

Summary of Credit Loss Experience

The provision for credit losses, comprised of a provision for loans and off-balance sheet credit losses, is a charge to earnings to maintain the allowance for credit losses at a level consistent with management’s assessment of expected losses at each balance sheet date.

Below is a discussion of provision for credit losses on loans.

The changes made to the Company’s current expected credit loss model, as discussed above and in Note 1 - Operations and Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this report, resulted in a reallocation of the allowance for credit losses between loan portfolio segments and allowance balances allocated to off-balance sheet financial instruments.

The changes made result in a higher allocation of losses to off-balance sheet financial statements.

See Note 6 - Financial Instruments with Off-Balance Sheet Risk in the accompanying notes to the consolidated financial statements included elsewhere in this report for presentation of the activity in the allowance for credit losses for off-balance asset credit losses.

The Company recorded a provision for credit losses on loans of $28.5 million for the nine months ended September 30, 2023 compared to a provision of $27.6 million for the nine months ended September 30, 2022.

The provision for credit losses on loans for the nine months ended September 30, 2023 reflects increases in criticized loans and total loans held for investment during the nine months ended September 30, 2023.

The Company recorded $37.1 million in net charge-offs during the nine months ended September 30, 2023 compared to $4.9 million in net charge-offs during the same period in 2022.

Criticized loans totaled $677.4 million at September 30, 2023, compared to $513.2 million and $484.0 million at December 31, 2022 and September 30, 2022, respectively.

As discussed in Note 1 - Operations and Summary of Significant Accounting Policies in the 2023 Form 10-K, 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, prior period balances in the tables below have been reclassified to conform to the current period presentation of portfolio segments.

The Company recorded a provision for credit losses of $19.0 million for the three months ended March 31, 2024, compared to a provision of $28.0 million for the three months ended March 31, 2023.

The provision for credit losses for the three months ended March 31, 2024 reflects increases in criticized and non-accrual loans, growth in loans held for investment and $10.8 million in net charge-offs recorded during the three months ended March 31, 2024.

The Company recorded $10.8 million in net charge-offs during the three months ended March 31, 2024, compared to $19.9 million in net charge-offs during the same period in 2023.

Criticized loans totaled $859.5 million at March 31, 2024, compared to $738.2 million at December 31, 2023.

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

September 30, 2023 September 30, 2022

March 31, 2024 March 31, 2023

Allowance for credit losses on loans to total loans held for investment 1.27 % 1.30 %

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Total provision for credit losses to average total loans held for investment(1)(2) 0.38 % 0.60 %

(1) Ratios are calculated using average balance for the nine months ended September 30, 2023 and 2022, respectively.

(2) Ratios are annualized utilizing provision for credit losses for the nine months ended September 30, 2023 and 2022, respectively.

(1) Ratios are calculated using average balance for the three months ended March 31, 2024 and 2023, respectively.

(2) Ratios are annualized utilizing provision for credit losses for the three months ended March 31, 2024 and 2023, respectively.

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

Nine Months Ended September 30,

Three Months Ended March 31,

(dollars in thousands) Net

Charge-offs Net Charge-offs

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Mortgage finance — — % — — %

CRE — — % 350 0.01 %

Commercial real estate 3,325 0.24 % — — %

Consumer — — % (3) — %

Total $ 10,764 0.22 % $ 19,910 0.43 %

(1) Ratios are annualized utilizing net charge-offs for the nine months ended September 30, 2023 and 2022, respectively.

(1) Ratios are calculated using net charge-offs for the three months ended March 31, 2024 and 2023, respectively.

Liquidity and Capital Resources

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

(dollars in thousands) September 30, 2023 December 31, 2022

(dollars in thousands) March 31, 2024 December 31, 2023

Interest bearing cash and cash equivalents $ 3,148,157 $ 3,042,357

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Total deposits 13.1 % 13.6 %

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 focus on treasury management products.

As of September 30, 2023, estimated uninsured deposits represented approximately 40% of total deposits.

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:

(dollars in thousands) September 30, 2023 December 31, 2022

Balance % of Total Balance % of Total

March 31, 2024 December 31, 2023

(dollars in thousands) Balance % of Total Balance % of Total

Customer deposits $ 23,351,853 97.5 % $ 21,454,568 95.9 %

1 unchanged sentence

Total deposits $ 23,954,037 100.0 % $ 22,371,839 100.0 %

Estimated uninsured assessable deposits, including accrued interest, were 42% of total deposits at March 31, 2024 ,compared to 43% of total deposits at December 31, 2023.

The uninsured amounts are estimated based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements.

The Company has short-term borrowing sources available to supplement deposits and meet its funding needs.

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The following table summarizes short-term borrowings, all of which mature within one year:

(in thousands) September 30, 2023 December 31, 2022

(in thousands) March 31, 2024 December 31, 2023

Repurchase agreements $ — $ —

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

(in thousands) September 30, 2023 December 31, 2022

(in thousands) March 31, 2024 December 31, 2023

FHLB borrowing capacity relating to loans and pledged securities $ 4,053,570 $ 2,602,092

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The loan agreement contains customary financial covenants and restrictions.

No borrowings were made against this line of credit during the nine months ended September 30, 2023.

The Company has long-term debt outstanding of $858.5 million as of September 30, 2023, comprised of trust preferred securities, subordinated notes and senior unsecured credit linked notes with maturity dates ranging from September 2024 to December 2036.

In the second quarter of 2023, the Company partially paid down $75.0 million of the senior unsecured credit-linked notes in accordance with the terms of the notes.

No borrowings were made against this line of credit during the three months ended March 31, 2024 or 2023.

The Company has long-term debt outstanding of $859.8 million as of March 31, 2024, 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 5 - Short-Term Borrowings and Long-Term Debt in the accompanying notes to the consolidated financial statements included elsewhere in this report for additional information.

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Capital Resources

The Company’s equity capital averaged $3.1 billion for the nine months ended September 30, 2023 compared to $3.1 billion for the same period in 2022.

The Company’s equity capital averaged $3.2 billion for the three months ended March 31, 2024 compared to $3.1 billion for the same period in 2023.

The Company has not paid any cash dividends on common stock since operations commenced and has no plans to do so in the foreseeable future.

In January 2023, the Company completed the full $150.0 million of share repurchases authorized by the Company’s board of directors on April 19, 2022.

On January 18, 2023, the Company’s board of directors authorized a new share repurchase program under which the Company may repurchase up to $150.0 million in shares of outstanding common stock.

Any repurchases under the repurchase program have been made in accordance with applicable securities laws in open market or private transactions.

The extent to which the Company repurchases shares, and the timing of such repurchases, will be at management’s discretion and will depend upon a variety of factors, including market conditions, capital position and amount of retained earnings, regulatory requirements and other considerations.

No time limit was set for the completion of the share repurchase program, and the program may be suspended or discontinued at any time.

During the nine months ended September 30, 2023, the Company repurchased 1,011,909 shares of its common stock for an aggregate purchase price of $59.7 million, at a weighted average price of $58.98 per share.

The aggregate

purchase price and weighted average price per share does not include the effect of excise tax expense incurred on net stock repurchases.

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.

Remaining repurchase authorization under the January 18, 2023 share repurchase program was terminated upon authorization of this new program.

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.

During the three months ended March 31, 2024, the Company repurchased 529,338 shares of its common stock for an aggregate purchase price, including excise tax expense, of $31.5 million, at a weighted average price of $59.27 per share.

For additional information on the Company’s capital and stockholders’ equity, see Note 7 - Regulatory Ratios and Capital, in the accompanying notes to the consolidated financial statements included elsewhere in this report.

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The Company follows financial accounting and reporting policies that are in accordance with accounting principles generally accepted in the United States.

The more significant of these policies are summarized in Note 1 - Operations and Summary of Significant Accounting Policies in the notes to the consolidated financial statements included elsewhere in this report and in the Company’s 2022 Form 10-K.

Not all significant accounting policies require management to make difficult, subjective or complex judgments.

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Management considers a range of macroeconomic scenarios in connection with the allowance estimation process.

Within the various economic scenarios considered as of September 30, 2023, the quantitative estimate of the allowance for credit loss would increase by approximately $183.7 million under sole consideration of the most severe downside scenario.

Within the various economic scenarios considered as of March 31, 2024, the quantitative estimate of the allowance for credit loss would increase by approximately $135.1 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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis