Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Selected income statement data and key performance indicators are presented in the table below:
For the Year Ended December 31,
(dollars in thousands except per share data) 2024 2023 2022
Net interest income $ 901,300 $ 914,123 $ 875,765
Provision for credit losses 67,000 72,000 66,000
Non-interest income 31,046 161,419 349,522
Non-interest expense 758,285 756,947 727,532
Income before income taxes
107,061 246,595 431,755
Income tax expense
29,553 57,454 99,277
Net income
77,508 189,141 332,478
Preferred stock dividends 17,250 17,250 17,250
Net income available to common stockholders
$ 60,258 $ 171,891 $ 315,228
Basic earnings per common share
$ 1.29 $ 3.58 $ 6.25
Diluted earnings per common share
$ 1.28 $ 3.54 $ 6.18
Net interest margin 3.03 % 3.17 % 2.79 %
Return on average assets (“ROA”) 0.25 % 0.64 % 1.04 %
Return on average common equity (“ROE”) 2.04 % 6.15 % 11.33 %
Efficiency ratio(1) 81.3 % 70.4 % 59.4 %
Non-interest income to average earning assets 0.11 % 0.57 % 1.12 %
Non-interest expense to average earning assets 2.57 % 2.66 % 2.34 %
(1) Non-interest expense divided by the sum of net interest income and non-interest income.
Year ended December 31, 2024 compared to year ended December 31, 2023
The Company reported net income of $77.5 million and net income available to common stockholders of $60.3 million for the year ended December 31, 2024, compared to net income of $189.1 million and net income available to common stockholders of $171.9 million for the same period in 2023. On a fully diluted basis, earnings per common share was $1.28 for the year ended December 31, 2024, compared to $3.54 for the same period in 2023. ROE was 2.04% and ROA was 0.25% for the year ended December 31, 2024, compared to 6.15% and 0.64%, respectively, for the same period in 2023. The decrease in net income for the year ended December 31, 2024 compared to the same period in 2023 resulted primarily from a decrease in non-interest income, primarily as a result of the $179.6 million loss on sale of available-for-sale debt securities recognized during the third quarter of 2024 in connection with strategic balance sheet repositioning undertaken by the Company.
Details of the changes in the various components of net income are discussed below.
34
Taxable Equivalent Net Interest Income Analysis - Year to Date(1)
Year Ended December 31, 2024 Year Ended December 31, 2023 Year Ended December 31, 2022
(dollars in thousands) Average
Balance Revenue /
Expense Yield /
Rate Average
Balance Revenue /
Expense Yield /
Rate Average
Balance Revenue /
Expense Yield /
Rate
Assets
Investment securities(2) $ 4,386,458 $ 148,219 3.17 % $ 4,162,931 $ 108,294 2.37 % $ 3,525,986 $ 64,021 1.69 %
Interest bearing cash and cash equivalents 3,940,590 203,406 5.16 % 4,353,911 220,976 5.08 % 5,967,329 97,271 1.63 %
Loans held for sale 25,855 2,432 9.41 % 33,166 2,856 8.61 % 528,973 23,555 4.45 %
Loans held for investment, mortgage finance(4)
4,612,994 179,233 3.89 % 4,080,263 171,366 4.20 % 5,285,612 201,680 3.82 %
Loans held for investment(3)(4) 16,746,912 1,196,673 7.15 % 16,076,646 1,126,843 7.01 % 16,063,437 758,965 4.72 %
Less: Allowance for credit losses on loans 263,279 — — 249,180 — — 221,639 — —
Loans held for investment, net
21,096,627 1,375,906 6.52 % 19,907,729 1,298,209 6.52 % 21,127,410 960,645 4.55 %
Total earning assets 29,449,530 1,729,963 5.82 % 28,457,737 1,630,335 5.65 % 31,149,698 1,145,492 3.65 %
Cash and other assets 1,163,665 1,079,607 900,121
Total assets $ 30,613,195 $ 29,537,344 $ 32,049,819
Liabilities and Stockholders’ Equity
Transaction deposits $ 2,049,720 $ 65,215 3.18 % $ 1,466,583 $ 42,561 2.90 % $ 1,659,476 $ 18,099 1.09 %
Savings deposits 12,143,539 572,126 4.71 % 10,921,264 480,106 4.40 % 9,983,571 151,400 1.52 %
Time deposits 1,946,341 98,855 5.08 % 1,573,294 65,108 4.14 % 1,313,483 21,164 1.61 %
Total interest bearing deposits 16,139,600 736,196 4.56 % 13,961,141 587,775 4.21 % 12,956,530 190,663 1.47 %
Short-term borrowings 933,896 49,994 5.35 % 1,323,039 70,642 5.34 % 1,829,751 29,077 1.59 %
Long-term debt 739,136 42,060 5.69 % 882,904 57,383 6.50 % 927,847 48,739 5.25 %
Total interest bearing liabilities 17,812,632 828,250 4.65 % 16,167,084 715,800 4.43 % 15,714,128 268,479 1.71 %
Non-interest bearing deposits 9,013,038 9,814,517 12,951,134
Other liabilities 532,058 460,779 301,251
Stockholders’ equity 3,255,467 3,094,964 3,083,306
Total liabilities and stockholders’ equity $ 30,613,195 $ 29,537,344 $ 32,049,819
Net interest income $ 901,713 $ 914,535 $ 877,013
Net interest margin 3.03 % 3.17 % 2.79 %
(1) Taxable equivalent rates used where applicable.
(2) Yields on investment securities are calculated using available-for-sale securities at amortized cost.
(3) Average balances include non-accrual loans. Loan interest income includes loan fees totaling $54.6 million, $47.2 million and $37.2 million for the years ended December 31, 2024, 2023 and 2022, respectively.
(4) In the first quarter of 2024, enhancements were made to the Company’s 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.
35
Volume/Rate Analysis
The following table presents the changes in taxable equivalent net interest income and identifies the changes due to differences in the average volume of earning assets and interest bearing liabilities and the changes due to differences in the average interest rate on those assets and liabilities.
Years Ended December 31,
2024/2023 2023/2022
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 $ 39,925 $ 5,298 $ 34,627 $ 44,273 $ 10,764 $ 33,509
Interest bearing cash and cash equivalents (17,570) (20,997) 3,427 123,705 (26,299) 150,004
Loans held for sale (424) (629) 205 (20,699) (22,063) 1,364
Loans held for investment, mortgage finance 7,867 22,375 (14,508) (30,314) (46,044) 15,730
Loans held for investment 69,830 46,986 22,844 367,878 623 367,255
Total interest income 99,628 53,033 46,595 484,843 (83,019) 567,862
Interest expense
Transaction deposits 22,654 16,911 5,743 24,462 (2,103) 26,565
Savings deposits 92,020 53,780 38,240 328,706 14,253 314,453
Time deposits 33,747 15,444 18,303 43,944 4,183 39,761
Short-term borrowings (20,648) (20,780) 132 41,565 (8,057) 49,622
Long-term debt (15,323) (9,345) (5,978) 8,644 (2,360) 11,004
Total interest expense 112,450 56,010 56,440 447,321 5,916 441,405
Net interest income $ (12,822) $ (2,977) $ (9,845) $ 37,522 $ (88,935) $ 126,457
(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 $901.3 million for the year ended December 31, 2024 compared to $914.1 million for 2023. The decrease was primarily due to increases in average interest bearing liabilities and deposit costs, partially offset by increases in average earning assets and yields on average earning assets.
Average earning assets for the year ended December 31, 2024 increased $1.0 billion compared to the same period in 2023, which included increases of $1.2 billion in average total loans and $223.5 million in average investment securities, partially offset by a $413.3 million decrease in average interest bearing cash and cash equivalents. Average interest bearing liabilities increased $1.6 billion for the year ended December 31, 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 $389.1 million in average short-term borrowings and $143.8 million in average long-term debt. Average non-interest bearing deposits for the year ended December 31, 2024 decreased to $9.0 billion from $9.8 billion for the same period in 2023.
Net interest margin for the year ended December 31, 2024 was 3.03% compared to 3.17% for 2023. The decrease was primarily due to an increase in interest bearing deposit yields, partially offset by higher yields on investment securities compared to the same period in 2023.
The yield on total loans held for investment, net, of 6.52% for the year ended December 31, 2024 was unchanged compared to the same period in 2023 and the yield on earning assets increased to 5.82% for the year ended December 31, 2024 compared to 5.65% for the same period in 2023. The average cost of total deposits increased to 2.93% for 2024 from 2.47% for the same period in 2023 and total funding costs, including all deposits, long-term debt and stockholders' equity, increased to 2.75% for 2024 compared to 2.46% for the same period 2023.
36
Non-interest Income
Year Ended December 31,
(in thousands) 2024 2023 2022
Service charges on deposit accounts $ 25,546 $ 20,874 $ 23,266
Wealth management and trust fee income 15,315 13,955 15,036
Brokered loan fees 8,961 8,918 14,159
Investment banking and advisory fees 104,965 63,670 24,974
Trading income 21,635 22,512 10,080
Gain on disposal of subsidiary — — 248,526
Available-for-sale debt securities gains/(losses), net
(179,581) 489 —
Other 34,205 31,001 13,481
Total non-interest income $ 31,046 $ 161,419 $ 349,522
Non-interest income was $31.0 million for the year ended December 31, 2024, a $130.4 million decrease as compared to the same period in 2023, primarily due to the $179.6 million loss on sale of available-for-sale debt securities recognized during the third quarter of 2024, partially offset by an increase in investment banking and advisory fees.
Non-interest Expense
Year Ended December 31,
(in thousands) 2024 2023 2022
Salaries and benefits $ 466,578 $ 459,700 $ 434,906
Occupancy expense 45,266 38,494 44,222
Marketing 22,349 25,854 32,388
Legal and professional 53,783 64,924 75,858
Communications and technology 93,085 81,262 69,253
Federal Deposit Insurance Corporation (“FDIC”) insurance assessment 23,351 36,775 14,344
Other 53,873 49,938 56,561
Total non-interest expense $ 758,285 $ 756,947 $ 727,532
Non-interest expense was $758.3 million for the year ended December 31, 2024, an increase of $1.3 million as compared to the same period in 2023, primarily due to increases in salaries and benefits, occupancy expense and communications and technology expense, partially offset by decreases in legal and professional expense and FDIC insurance assessment. Non-interest expense for the year ended December 31, 2024 included restructuring expenses of $4.4 million recorded in salaries and benefits, $476,000 recorded in occupancy expense and $3.1 million recorded in communications and technology expense. The decrease in legal and professional expense for the year ended December 31, 2024 resulted primarily from declines in professional services, partially offset by a $5.0 million legal settlement expense recognized in the first quarter of 2024. FDIC insurance assessment included a $2.8 million special assessment expense in 2024, as compared to a $19.9 million special assessment expense in 2023.
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 accompanying notes to the consolidated financial statements included elsewhere in this report for details of these portfolio segments.
(in thousands) December 31, 2024 December 31, 2023
Commercial $ 11,145,591 $ 10,410,766
Mortgage finance 5,215,574 3,978,328
Commercial real estate 5,616,282 5,500,774
Consumer
565,376 530,948
Gross loans held for investment
22,542,823 20,420,816
Unearned income (net of direct origination costs)
( 92,757 ) ( 80,258 )
Total loans held for investment $ 22,450,066 $ 20,340,558
Total loans held for investment were $22.5 billion at December 31, 2024, an increase of $2.1 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. Commercial loan growth includes the impact of the acquisition of a $332.0 million loan portfolio completed during the third
37
quarter of 2024. Mortgage finance loans include legal ownership interests in mortgage loans that the Company purchases from unaffiliated mortgage originators, either directly or through a special purpose entity structure, that are typically sold within 10 to 20 days and represent 23% and 19% of gross loans held for investment at December 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 December 31, 2024, the Company had $5.7 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 December 31, 2024, approximately $34.7 million of the Company’s shared national credits were on non-accrual.
Portfolio Concentrations
Although more than 50% of the Company’s total loan exposure is outside of Texas and more than 50% of deposits are sourced outside of Texas, Texas concentration remains significant. As of December 31, 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 determining the appropriateness of the allowance for credit losses.
The table below summarizes the industry concentrations of loans held for investment on a gross basis at December 31, 2024:
(dollars in thousands) Amount Percent of Total
Commercial:
Financials (excluding banks) $ 3,991,253 17.7 %
Energy 1,226,290 5.4 %
Technology, telecom and media 1,141,324 5.1 %
Real estate related services (not secured by real estate) 960,319 4.3 %
Healthcare and pharmaceuticals 651,417 2.9 %
Commercial services 584,910 2.6 %
Retail 388,120 1.7 %
Machinery, equipment and parts manufacturing 361,545 1.6 %
Entertainment and recreation 283,499 1.3 %
Government and education 226,498 1.0 %
Food and beverage manufacturing and wholesale 185,241 0.8 %
Materials and commodities 180,240 0.8 %
Transportation services 172,949 0.8 %
Consumer services 139,321 0.6 %
Utilities 77,780 0.3 %
Diversified or miscellaneous 574,885 2.6 %
Total commercial 11,145,591 49.5 %
Mortgage finance 5,215,574 23.1 %
Commercial real estate 5,616,282 24.9 %
Consumer 565,376 2.5 %
Total $ 22,542,823 100.0 %
The Company’s largest concentration of commercial loans held for investment in any single industry is in financials excluding banks. Loans extended to borrowers in the financials excluding banks category are comprised largely of loans to companies who loan money to businesses and consumers for various purposes including, but not limited to, insurance, consumer goods and real estate. This category also includes loans to companies involved in investment management and securities and commodities trading.
38
The Company believes the loans it originates are appropriately collateralized under its credit standards. Approximately 97% of the Company’s loans held for investment are secured by collateral. The table below sets forth information regarding the distribution of loans held for investment on a gross basis among various types of collateral at December 31, 2024:
(dollars in thousands) Amount Percent of Total
Commercial:
Business assets $ 9,733,194 43.2 %
Highly liquid assets 320,950 1.4 %
Other assets 174,560 0.8 %
Municipal tax- and revenue-secured 99,844 0.4 %
Rolling stock 37,604 0.2 %
U. S. Government guaranty 448 — %
Unsecured 778,991 3.5 %
Total commercial 11,145,591 49.5 %
Mortgage finance 5,215,574 23.1 %
Commercial real estate 5,616,282 24.9 %
Consumer 565,376 2.5 %
Total $ 22,542,823 100.0 %
As noted in the tables above, approximately 25% of loans held for investment as of December 31, 2024 are commercial real estate loans that are generally secured by real property. The commercial real estate portfolio is comprised primarily of non-owner occupied construction/development financing and limited term financing provided to professional real estate developers, owners/managers of commercial real estate projects and properties, and residential builders/developers. Collateral properties include office buildings, warehouse/distribution buildings, shopping centers, hotels/motels, senior living, apartment buildings, residential and commercial tract developments, and raw land or lots to be developed into single-family homes. The primary source of repayment on these loans is generally expected to come from the sale, permanent financing or lease of the real property collateral. As a result, the performance of these loans is generally impacted by fluctuations in collateral values, the ability of the borrower to obtain permanent financing, and, in the case of loans to residential builder/developers, volatility in consumer demand.
The table below summarizes the commercial real estate loan portfolio on a gross basis, by property type as of December 31, 2024:
(dollars in thousands) Amount Percent of Total
Apartment/condominium buildings $ 2,347,883 41.8 %
Industrial buildings 1,092,380 19.5 %
1-4 Family dwellings (other than condominium) 390,235 6.9 %
Office buildings 361,941 6.4 %
Senior housing buildings 318,580 5.7 %
Shopping center/mall buildings 285,257 5.1 %
Commercial buildings 210,702 3.8 %
Hotel/motel buildings 136,767 2.4 %
Self-storage buildings 113,861 2.0 %
Student housing 72,695 1.3 %
Commercial lots 67,705 1.2 %
Residential lots 46,265 0.8 %
Other 172,011 3.1 %
Total commercial real estate loans $ 5,616,282 100.0 %
39
The table below summarizes the Company’s commercial real estate portfolio on a gross basis at December 31, 2024 as segregated by the geographic region in which the property is located. Approximately 55% of the commercial real estate collateral is located in Texas.
(dollars in thousands) Amount Percent of Total
Texas geographic region:
Dallas/Fort Worth $ 975,287 17.3 %
Houston 745,756 13.3 %
San Antonio 627,445 11.2 %
Austin 537,600 9.6 %
Other Texas cities 179,083 3.2 %
Total Texas 3,065,171 54.6 %
Other states 2,551,111 45.4 %
Total commercial real estate loans
$ 5,616,282 100.0 %
The determination of collateral value is critically important when financing real estate. As a result, obtaining current and objectively prepared appraisals is a major part of the underwriting and monitoring processes. The Company engages a variety of professional firms to supply appraisals, market studies and feasibility reports, environmental assessments and project site inspections to complement its internal resources to underwrite and monitor these credit exposures. Generally, the credit policy requires a new appraisal every three years. However, in periods of economic uncertainty where real estate market conditions may change rapidly, more current appraisals are obtained when warranted by conditions such as a borrower’s deteriorating financial condition, their possible inability to perform on the loan or other indicators of increasing risk of reliance on collateral value as the sole source of repayment of the loan. Annual appraisals are generally obtained for loans graded substandard or worse where real estate is a material portion of the collateral value and/or the income from the real estate or sale of the real estate is the primary source of debt service.
Appraisals are, in substantially all cases, reviewed by a third party to determine the reasonableness of the appraised value. The third-party reviewer will challenge whether or not the data used is appropriate and relevant, form an opinion as to the appropriateness of the appraisal methods and techniques used, and determine if overall the analysis and conclusions of the appraiser can be relied upon. Additionally, the third-party reviewer provides a detailed report of that analysis. Further review may be conducted by credit officers, including the Bank’s managed asset committee as conditions warrant. These additional steps of review are undertaken to confirm that the underlying appraisal and the third-party analysis can be relied upon. If differences arise, management addresses those with the reviewer and determines an appropriate resolution. Both the appraisal process and the appraisal review process can be less reliable in establishing accurate collateral values during and following periods of economic weakness due to the lack of comparable sales and the limited availability of financing to support an active market of potential purchasers.
Interest Reserve Loans
As of December 31, 2024 and December 31, 2023, the Company had $797.3 million and $788.9 million, respectively, in loans held for investment that included interest reserve arrangements, representing approximately 6% and 14%, respectively, of outstanding commercial real estate loans. The use of interest reserves is common in construction loans and is carefully controlled by underwriting standards, which consider the feasibility of the project, the creditworthiness of the borrower and guarantors and the loan-to-value coverage of the collateral. The interest reserve allows the borrower to draw loan funds to pay interest charges on the outstanding balance of the loan when financial condition precedents are met. When drawn, the interest is capitalized and added to the loan balance, subject to conditions specified during the initial underwriting and at the time the credit is approved. The Company has ongoing controls for monitoring compliance with loan covenants, advancing funds and determining default conditions.
When the Company finances land on which improvements will be constructed, construction funds are generally not advanced until the borrower has received lease or purchase commitments which will meet cash flow coverage requirements and/or an analysis of market conditions and project feasibility indicates to management’s satisfaction that such lease or purchase commitments are forthcoming or other sources of repayment have been identified to repay the loan. It is the general policy to require a substantial equity investment by the borrower to complement the Bank's credit commitment. Any such required borrower investment is first contributed and invested in the project before any draws are allowed under the Bank's credit commitment. The Company requires current financial statements of the borrowing entity and guarantors, as well as conduct periodic inspections of the project and analysis of whether the project is on schedule or delayed. Updated appraisals are ordered when necessary to validate the collateral values to support advances, including reserve interest. Advances of interest reserves are discontinued if collateral values do not support the advances or if the borrower does not comply with other terms and conditions in the loan agreements. If at any time management believes that the collateral position is jeopardized, the Company
40
retains the right to stop the use of interest reserves. As of December 31, 2024 and December 31, 2023, none of the loans with interest reserves were on non-accrual.
Large Credit Relationships
The Company originates and maintains large credit relationships with numerous customers in the ordinary course of business. The legal lending limit of the Bank is approximately $595.2 million. The Company, however, generally employs lower house limits which vary by assigned risk grade, product and collateral type. Such house limits, which generally range from $20 million to $60 million, may be exceeded with appropriate authorization for exceptionally strong borrowers and otherwise where business opportunity and assessed credit risk warrant a somewhat larger investment. The Company considers large credit relationships to be those with commitments equal to or in excess of $20.0 million. The following table provides additional information on large held for investment credit relationships outstanding at year-end:
December 31, 2024 December 31, 2023
Period End Balances Period End Balances
(dollars in thousands) Number of
Relationships Committed Outstanding Number of
Relationships Committed Outstanding
$30.0 million and greater 373 $ 20,195,542 $ 13,965,661 344 $ 18,053,123 $ 11,794,216
$20.0 million to $29.9 million 225 5,516,052 3,792,528 215 5,245,658 3,493,601
Loan Maturities and Interest Rate Sensitivity
The following table shows the contractual maturity distribution of loans held for investment on a gross basis as of December 31, 2024:
(in thousands) Within 1 Year 1-5 Years 5-15 Years After 15 Years Total
Commercial $ 1,945,669 $ 8,854,449 $ 332,219 $ 13,254 $ 11,145,591
Mortgage finance 5,215,574 — — — 5,215,574
Commercial real estate 1,941,802 3,405,219 225,391 43,870 5,616,282
Consumer 222,541 13,551 4,180 325,104 565,376
Total loans held for investment $ 9,325,586 $ 12,273,219 $ 561,790 $ 382,228 $ 22,542,823
The following table shows the interest rate composition of loans held for investment on a gross basis with a maturity date over one year as of December 31, 2024:
(in thousands) Fixed Interest Rate Floating Interest Rate Total
Commercial $ 667,754 $ 8,532,168 $ 9,199,922
Mortgage finance — — —
Commercial real estate 270,721 3,403,759 3,674,480
Consumer 13,498 329,337 342,835
Total loans held for investment $ 951,973 $ 12,265,264 $ 13,217,237
41
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) December 31, 2024 December 31, 2023
Non-accrual loans held for investment
Commercial:
Business assets $ 64,481 $ 63,094
Oil and gas properties — 2,543
Accounts receivable and inventory 6,315 —
Machinery and equipment
2,729 3,332
Unsecured 60 79
Highly liquid assets 1,340 —
Other 639 —
Total commercial 75,564 69,048
Commercial real estate:
Industrial buildings
20,637 —
Office buildings
14,000 —
Hotel/motel buildings
— 12,350
Total commercial real estate 34,637 12,350
Consumer:
Single family residences 964 —
Total consumer 964 —
Total non-accrual loans held for investment 111,165 81,398
Non-accrual loans held for sale — —
Other real estate owned (“OREO”) — —
Total non-performing assets $ 111,165 $ 81,398
Non-accrual loans held for investment to total loans held for investment 0.50 % 0.40 %
Total non-performing assets to total assets 0.36 % 0.29 %
Allowance for credit losses on loans to non-accrual loans held for investment 2.4x 3.1x
Loans held for investment past due 90 days and accruing $ 4,265 $ 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 $ — $ —
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 $67.0 million for the year ended December 31, 2024, compared to a provision of $72.0 million for the year ended December 31, 2023. The provision for credit losses for the year ended December 31, 2024 reflects growth in loans held for investment and $40.9 million in net charge-offs recorded during the year ended December 31, 2024, compared to $50.9 million in net charge-offs during the same period in 2023. Criticized loans totaled $714.0 million at December 31, 2024, compared to $738.2 million at December 31, 2023.
42
The table below presents key metrics related to the Company’s credit loss experience:
December 31, 2024 December 31, 2023
Allowance for credit losses on loans to total loans held for investment 1.21 % 1.23 %
Allowance for credit losses on loans to average total loans held for investment 1.27 % 1.24 %
Total allowance for credit losses to total loans held for investment 1.45 % 1.46 %
Total provision for credit losses to average total loans held for investment 0.31 % 0.36 %
The table below details net charge-offs/(recoveries) as a percentage of average total loans by portfolio segment:
Year Ended December 31,
2024 2023
(dollars in thousands) Net
Charge-offs Net Charge-offs
to Average
Loans Net
Charge-offs Net Charge-offs
to Average
Loans
Commercial $ 32,612 0.31 % $ 45,395 0.44 %
Mortgage finance — — % — — %
Commercial real estate 8,246 0.15 % 5,496 0.10 %
Consumer 15 — % 36 0.01 %
Total $ 40,873 0.19 % $ 50,927 0.25 %
The allowance for credit losses on loans totaled $271.7 million at December 31, 2024 and $250.0 million at December 31, 2023. The following table presents a summary of the Company’s allowance for credit losses on loans by portfolio segment for the past two years:
December 31,
2024 2023
(dollars in thousands) Allowance for Credit Losses on Loans % of Loans in each Category to Total Loans Allowance for Credit Losses on Loans % of Loans in each Category to Total Loans
Commercial $ 198,423 49 % $ 171,437 51 %
Mortgage finance 2,755 23 % 4,173 19 %
Commercial real estate 68,825 25 % 71,829 27 %
Consumer 1,706 3 % 2,534 3 %
Total $ 271,709 100 % $ 249,973 100 %
See Note 1 - Operations and Summary of Significant Accounting Policies and Note 4 - Loans and Allowance for Credit Losses on Loans in the accompanying notes to the consolidated financial statements included elsewhere in this report for details of the allowance for credit losses on loans.
Deposits
The Company competes for deposits by offering a full suite of deposit products and services to its customers. While this includes offering competitive interest rates and fees, the primary means of competing for deposits is convenience and service to customers, tailored to the strategy of maintaining a branch-lite network. The Company offers banking centers, courier services and online and mobile banking. Bask Bank, the Bank’s digital-only online banking division, serves customers on a 24 hours-a-day, 7 days-a-week basis solely through online banking.
Average total deposits for the year ended December 31, 2024 increased $1.4 billion compared to 2023. Average non-interest bearing deposits for the year ended December 31, 2024 decreased $801.5 million compared to 2023 and average interest bearing deposits increased $2.2 billion compared to 2023. The average cost of total deposits increased to 2.93% in 2024 from 2.47% in 2023.
43
The following table discloses average deposits and weighted-average cost of deposits by type:
Year Ended December 31,
2024 2023
(dollars in thousands) Average Balance Average Rate Paid Average Balance Average Rate Paid
Non-interest bearing $ 9,013,038 — % $ 9,814,517 — %
Interest bearing transaction 2,049,720 3.18 % 1,466,583 2.90 %
Savings 12,143,539 4.71 % 10,921,264 4.40 %
Time deposits 1,946,341 5.08 % 1,573,294 4.14 %
Total $ 25,152,638 2.93 % $ 23,775,658 2.47 %
The following table shows scheduled maturities of time deposits greater than $250,000:
(in thousands) December 31, 2024 December 31, 2023
Months to maturity:
Three or less $ 181,982 $ 79,162
Over three through six 84,889 127,289
Over six through twelve 186,469 150,382
Over twelve 42,148 19,535
Total $ 495,488 $ 376,368
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 loans, 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 loans.
The following table summarizes the Company’s interest bearing cash and cash equivalents:
(dollars in thousands) December 31, 2024 December 31, 2023
Interest bearing cash and cash equivalents $ 3,012,307 $ 3,042,357
Interest bearing cash and cash equivalents as a percent of:
Total loans held for investment 13.4 % 15.0 %
Total earning assets 10.2 % 11.1 %
Total deposits 11.9 % 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 through digital acquisition or as a result of 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:
December 31, 2024 December 31, 2023
(dollars in thousands) Balance % of Total Balance % of Total
Customer deposits $ 24,704,091 97.9 % $ 21,454,568 95.9 %
Brokered deposits 534,508 2.1 % 917,271 4.1 %
Total deposits $ 25,238,599 100.0 % $ 22,371,839 100.0 %
44
Estimated uninsured deposits, including accrued interest, were 41% of total deposits at December 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) December 31, 2024 December 31, 2023
FHLB borrowings $ 885,000 $ 1,500,000
Total short-term and other borrowings $ 885,000 $ 1,500,000
The following table summarizes the Company’s short-term borrowing capacities net of balances outstanding:
(in thousands) December 31, 2024 December 31, 2023
FHLB borrowing capacity relating to loans and pledged securities $ 4,664,703 $ 2,602,092
FHLB borrowing capacity relating to unencumbered securities 4,189,993 3,737,615
Total FHLB borrowing capacity(1) $ 8,854,696 $ 6,339,707
Unused federal funds lines available from commercial banks $ 1,370,000 $ 1,188,000
Unused Federal Reserve borrowings capacity $ 5,436,652 $ 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 loans and certain pledged securities.
(2) Unsecured revolving, non-amortizing line of credit with maturity date of February 8, 2026. 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 year ended months ended December 31, 2024 or 2023.
The Company has long-term debt outstanding of $660.3 million as of December 31, 2024, comprised of trust preferred securities and subordinated notes with maturity dates ranging from January 2026 to December 2036. See Note 8 - Short-Term Borrowings and Long-Term Debt in the accompanying notes to the consolidated financial statements included elsewhere in this report for additional information. The Company may consider raising additional capital, if needed, in public or private offerings of debt or equity securities to supplement deposits and meet its long-term funding needs.
As the Company is a holding company and is a separate operating entity from the Bank, the Company’s primary sources of liquidity are dividends received from the Bank and borrowings from outside sources. Banking regulations may limit the amount of dividends that may be paid by the Bank. See Note 10 - Regulatory Ratios and Capital in the accompanying notes to the consolidated financial statements included elsewhere in this report for additional information regarding dividend restrictions and “ Liquidity Risks ” included in Part I, Item 1A. Risk Factors.
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 $3.3 billion for the year ended December 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.
On January 17, 2024, the Company’s board of directors authorized a share repurchase program under which the Company could repurchase up to $150.0 million in shares of its outstanding common stock, excluding the effect of excise tax expense incurred on net stock repurchases. Remaining repurchase authorization under the January 18, 2023 share repurchase program was terminated upon authorization of this new program. During the year ended December 31, 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.
45
On January 22, 2025, the Company’s board of directors authorized a new share repurchase program under which the Company may repurchase up to $200.0 million in shares of its outstanding common stock, excluding the effect of excise tax expense incurred on net stock repurchases. The share repurchase program expires on January 31, 2026, but may be suspended or discontinued at any time. Remaining repurchase authorization under the January 17, 2024 share repurchase program was terminated upon authorization of this new program.
Any repurchases under the Company’s 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, the Company’s capital position and amount of retained earnings, regulatory requirements and other considerations.
For additional information on the Company’s capital and stockholders’ equity, see Note 10 - Regulatory Ratios and Capital, in the accompanying notes to the consolidated financial statements included elsewhere in this report.
Critical Accounting Estimates
SEC guidance requires disclosure of “critical accounting estimates.” The SEC defines “critical accounting estimates” as those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant.
The Company follows financial accounting and reporting policies that are in accordance with accounting principles generally accepted in the United States. The more significant of these policies are summarized in Note 1 - Operations and Summary of Significant Accounting Policies in the notes to the consolidated financial statements included elsewhere in this report. Not all significant accounting policies require management to make difficult, subjective or complex judgments. However, the policy noted below could be deemed to meet the SEC’s definition of a critical accounting estimate.
Allowance for Credit Losses
Management considers the policies related to the allowance for credit losses as the most critical to the financial statement presentation. The total allowance for credit losses includes activity related to allowances calculated in accordance with Accounting Standards Codification 326, Credit Losses . The allowance for credit losses is established through a provision for credit losses charged to current earnings. The amount maintained in the allowance reflects management’s continuing evaluation of the credit losses expected to be recognized over the life of the loans in the Company’s portfolio. The allowance for credit losses on loans is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. The allowance for credit losses on off-balance sheet financial instruments is recorded in other liabilities on the consolidated balance sheets. For purposes of determining the allowance for credit losses, the loan portfolio is segregated into pools first by portfolio segment and then by past due status or credit grade. Each pool is assigned a loss estimate, reflecting historical loss rates that incorporate probability of default and severity of losses over the estimated remaining life of the loans. Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective (pool) evaluation. Management estimates the allowance balance using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts. Modifications to loss estimates are made to incorporate a reasonable and supportable forecast of future losses at the pool level, as well as any necessary qualitative adjustments using a Portfolio Level Qualitative Factor (“PLQF”) and/or a Portfolio Segment Level Qualitative Factor (“SLQF”). A similar process is employed to calculate a reserve assigned to off-balance sheet financial instruments, specifically unfunded loan commitments and letters of credit. Modified loss estimates are assigned based on the balance of the commitments estimated to be outstanding at the time of default. The PLQF and SLQF are utilized to address factors that are not present in historical loss rates and are otherwise unaccounted for in the quantitative process. A reserve is recorded upon origination or purchase of a loan. See “Summary of Credit Loss Experience” above and Note 4 - Loans and Allowance for Credit Losses on Loans in the accompanying notes to the consolidated financial statements included elsewhere in this report for further discussion of the risk factors considered by management in establishing the allowance for credit losses.
Management considers a range of macroeconomic scenarios in connection with the allowance estimation process. Within the various economic scenarios considered as of December 31, 2024, the quantitative estimate of the allowance for credit loss would increase by approximately $139.6 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.
46