Item 2. Management’s Discussion and Analysis
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 six months ended June 30, 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 2023 Form 10-K. Operating results for the three and six months ended June 30, 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 its 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.
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Results of Operations
Selected income statement data and key performance indicators are presented in the table below:
Three Months Ended June 30, Six Months Ended June 30,
(dollars in thousands except per share data) 2024 2023 2024 2023
Net interest income $ 216,582 $ 231,990 $ 431,591 $ 467,335
Provision for credit losses 20,000 7,000 39,000 35,000
Non-interest income 50,424 46,011 91,743 83,414
Non-interest expense 188,409 181,644 390,802 375,671
Income before income taxes 58,597 89,357 93,532 140,078
Income tax expense 16,935 20,706 25,728 32,766
Net income 41,662 68,651 67,804 107,312
Preferred stock dividends 4,312 4,312 8,625 8,625
Net income available to common stockholders $ 37,350 $ 64,339 $ 59,179 $ 98,687
Basic earnings per common share $ 0.80 $ 1.34 $ 1.26 $ 2.05
Diluted earnings per common share $ 0.80 $ 1.33 $ 1.25 $ 2.02
Net interest margin 3.01 % 3.29 % 3.02 % 3.31 %
Return on average assets (“ROA”) 0.56 % 0.95 % 0.46 % 0.74 %
Return on average common equity (“ROE”) 5.26 % 9.17 % 4.14 % 7.15 %
Efficiency ratio(1) 70.6 % 65.3 % 74.7 % 68.2 %
Non-interest income to average earning assets 0.71 % 0.66 % 0.65 % 0.60 %
Non-interest expense to average earning assets 2.65 % 2.61 % 2.77 % 2.69 %
(1) Non-interest expense divided by the sum of net interest income and non-interest income.
Three months ended June 30, 2024 compared to three months ended June 30, 2023
The Company reported net income of $41.7 million and net income available to common stockholders of $37.4 million for the second quarter of 2024, compared to net income of $68.7 million and net income available to common stockholders of $64.3 million for the second quarter of 2023. On a fully diluted basis, earnings per common share were $0.80 for the second quarter of 2024, compared to $1.33 for the same period in 2023. ROE was 5.26% and ROA was 0.56% for the second quarter of 2024, compared to 9.17% and 0.95%, respectively, for the same period in 2023. The decrease in net income for the second quarter of 2024 compared to the second quarter of 2023 resulted primarily from a decrease in net interest income and an increase in provision for credit losses.
Six months ended June 30, 2024 compared to six months ended June 30, 2023
The Company reported net income of $67.8 million and net income available to common stockholders of $59.2 million for the six months ended June 30, 2024, compared to net income of $107.3 million and net income available to common stockholders of $98.7 million for the same period in 2023. On a fully diluted basis, earnings per common share were $1.25 for the six months ended June 30, 2024, compared to $2.02 for the same period in 2023. ROE was 4.14% and ROA was 0.46% for the six months ended June 30, 2024, compared to 7.15% and 0.74%, respectively, for the same period in 2023. The decrease in net income for the six months ended June 30, 2024 compared to the same period in 2023 resulted primarily from a decrease in net interest income and an increase in non-interest expense.
Details of the changes in the various components of net income are discussed below.
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Taxable Equivalent Net Interest Income Analysis - Quarterly(1)
Three Months Ended June 30, 2024 Three Months Ended June 30, 2023
(in thousands except percentages) Average
Balance Income/
Expense Yield/
Rate Average
Balance Income/
Expense Yield/
Rate
Assets
Investment securities(2) $ 4,427,023 $ 33,584 2.80 % $ 4,306,881 $ 27,478 2.36 %
Interest-bearing cash and cash equivalents 3,273,069 43,233 5.31 % 3,286,091 41,571 5.07 %
Loans held for sale 28,768 683 9.55 % 28,414 599 8.46 %
Loans held for investment, mortgage finance(4) 4,357,288 42,722 3.94 % 4,376,235 49,425 4.53 %
Loans held for investment(3)(4) 16,750,788 301,910 7.25 % 16,217,314 282,956 7.00 %
Less: Allowance for credit losses on loans 263,145 — — 261,027 — —
Loans held for investment, net 20,844,931 344,632 6.65 % 20,332,522 332,381 6.56 %
Total earning assets 28,573,791 422,132 5.86 % 27,953,908 402,029 5.69 %
Cash and other assets 1,177,061 1,049,145
Total assets $ 29,750,852 $ 29,003,053
Liabilities and Stockholders’ Equity
Transaction deposits $ 2,061,622 $ 16,982 3.31 % $ 1,345,742 $ 9,468 2.82 %
Savings deposits 11,981,668 143,173 4.81 % 10,590,558 114,275 4.33 %
Time deposits 1,658,899 21,125 5.12 % 1,531,922 13,648 3.57 %
Total interest bearing deposits 15,702,189 181,280 4.64 % 13,468,222 137,391 4.09 %
Short-term borrowings 927,253 12,749 5.53 % 1,397,253 18,253 5.24 %
Long-term debt 778,401 11,457 5.92 % 883,871 14,282 6.48 %
Total interest bearing liabilities 17,407,843 205,486 4.75 % 15,749,346 169,926 4.33 %
Non-interest bearing deposits 8,647,594 9,749,105
Other liabilities 537,754 389,155
Stockholders’ equity 3,157,661 3,115,447
Total liabilities and stockholders’ equity $ 29,750,852 $ 29,003,053
Net interest income $ 216,646 $ 232,103
Net interest margin 3.01 % 3.29 %
(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.
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Taxable Equivalent Net Interest Income Analysis - Year to Date(1)
Six Months Ended June 30, 2024 Six Months Ended June 30, 2023
(dollars in thousands) Average
Balance Revenue /
Expense Yield /
Rate Average
Balance Revenue /
Expense Yield /
Rate
Assets
Investment securities(2) $ 4,363,195 $ 65,728 2.79 % $ 4,184,349 $ 52,770 2.34 %
Interest bearing cash and cash equivalents 3,662,348 97,588 5.36 % 4,407,486 104,007 4.76 %
Loans held for sale 39,966 1,867 9.40 % 35,902 1,537 8.63 %
Loans held for investment, mortgage finance(4)
3,937,498 74,177 3.79 % 3,834,529 86,844 4.57 %
Loans held for investment(3)(4)
16,636,438 600,216 7.26 % 15,909,792 542,196 6.87 %
Less: Allowance for credit losses on loans 256,541 — — 256,900 — —
Loans held for investment, net
20,317,395 674,393 6.68 % 19,487,421 629,040 6.51 %
Total earning assets 28,382,904 839,576 5.87 % 28,115,158 787,354 5.57 %
Cash and other assets 1,117,763 1,045,466
Total assets $ 29,500,667 $ 29,160,624
Liabilities and Stockholders’ Equity
Transaction deposits $ 2,034,057 $ 33,840 3.35 % $ 1,062,694 $ 13,321 2.53 %
Savings deposits 11,695,673 279,963 4.81 % 10,891,309 219,982 4.07 %
Time deposits 1,689,112 43,077 5.13 % 1,481,569 24,182 3.29 %
Total interest bearing deposits 15,418,842 356,880 4.65 % 13,435,572 257,485 3.86 %
Short-term borrowings 919,670 25,532 5.58 % 1,320,493 32,997 5.04 %
Long-term debt 818,955 25,443 6.25 % 907,701 29,265 6.50 %
Total interest bearing liabilities 17,157,467 407,855 4.78 % 15,663,766 319,747 4.12 %
Non-interest bearing deposits 8,642,685 10,000,024
Other liabilities 523,520 412,758
Stockholders’ equity 3,176,995 3,084,076
Total liabilities and stockholders’ equity $ 29,500,667 $ 29,160,624
Net interest income $ 431,721 $ 467,607
Net interest margin 3.02 % 3.31 %
(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.
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Volume/Rate Analysis
The following table presents the changes in taxable equivalent net interest income and identifies the changes due to differences in the average volume of earning assets and interest bearing liabilities and the changes due to differences in the average interest rate on those assets and liabilities.
Three Months Ended June 30, 2024/2023 Six Months Ended June 30, 2024/2023
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 $ 6,106 $ 707 $ 5,399 $ 12,958 $ 2,083 $ 10,875
Interest bearing cash and cash equivalents 1,662 (165) 1,827 (6,419) (17,138) 10,719
Loans held for sale 84 7 77 330 175 155
Loans held for investment, mortgage finance (6,703) (214) (6,489) (12,667) 2,446 (15,113)
Loans held for investment 18,954 9,310 9,644 58,020 24,824 33,196
Total interest income 20,103 9,645 10,458 52,222 12,390 39,832
Interest expense
Transaction deposits 7,514 5,033 2,481 20,519 11,197 9,322
Savings deposits 28,898 15,018 13,880 59,981 17,064 42,917
Time deposits 7,477 1,130 6,347 18,895 3,282 15,613
Short-term borrowings (5,504) (6,140) 636 (7,465) (10,107) 2,642
Long-term debt (2,825) (1,704) (1,121) (3,822) (2,879) (943)
Total interest expense 35,560 13,337 22,223 88,108 18,557 69,551
Net interest income $ (15,457) $ (3,692) $ (11,765) $ (35,886) $ (6,167) $ (29,719)
(1) Yield/rate and volume variances are allocated to yield/rate.
(2) Taxable equivalent rates used where applicable.
Net Interest Income
Net interest income was $216.6 million for the three months ended June 30, 2024, compared to $232.0 million for the same period in 2023. The decrease was primarily due to increases in funding costs and average interest bearing deposits, partially offset by increases in yields on average earning assets and average loans held for investment, excluding mortgage finance.
Average earning assets for the three months ended June 30, 2024 increased $619.9 million compared to the same period in 2023, which included increases of $512.4 million in average total loans held for investment and $120.1 million in average investment securities, partially offset by a $13.0 million decrease in average interest-bearing cash and cash equivalents. Average interest-bearing liabilities increased $1.7 billion for the three months ended June 30, 2024 compared to the same period in 2023, primarily due to a $2.2 billion increase in average interest-bearing deposits, partially offset by decreases of $470.0 million in average short-term borrowings and $105.5 million in average long-term debt related to the second quarter 2024 redemption in full of the bank-issued senior unsecured credit-linked notes of $275.0 million. Average non-interest bearing deposits for the three months ended June 30, 2024 decreased to $8.6 billion from $9.7 billion for the same period in 2023.
Net interest margin for the three months ended June 30, 2024 was 3.01%, compared to 3.29% for the same period in 2023. The decrease in net interest margin was primarily due to an increase in funding costs, partially offset by an increase in yields on average earning assets. 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 6.65% for the three months ended June 30, 2024, compared to 6.56% for the same period in 2023, and the yield on earning assets increased to 5.86% for the three months ended June 30, 2024, compared to 5.69% for the same period in 2023. Total cost of deposits increased to 2.99% for the three months ended June 30, 2024 from 2.37% 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 June 30, 2024, compared to 2.38% for the same period in 2023.
Net interest income was $431.6 million for the six months ended June 30, 2024, compared to $467.3 million for the same period in 2023. The decrease was primarily due to rising funding costs and an increase in average interest bearing deposits, partially offset by an increase in yields on average earnings assets and an increase in average total earning assets.
Average earning assets increased $267.7 million for the six months ended June 30, 2024, compared to the same period in 2023, which included increases of $830.0 million in average total loans held for investment and $178.8 million in average investment securities, partially offset by a decrease of $745.1 million in average interest-bearing cash and cash equivalents. Average
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interest-bearing liabilities increased $1.5 billion for the six months ended June 30, 2024, compared to the same period in 2023, primarily due to an increase of $2.0 billion in average interest-bearing deposits, partially offset by a $400.8 million decrease in average short-term borrowings. Average non-interest bearing deposits for the six months ended June 30, 2024 decreased to $8.6 billion from $10.0 billion for the same period in 2023.
Net interest margin for the six months ended June 30, 2024 was 3.02%, compared to 3.31% for the same period of 2023. The decrease was primarily due to the effect of rising interest rates on funding costs, 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 6.68% for the six months ended June 30, 2024, compared to 6.51% for the same period in 2023, and the yield on earning assets increased to 5.87% for the six months ended June 30, 2024, compared to 5.57% for the same period in 2023. Total cost of deposits increased to 2.98% for the six months ended June 30, 2024 from 2.22% for the same period in 2023 and total funding costs, including non-interest bearing deposits and stockholders' equity, increased to 2.83% for the six months ended June 30, 2024, compared to 2.24% for the same period in 2023.
Non-interest Income
Three Months Ended June 30, Six Months Ended June 30,
(in thousands) 2024 2023 2024 2023
Service charges on deposit accounts $ 5,911 $ 5,158 $ 12,250 $ 10,180
Wealth management and trust fee income 3,699 3,715 7,266 7,144
Brokered loan fees 2,131 2,415 4,042 4,310
Investment banking and advisory fees 25,048 19,101 43,472 33,665
Trading income 5,650 8,397 10,362 12,601
Other 7,985 7,225 14,351 15,514
Total non-interest income $ 50,424 $ 46,011 $ 91,743 $ 83,414
Non-interest income increased $4.4 million during the three months ended June 30, 2024, compared to the same period in 2023. The increase was primarily due to increases in investment banking and advisory fees, partially offset by a decrease in trading income.
Non-interest income increased $8.3 million during the six months ended June 30, 2024 to $91.7 million, compared to $83.4 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 June 30, Six Months Ended June 30,
(in thousands) 2024 2023 2024 2023
Salaries and benefits $ 118,840 $ 113,050 $ 247,567 $ 241,720
Occupancy expense 10,666 9,482 20,403 19,101
Marketing 5,996 6,367 12,032 15,411
Legal and professional 11,273 15,669 27,468 30,183
Communications and technology 22,013 20,525 43,127 38,048
Federal Deposit Insurance Corporation (“FDIC”) insurance assessment 5,570 3,693 13,991 5,863
Other 14,051 12,858 26,214 25,345
Total non-interest expense $ 188,409 $ 181,644 $ 390,802 $ 375,671
Non-interest expense increased $6.8 million during the three months ended June 30, 2024, compared to the same period in 2023. The increase was primarily due to increases in salaries and benefits, occupancy expense, communications and technology expense, FDIC insurance assessment and other non-interest expense, partially offset by a decrease in legal and professional expense.
Non-interest expense for the six months ended June 30, 2024 increased $15.1 million, compared to the same period in 2023, primarily due to increases in salaries and benefits, communications and technology expense and FDIC insurance assessment, resulting from an additional $3.5 million FDIC special assessment expense recorded in the first six months of 2024, partially offset by decreases in marketing expense and legal and professional expense.
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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) June 30, 2024 December 31, 2023
Commercial $ 10,533,930 $ 10,410,766
Mortgage finance 5,078,161 3,978,328
Commercial real estate 5,689,094 5,500,774
Consumer
557,951 530,948
Gross loans held for investment
21,859,136 20,420,816
Unearned income (net of direct origination costs)
(80,406) (80,258)
Total loans held for investment $ 21,778,730 $ 20,340,558
Total loans held for investment were $21.8 billion at June 30, 2024, an increase of $1.4 billion from December 31, 2023. The Company experienced loan growth in all loan 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 23% and 19% of gross loans held for investment at June 30, 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 June 30, 2024, the Company had $5.3 billion in shared national credits, $871.9 million of which the Company administered as agent. All syndicated loans, whether the Company acts as agent or participant, are underwritten to the same standards as all other loans the Company originates. As of June 30, 2024, approximately $16.8 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 June 30, 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.
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Non-performing Assets
Non-performing assets include non-accrual loans and leases and repossessed assets. The table below summarizes non-accrual loans by portfolio segment and by type of property securing the credit.
(dollars in thousands) June 30, 2024 December 31, 2023
Non-accrual loans held for investment
Commercial:
Business assets $ 73,114 $ 63,094
Oil and gas properties 908 2,543
Accounts receivable and inventory 6,952 —
Machinery and equipment
— 3,332
Unsecured 1,642 79
Highly liquid assets 1,156 —
Total commercial 83,772 69,048
Commercial real estate:
Hotel/motel — 12,350
Commercial property 265 —
Total commercial real estate 265 12,350
Consumer:
Single family residences 984 —
Total consumer 984 —
Total non-accrual loans held for investment 85,021 81,398
Non-accrual loans held for sale — —
Other real estate owned (“OREO”) — —
Total non-performing assets $ 85,021 $ 81,398
Non-accrual loans held for investment to total loans held for investment 0.39 % 0.40 %
Total non-performing assets to total assets 0.28 % 0.29 %
Allowance for credit losses on loans to non-accrual loans held for investment 3.1x 3.1x
Loans held for investment past due 90 days and accruing $ 286 $ 19,523
Loans held for investment past due 90 days to total loans held for investment — % 0.10 %
Loans held for sale past due 90 days and accruing $ 64 $ —
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.
The Company recorded a provision for credit losses of $39.0 million for the six months ended June 30, 2024, compared to a provision of $35.0 million for the six months ended June 30, 2023. The provision for credit losses for the six months ended June 30, 2024 reflects growth in loans held for investment and $22.7 million in net charge-offs recorded during the six months ended June 30, 2024. The Company recorded $22.7 million in net charge-offs during the six months ended June 30, 2024, compared to $28.1 million in net charge-offs during the same period in 2023. Criticized loans totaled $859.7 million at June 30, 2024, compared to $738.2 million at December 31, 2023.
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The table below presents key metrics related to the Company’s credit loss experience:
June 30, 2024 June 30, 2023
Allowance for credit losses on loans to total loans held for investment 1.23 % 1.11 %
Allowance for credit losses on loans to average total loans held for investment(1) 1.30 % 1.20 %
Total allowance for credit losses to total loans held for investment 1.44 % 1.32 %
Total provision for credit losses to average total loans held for investment(1)(2) 0.20 % 0.36 %
(1) Ratios are calculated using average balance for the six months ended June 30, 2024 and 2023, respectively.
(2) Ratios are annualized utilizing provision for credit losses for the six months ended June 30, 2024 and 2023, respectively.
The table below details net charge-offs/(recoveries) as a percentage of average total loans by portfolio segment:
Six Months Ended June 30,
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 $ 17,283 0.33 % $ 28,154 0.55 %
Mortgage finance — — % — — %
Commercial real estate 5,436 0.19 % — — %
Consumer — — % (5) — %
Total $ 22,719 0.22 % $ 28,149 0.29 %
(1) Ratios are calculated using net charge-offs for the six months ended June 30, 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) June 30, 2024 December 31, 2023
Interest bearing cash and cash equivalents $ 2,691,352 $ 3,042,357
Interest bearing cash and cash equivalents as a percent of:
Total loans held for investment 12.4 % 15.0 %
Total earning assets 9.4 % 11.1 %
Total deposits 11.3 % 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 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:
June 30, 2024 December 31, 2023
(dollars in thousands) Balance % of Total Balance % of Total
Customer deposits $ 23,294,432 97.8 % $ 21,454,568 95.9 %
Brokered deposits 523,895 2.2 % 917,271 4.1 %
Total deposits $ 23,818,327 100.0 % $ 22,371,839 100.0 %
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Estimated uninsured assessable deposits, including accrued interest, were 40% of total deposits at June 30, 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) June 30, 2024 December 31, 2023
Repurchase agreements $ — $ —
FHLB borrowings 1,675,000 1,500,000
Total short-term and other borrowings $ 1,675,000 $ 1,500,000
The following table summarizes the Company’s short-term borrowing capacities net of balances outstanding:
(in thousands) June 30, 2024 December 31, 2023
FHLB borrowing capacity relating to loans and pledged securities $ 3,981,302 $ 2,602,092
FHLB borrowing capacity relating to unencumbered securities 4,188,358 3,737,615
Total FHLB borrowing capacity(1) $ 8,169,660 $ 6,339,707
Unused federal funds lines available from commercial banks $ 1,287,000 $ 1,188,000
Unused Federal Reserve borrowings capacity $ 4,385,827 $ 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 six months ended June 30, 2024 or 2023.
The Company has long-term debt outstanding of $660.0 million as of June 30, 2024, comprised of trust preferred securities and subordinated notes with maturity dates ranging from January 2026 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 six months ended June 30, 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.
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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 six months ended June 30, 2024, the Company repurchased 1,381,436 shares of its common stock for an aggregate purchase price, including excise tax expense, of $81.5 million, at a weighted average price of $58.57 per share.
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 June 30, 2024, the quantitative estimate of the allowance for credit loss would increase by approximately $151.7 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.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.