TEXAS CAPITAL BANCSHARES INC/TX 10-Q

ITEM 2. 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 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 and future performance. These statements are not historical in nature and may often be identified by the use of words such as “believes,” “projects,” “expects,” “may,” “estimates,” “should,” “plans,” “targets,” “intends” “could,” “would,” “anticipates,” “potential,” “confident,” “optimistic” or the negative thereof, or other variations thereon, or comparable terminology, or by discussions of strategy, objectives, estimates, trends, guidance, expectations and future plans. Because forward-looking statements relate to future results and occurrences, they are subject to inherent and various uncertainties, risks, and changes in circumstances that are difficult to predict, may change over time, are based on management’s expectations and assumptions at the time the statements are made and are not guarantees of future results. Numerous risks and other factors, many of which are beyond management’s control, could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. While there can be no assurance that any list of risks is complete, important 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; 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; elevated or further changes in interest rates, including the impact of interest rates on TCBI’s securities portfolio and funding costs, as well as related balance sheet implications stemming from the fair value of our assets and liabilities; the effectiveness of TCBI’s risk management processes, strategies and monitoring; fluctuations in commercial and residential real estate values, especially as they relate to the value of collateral supporting TCBI’s loans; 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; 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; and the risks and factors more fully described in TCBI’s most recent Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and other documents and filings with the SEC. The information contained in this communication speaks only as of its date. 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. 20 Table of Contents Results of Operations Selected income statement data and key performance indicators are presented in the table below: Three Months Ended March 31, (dollars in thousands except per share data) 2024 2023 Net interest income $ 215,009 $ 235,345 Provision for credit losses 19,000 28,000 Non-interest income 41,319 37,403 Non-interest expense 202,393 194,027 Income before income taxes 34,935 50,721 Income tax expense 8,793 12,060 Net income 26,142 38,661 Preferred stock dividends 4,313 4,313 Net income available to common stockholders $ 21,829 $ 34,348 Basic earnings per common share $ 0.46 $ 0.71 Diluted earnings per common share $ 0.46 $ 0.70 Net interest margin 3.03 % 3.33 % Return on average assets (“ROA”) 0.36 % 0.53 % Return on average common equity (“ROE”) 3.03 % 5.06 % Efficiency ratio(1) 79.0 % 71.1 % Non-interest income to average earning assets 0.59 % 0.54 % Non-interest expense to average earning assets 2.89 % 2.78 % (1) Non-interest expense divided by the sum of net interest income and non-interest income. 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. 21 Table of Contents Taxable Equivalent Net Interest Income Analysis - Year to Date(1) Three Months Ended March 31, 2024 Three Months Ended March 31, 2023 (dollars in thousands) Average Balance Revenue / Expense Yield / Rate Average Balance Revenue / Expense Yield / Rate Assets Investment securities(2) $ 4,299,368 $ 32,144 2.77 % $ 4,060,456 $ 25,292 2.31 % Interest bearing cash and cash equivalents 4,051,627 54,355 5.40 % 5,541,341 62,436 4.57 % Loans held for sale 51,164 1,184 9.31 % 43,472 938 8.75 % Loans held for investment, mortgage finance(4) 3,517,707 31,455 3.60 % 3,286,804 37,419 4.62 % Loans held for investment(3)(4) 16,522,089 298,306 7.26 % 15,598,854 259,240 6.74 % Less: Allowance for credit losses on loans 249,936 — — 252,727 — — Loans held for investment, net 19,789,860 329,761 6.70 % 18,632,931 296,659 6.46 % Total earning assets 28,192,019 417,444 5.88 % 28,278,200 385,325 5.45 % Cash and other assets 1,058,463 1,041,745 Total assets $ 29,250,482 $ 29,319,945 Liabilities and Stockholders’ Equity Transaction deposits $ 2,006,493 $ 16,858 3.38 % $ 776,500 $ 3,853 2.01 % Savings deposits 11,409,677 136,790 4.82 % 11,195,402 105,707 3.83 % Time deposits 1,719,325 21,952 5.14 % 1,430,657 10,534 2.99 % Total interest bearing deposits 15,135,495 175,600 4.67 % 13,402,559 120,094 3.63 % Short-term borrowings 912,088 12,783 5.64 % 1,242,881 14,744 4.81 % Long-term debt 859,509 13,986 6.54 % 931,796 14,983 6.52 % Total interest bearing liabilities 16,907,092 202,369 4.81 % 15,577,236 149,821 3.90 % Non-interest bearing deposits 8,637,775 10,253,731 Other liabilities 509,286 436,621 Stockholders’ equity 3,196,329 3,052,357 Total liabilities and stockholders’ equity $ 29,250,482 $ 29,319,945 Net interest income $ 215,075 $ 235,504 Net interest margin 3.03 % 3.33 % (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. (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. 22 Table of Contents 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 March 31, 2024/2023 Net Change Change Due To(1) (in thousands) Volume Yield/Rate(2) Interest income Investment securities $ 6,852 $ 1,376 $ 5,476 Interest bearing cash and cash equivalents (8,081) (16,973) 8,892 Loans held for sale 246 168 78 Loans held for investment, mortgage finance (5,964) 2,660 (8,624) Loans held for investment 39,066 15,514 23,552 Total interest income 32,119 2,745 29,374 Interest expense Transaction deposits 13,005 6,164 6,841 Savings deposits 31,083 2,046 29,037 Time deposits 11,418 2,152 9,266 Short-term borrowings (1,961) (3,967) 2,006 Long-term debt (997) (1,175) 178 Total interest expense 52,548 5,220 47,328 Net interest income $ (20,429) $ (2,475) $ (17,954) (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 $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. 23 Table of Contents Non-interest Income Three Months Ended March 31, (in thousands) 2024 2023 Service charges on deposit accounts $ 6,339 $ 5,022 Wealth management and trust fee income 3,567 3,429 Brokered loan fees 1,911 1,895 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 $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 March 31, (in thousands) 2024 2023 Salaries and benefits $ 128,727 $ 128,670 Occupancy expense 9,737 9,619 Marketing 6,036 9,044 Legal and professional 16,195 14,514 Communications and technology 21,114 17,523 Federal Deposit Insurance Corporation (“FDIC”) insurance assessment 8,421 2,170 Other 12,163 12,487 Total non-interest expense $ 202,393 $ 194,027 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 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 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 Mortgage finance 4,153,313 3,978,328 Commercial real estate 5,822,461 5,500,774 Consumer 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 $20.8 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. 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 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 24 Table of Contents 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 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. The risks created by this concentration have been considered by management in the determination of the appropriateness of the allowance for credit losses. Non-performing Assets Non-performing assets include non-accrual loans and leases and repossessed assets. The table below summarizes non-accrual loans by portfolio segment and by type of property securing the credit. (dollars in thousands) March 31, 2024 December 31, 2023 Non-accrual loans held for investment Commercial: Business assets $ 65,325 $ 63,094 Oil and gas properties 2,071 2,543 Accounts receivable and inventory 6,952 — Machinery and equipment 3,191 3,332 Unsecured 1,743 — Other 1,234 79 Total commercial 80,516 69,048 Commercial real estate: Hotel/motel 11,349 12,350 Total commercial real estate 11,349 12,350 Consumer Single family residences 984 — Total consumer 984 — Total non-accrual loans held for investment 92,849 81,398 Non-accrual loans held for sale(1) 9,250 — Other real estate owned (“OREO”) — — Total non-performing assets $ 102,099 $ 81,398 Non-accrual loans held for investment to total loans held for investment 0.45 % 0.40 % Total non-performing assets to total assets 0.35 % 0.29 % Allowance for credit losses on loans to non-accrual loans held for investment 2.8x 3.1x Loans held for investment past due 90 days and accruing $ 3,674 $ 19,523 Loans held for investment past due 90 days to total loans held for investment 0.02 % 0.10 % 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. 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. 25 Table of Contents 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: March 31, 2024 March 31, 2023 Allowance for credit losses on loans to total loans held for investment 1.27 % 1.30 % Allowance for credit losses on loans to average total loans held for investment(1) 1.32 % 1.38 % Total allowance for credit losses to total loans held for investment 1.46 % 1.41 % 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 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: Three Months Ended March 31, 2024 2023 (dollars in thousands) Net Charge-offs Net Charge-offs to Average Loans(1) Net Charge-offs Net Charge-offs to Average Loans(1) Commercial $ 7,439 0.29 % $ 19,913 0.79 % Mortgage finance — — % — — % Commercial real estate 3,325 0.24 % — — % Consumer — — % (3) — % Total $ 10,764 0.22 % $ 19,910 0.43 % (1) Ratios are calculated using net charge-offs for the three months ended March 31, 2024 and 2023, respectively. Liquidity and Capital Resources Liquidity In general terms, liquidity is a measurement of the Company’s ability to meet its cash needs. The Company’s objectives in managing its liquidity are to maintain the ability to meet loan commitments, repurchase investment securities and repay deposits and other liabilities in accordance with their terms, without an adverse impact on current or future earnings. The Company’s liquidity strategy is guided by policies, formulated and monitored by senior management and the Asset and Liability Management Committee (“ALCO”), which take into account the demonstrated marketability of the Company’s assets, the sources and stability of its funding and the level of unfunded commitments. The Company regularly evaluates all of its various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness. The Company’s principal source of funding is customer deposits, supplemented by short-term borrowings, primarily from federal funds purchased and Federal Home Loan Bank (“FHLB”) borrowings, which are generally used to fund mortgage finance assets, and long-term debt. The Company also relies on the availability of the mortgage secondary market provided by Ginnie Mae and government sponsored entities to support the liquidity of mortgage finance assets. The following table summarizes the Company’s interest bearing cash and cash equivalents: (dollars in thousands) March 31, 2024 December 31, 2023 Interest bearing cash and cash equivalents $ 3,148,157 $ 3,042,357 Interest bearing cash and cash equivalents as a percent of: Total loans held for investment 15.1 % 15.0 % Total earning assets 11.2 % 11.1 % Total deposits 13.1 % 13.6 % 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 26 Table of Contents 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: 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 % Brokered deposits 602,184 2.5 % 917,271 4.1 % 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. Such borrowings are generally used to fund mortgage finance loans, due to their liquidity, short duration and interest spreads available. These borrowing sources include federal funds purchased from downstream correspondent bank relationships (which consist of banks that are smaller than the Bank) and from upstream correspondent bank relationships (which consist of banks that are larger than the Bank), customer repurchase agreements and advances from the FHLB and the Federal Reserve. The following table summarizes short-term borrowings, all of which mature within one year: (in thousands) March 31, 2024 December 31, 2023 Repurchase agreements $ — $ — FHLB borrowings 750,000 1,500,000 Total short-term and other borrowings $ 750,000 $ 1,500,000 The following table summarizes the Company’s short-term borrowing capacities net of balances outstanding: (in thousands) March 31, 2024 December 31, 2023 FHLB borrowing capacity relating to loans and pledged securities $ 4,053,570 $ 2,602,092 FHLB borrowing capacity relating to unencumbered securities 4,214,852 3,737,615 Total FHLB borrowing capacity(1) $ 8,268,422 $ 6,339,707 Unused federal funds lines available from commercial banks $ 1,158,000 $ 1,188,000 Unused Federal Reserve borrowings capacity $ 4,309,048 $ 4,094,801 Unused revolving line of credit(2) $ 75,000 $ 100,000 (1) FHLB borrowings are collateralized by a blanket floating lien on certain real estate secured loans, mortgage finance assets and certain pledged securities. (2) Unsecured revolving, non-amortizing line of credit with maturity date of February 8, 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 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. The Company may consider raising additional capital, if needed, in public or private offerings of debt or equity securities to supplement deposits and meet its long-term funding needs. As the Company is a holding company and is a separate operating entity from the Bank, the Company’s primary sources of liquidity are dividends received from the Bank and borrowings from outside sources. Banking regulations may limit the amount of dividends that may be paid by the Bank. See Note 7 - Regulatory Ratios and Capital in the accompanying notes to the consolidated financial statements included elsewhere in this report for additional information regarding dividend restrictions and “Liquidity Risks” included in Part I, Item 1A of the 2023 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 $3.2 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. 27 Table of Contents 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. 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 in the Company’s 2023 Form 10-K. Not all significant accounting policies require management to make difficult, subjective or complex judgments. However, the policy noted below could be deemed to meet the SEC’s definition of a critical accounting policy. Allowance for Credit Losses Management considers the policies related to the allowance for credit losses as the most critical to the financial statement presentation. The total allowance for credit losses includes activity related to allowances calculated in accordance with Accounting Standards Codification 326, Credit Losses . The allowance for credit losses is established through a provision for credit losses charged to current earnings. The amount maintained in the allowance reflects management’s continuing evaluation of the credit losses expected to be recognized over the life of the loans in the Company’s portfolio. The allowance for credit losses on loans is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. The allowance for credit losses on off-balance sheet financial instruments is recorded in other liabilities on the consolidated balance sheets. For purposes of determining the allowance for credit losses, the loan portfolio is segregated into pools first by portfolio segment and then by past due status or credit grade. Each pool is assigned a loss estimate, reflecting historical loss rates that incorporate probability of default and severity of losses over the estimated remaining life of the loans. Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective (pool) evaluation. Management estimates the allowance balance using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts. Modifications to loss estimates are made to incorporate a reasonable and supportable forecast of future losses at the pool level, as well as any necessary qualitative adjustments using a Portfolio Level Qualitative Factor (“PLQF”) and/or a Portfolio Segment Level Qualitative Factor (“SLQF”). A similar process is employed to calculate a reserve assigned to off-balance sheet financial instruments, specifically unfunded loan commitments and letters of credit. Modified loss estimates are assigned based on the balance of the commitments estimated to be outstanding at the time of default. The PLQF and SLQF are utilized to address factors that are not present in historical loss rates and are otherwise unaccounted for in the quantitative process. A reserve is recorded upon origination or purchase of a loan. See “Summary of Credit Loss Experience” above and Note 4 - Loans and Allowance for Credit Losses on Loans in the accompanying notes to the consolidated financial statements included elsewhere in this report for further discussion of the risk factors considered by management in establishing the allowance for credit losses. Management considers a range of macroeconomic scenarios in connection with the allowance estimation process. Within the various economic scenarios considered as of 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. 28 Table of Contents