# Texas Capital Bancshares Inc: Form 10-Q for the period ended Mar 31, 2023

- Company: [Texas Capital Bancshares Inc](/companies/tcbi.md) (CIK 1077428)
- Form: 10-Q
- Filed: 2023-04-20
- Accepted by EDGAR: Apr 20, 2023, 16:06 ET
- Period: 2023-03-31
- Accession: 0001077428-23-000079
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1077428/000107742823000079/tcbi-20230331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1077428/000107742823000079/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2023-01-01 to 2023-03-31 | $149.8m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-01-01 to 2023-03-31 | $12.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | $38.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.70 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.71 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-03-31 | 48,880,725 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | $18.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-01-01 to 2023-03-31 | $1.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 3 months, 2023-01-01 to 2023-03-31 | $60.2m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2023-03-31 | $28.60bn | us-gaap:Assets |
| Total liabilities | at 2023-03-31 | $25.52bn | us-gaap:Liabilities |
| Long-term debt | at 2023-03-31 | $932.1m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2023-03-31 | $3.08bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 1,980 characters.

The Company repurchased shares of its common stock in the open market during the three months ended March 31, 2023 as follows:

|  | Total Number of Shares Purchased | Average Price Paid per Share(2) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs(1) |
| --- | ---: | ---: | ---: | ---: |
| January 2023 | 564,206 | $61.50 | 564,206 | $150,000,000 |
| February 2023 | — | — | — | 150,000,000 |
| March 2023 | 447,703 | 55.80 | 447,703 | 125,019,420 |
| Total | 1,011,909 | $58.98 | 1,011,909 | $125,019,420 |

(1) On April 19, 2022, the Company’s board of directors authorized a share repurchase program under which the Company could repurchase up to $150.0 million in shares of its outstanding common stock. In January 2023, the Company completed the full $150.0 million of repurchases authorized under this plan. On January 18, 2023, the Company’s board of directors authorized a new share repurchase program under which the Company may repurchase up to $150.0 million in shares of its outstanding common stock. Any repurchases under the repurchase program will be made in accordance with applicable securities laws from time to time in open market or private transactions. The extent to which the Company repurchases shares, and the timing of such repurchases, will be at management’s discretion and will depend upon a variety of factors, including market conditions, the Company’s capital position and amount of retained earnings, regulatory requirements and other considerations. No time limit was set for the completion of the share repurchase program, and the program may be suspended or discontinued at any time.

(2) The aggregate purchase price and weighted average price per share does not include the effect of excise tax expense incurred on net stock repurchases. For the quarter ended March 31, 2023, excise tax expense totaled $540,000.

## Market risk

As filed, 35,231 characters.

The following discussion and analysis of the Company’s financial condition and results of operations for the three months ended March 31, 2023 and 2022 should be read in conjunction with its audited consolidated financial statements and the related notes to the consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”). Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results for the year ending December 31, 2023 or any future period.

### Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of and pursuant to the Private Securities Litigation Reform Act of 1995 regarding, among other things, the Company’s financial condition, results of operations, business plans, strategies, future performance and business and industry outlook. These statements are not historical in nature and may often be identified by the use of words such as “believes,” “projects,” “expects,” “may,” “estimates,” “should,” “plans,” “targets,” “intends” “could,” “would,” “anticipates,” “potential,” “confident,” “optimistic” or the negative thereof, or other variations thereon, or comparable terminology, or by discussions of strategy, objectives, estimates, trends, guidance, expectations and future plans.

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 risk and other factors that could cause actual results to differ materially from those contemplated by forward-looking statements include, but are not limited to, credit quality and risk, the unpredictability of economic and business conditions that may impact the Company or its customers, recent adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, liquidity and regulatory responses to these developments, the Company’s ability to effective manage its liquidity risk and any growth plans and the availability of capital and funding, the Company’s ability to effectively manage information technology systems, cyber incidents or other failures, disruptions or security breaches, interest rates, including the impact of rising rates on the Company’s securities portfolio and funding costs, commercial and residential real estate values, adverse or unexpected economic conditions, including inflation, recession, the threat of recession, and market conditions in Texas, the United States or globally, including governmental and consumer responses to those economic and market conditions, fund availability, accounting estimates and risk management processes, the transition away from the London Interbank Offered Rate (LIBOR), legislative and regulatory changes, enforcement actions and regulatory examinations and investigations, ratings or interpretations, business strategy execution, the failure to identify, attract and retain key personnel and other employees, increased or expanded competition from banks and other financial service providers in the Company’s markets, the failure to maintain adequate regulatory capital, environmental liability associated with properties related to the Company’s lending activities, and severe weather, natural disasters, acts of war, terrorism, global conflict, a material worsening of the COVID-19 pandemic or other health emergencies or other external events, climate change and related legislative and regulatory initiatives as well as the risks more fully described in the 2022 10-K, including the “Risk Factors” section in Part I, Item 1A of the 2022 10-K, Quarterly Reports on Form 10-Q, including the “Risk Factors” section in Part II, Item 1A of this report, and in its other documents and filings with the SEC. The information contained in this report 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.

### Overview

### Recent Industry Developments

During the first quarter of 2023, the banking industry experienced significant volatility with multiple high-profile bank failures and industry wide concerns related to liquidity, deposit outflows, unrealized securities losses and eroding consumer confidence in the banking system. Despite these negative industry developments, the Company’s liquidity position and balance sheet remains robust. The Company’s total deposits decreased by 3% as compared to December 31, 2022, to $22.2 billion at March 31, 2023 as we experienced minimal deposit outflow in the first quarter. The Company also took a number of preemptive actions, which included pro-active outreach to clients and actions to maximize its funding sources in response to these recent developments. Furthermore, the Company’s capital remains at historically high levels with CET1 and Total Capital ratios of 12.4% and 16.9%, respectively, as of March 31, 2023.

### Results of Operations

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

*(dollars in thousands except per share data)*

|  | Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Net interest income | $235,345 | $183,546 |
| Provision for credit losses | 28,000 | (2,000) |
| Non-interest income | 37,403 | 20,283 |
| Non-interest expense | 194,027 | 153,092 |
| Income before income taxes | 50,721 | 52,737 |
| Income tax expense | 12,060 | 13,087 |
| Net income | 38,661 | 39,650 |
| Preferred stock dividends | 4,313 | 4,313 |
| Net income available to common stockholders | $34,348 | $35,337 |
| Basic earnings per common share | $0.71 | $0.70 |
| Diluted earnings per common share | $0.70 | $0.69 |
| Net interest margin | 3.33% | 2.23% |
| Return on average assets (“ROA”) | 0.53% | 0.47% |
| Return on average common equity (“ROE”) | 5.06% | 4.97% |
| Non-interest income to average earning assets | 0.54% | 0.25% |
| Efficiency ratio(1) | 71.1% | 75.1% |
| Non-interest expense to average earning assets | 2.78% | 1.86% |

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

### Three months ended March 31, 2023 compared to three months ended March 31, 2022

The Company reported net income of $38.7 million and net income available to common stockholders of $34.3 million for the three months ended March 31, 2023, compared to net income of $39.7 million and net income available to common stockholders of $35.3 million for the same period in 2022. On a fully diluted basis, earnings per common share were $0.70 for the three months ended March 31, 2023, compared to $0.69 for the same period in 2022. ROE was 5.06% and ROA was 0.53% for the three months ended March 31, 2023, compared to 4.97% and 0.47%, respectively, for the same period in 2022. The decrease in net income for the three months ended March 31, 2023 compared to the same period in 2022 resulted primarily from increases in provision for credit losses and non-interest expense, partially offset by increases in net interest income and non-interest income.

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

### Taxable Equivalent Net Interest Income Analysis(1)

*(dollars in thousands)*

| Assets | Three Months Ended March 31, 2023 Average Balance | Revenue / Expense | Yield / Rate | Three Months Ended March 31, 2022 Average Balance | Revenue / Expense | Yield / Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Investment securities(2) | $4,060,456 | $25,292 | 2.31% | $3,669,257 | $17,743 | 1.91% |
| Interest bearing cash and cash equivalents | 5,541,341 | 62,436 | 4.57% | 8,552,300 | 3,571 | 0.17% |
| Loans held for sale | 43,472 | 938 | 8.75% | 7,633 | 113 | 6.01% |
| Loans held for investment, mortgage finance | 3,286,804 | 28,528 | 3.52% | 5,732,901 | 43,466 | 3.07% |
| Loans held for investment(3) | 15,598,854 | 268,131 | 6.97% | 15,686,319 | 144,133 | 3.73% |
| Less: Allowance for credit losses on loans | 252,727 | — | — | 212,612 | — | — |
| Loans held for investment, net | 18,632,931 | 296,659 | 6.46% | 21,206,608 | 187,599 | 3.59% |
| Total earning assets | 28,278,200 | 385,325 | 5.45% | 33,435,798 | 209,026 | 2.54% |
| Cash and other assets | 1,041,745 |  |  | 819,486 |  |  |
| **Total assets** | $29,319,945 |  |  | $34,255,284 |  |  |
| **Liabilities and Stockholders’ Equity** |  |  |  |  |  |  |
| Transaction deposits | $776,500 | $3,853 | 2.01% | $2,432,687 | $3,962 | 0.66% |
| Savings deposits | 11,195,402 | 105,707 | 3.83% | 10,420,545 | 8,583 | 0.33% |
| Time deposits | 1,430,657 | 10,534 | 2.99% | 1,038,722 | 1,085 | 0.42% |
| Total interest bearing deposits | 13,402,559 | 120,094 | 3.63% | 13,891,954 | 13,630 | 0.40% |
| Short-term borrowings | 1,242,881 | 14,744 | 4.81% | 1,770,781 | 758 | 0.17% |
| Long-term debt | 931,796 | 14,983 | 6.52% | 929,005 | 10,595 | 4.63% |
| Total interest bearing liabilities | 15,577,236 | 149,821 | 3.90% | 16,591,740 | 24,983 | 0.61% |
| Non-interest bearing deposits | 10,253,731 |  |  | 14,235,749 |  |  |
| Other liabilities | 436,621 |  |  | 243,141 |  |  |
| Stockholders’ equity | 3,052,357 |  |  | 3,184,654 |  |  |
| **Total liabilities and stockholders’ equity** | $29,319,945 |  |  | $34,255,284 |  |  |
| Net interest income |  | $235,504 |  |  | $184,043 |  |
| Net interest margin |  |  | 3.33% |  |  | 2.23% |
| Net interest spread |  |  | 1.55% |  |  | 1.93% |

(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.

### 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.

*(in thousands)*

| Interest income | Three Months Ended March 31, 2023/2022 Net Change Volume | Change Due To(1) Yield/Rate(2) |  |
| --- | ---: | ---: | ---: |
| Investment securities | $7,549 | $1,842 | $5,707 |
| Interest bearing cash and cash equivalents | 58,865 | (1,262) | 60,127 |
| Loans held for sale | 825 | 531 | 294 |
| Loans held for investment, mortgage finance | (14,938) | (18,517) | 3,579 |
| Loans held for investment | 123,998 | (803) | 124,801 |
| Total interest income | 176,299 | (18,209) | 194,508 |
| **Interest expense** |  |  |  |
| Transaction deposits | (109) | (2,695) | 2,586 |
| Savings deposits | 97,124 | 631 | 96,493 |
| Time deposits | 9,449 | 406 | 9,043 |
| Short-term borrowings | 13,986 | (221) | 14,207 |
| Long-term debt | 4,388 | 32 | 4,356 |
| Total interest expense | 124,838 | (1,847) | 126,685 |
| Net interest income | $51,461 | $(16,362) | $67,823 |

(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 $235.3 million for the three months ended March 31, 2023, compared to $183.5 million for the same period in 2022. The increase was primarily due to an increase in yields on average earnings assets, partially offset by rising funding costs and a decrease in total average earning assets.

Average earning assets decreased $5.2 billion for the three months ended March 31, 2023, compared to the same period in 2022, which included decreases of $3.0 billion in average interest-bearing cash and cash equivalents and $2.5 million in loans held for investment, mortgage finance. Average interest-bearing liabilities decreased $1.0 billion for the three months ended March 31, 2023, compared to the same period in 2022, primarily due to decreases of $489.4 million in average interest-bearing deposits and $527.9 million in average short-term borrowings. Average demand deposits for the three months ended March 31, 2023 decreased to $10.3 billion from $14.2 billion for the same period in 2022.

Net interest margin for the three months ended March 31, 2023 was 3.33%, compared to 2.23% for the same period of 2022. The increase was primarily due to the effect of rising interest rates on earning asset yields and a shift in earning asset composition, partially offset by higher funding costs, also as a result of rising interest rates, compared to the same period in 2022.

The yield on total loans held for investment increased to 6.46% for the three months ended March 31, 2023, compared to 3.59% for the same period in 2022, and the yield on earning assets increased to 5.45% for the three months ended March 31, 2023, compared to 2.54% for the same period in 2022. Total cost of deposits increased to 2.06% for the three months ended March 31, 2023 from 0.20% for the same period in 2022 and total funding costs, including all deposits, long-term debt and stockholders' equity, increased to 2.10% for the three months ended March 31, 2023, compared to 0.30% for the same period in 2022.

### Non-interest Income

*(in thousands)*

|  | Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Service charges on deposit accounts | $5,022 | $6,115 |
| Wealth management and trust fee income | 3,429 | 3,912 |
| Brokered loan fees | 1,895 | 3,970 |
| Investment banking and trading income | 18,768 | 4,179 |
| Other | 8,289 | 2,107 |
| Total non-interest income | $37,403 | $20,283 |

Non-interest income increased by $17.1 million during the three months ended March 31, 2023 to $37.4 million, compared to $20.3 million for the same period in 2022. The increase was primarily due to increases in investment banking and trading income and other non-interest income, partially offset by a decrease in brokered loans fees.

### Non-interest Expense

*(in thousands)*

|  | Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Salaries and benefits | $128,670 | $99,859 |
| Occupancy expense | 9,619 | 8,885 |
| Marketing | 9,044 | 4,977 |
| Legal and professional | 14,514 | 10,302 |
| Communications and technology | 17,523 | 14,700 |
| Federal Deposit Insurance Corporation insurance assessment | 2,170 | 3,981 |
| Other | 12,487 | 10,388 |
| Total non-interest expense | $194,027 | $153,092 |

Non-interest expense for the three months ended March 31, 2023 increased $40.9 million compared to the same period in 2022, primarily due to an increase in salaries and benefits expense, resulting from an increase in headcount, as well as increases in marketing, legal and professional, and communications and technology expenses.

### Analysis of Financial Condition

### Loans Held for Investment

The following table summarizes the Company’s loans held for investment on a gross basis by portfolio segment. See Note 1 - Operations and Summary of Significant Accounting Policies included in the 2022 Form 10-K for details of these portfolio segments.

*(in thousands)*

|  | March 31, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Commercial | $9,514,781 | $8,902,948 |
| Energy | 1,294,671 | 1,159,296 |
| Mortgage finance | 4,060,570 | 4,090,033 |
| Real estate | 5,272,443 | 5,198,643 |
| Gross loans held for investment | $20,142,465 | $19,350,920 |

Gross loans held for investment were $20.1 billion at March 31, 2023, an increase of $791.5 million from December 31, 2022. The Company experienced broad-based loan growth across all loan categories, except for mortgage finance loans, 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% of total loans held for investment at March 31, 2023 compared to 21% at December 31, 2022. 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. Mortgage finance loan balances have declined as compared to December 31, 2022 as interest rates have continued to rise during 2023.

The Company originates a substantial majority of all loans held for investment. The Company also participates in syndicated loan relationships, both as a participant and as an agent. As of March 31, 2023, the Company had $4.3 billion in syndicated loans, $1.2 billion of which the Company administered as agent. All syndicated loans, whether the Company acts as agent or participant, are underwritten to the same standards as all other loans the Company originates. As of March 31, 2023, $3.2 million of syndicated loans 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, 2023, a majority of the loans held for investment, excluding mortgage finance and other national lines of business, were to businesses with headquarters or operations in Texas. This geographic concentration subjects the Company’s loan portfolio to the general economic conditions within this state. The risks created by this concentration have been considered by management in the determination of the appropriateness of the allowance for credit losses.

### Non-performing Assets

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

*(dollars in thousands)*

| Non-accrual loans held for investment Commercial: | March 31, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Business assets | $86,020 | $41,448 |
| Accounts receivable and inventory | 859 | 1,405 |
| Other | 61 | 564 |
| Total commercial | 86,940 | 43,417 |
| Energy: |  |  |
| Oil and gas properties | 3,477 | 3,658 |
| Total energy | 3,477 | 3,658 |
| Real estate: |  |  |
| Business assets | — | — |
| Commercial property | 3,534 | 1,263 |
| Single family residences | — | — |
| Total real estate | 3,534 | 1,263 |
| Total non-accrual loans held for investment | $93,951 | $48,338 |
| Non-accrual loans held for sale | — | — |
| Other real estate owned (“OREO”) | — | — |
| Total non-performing assets | $93,951 | $48,338 |
| Non-accrual loans held for investment to total loans held for investment | 0.47% | 0.25% |
| Total non-performing assets to total assets | 0.33% | 0.17% |
| Allowance for credit losses on loans to non-accrual loans held for investment | 2.8x | 5.2x |
| Loans held for investment past due 90 days and accruing | $3,098 | $131 |
| Loans held for investment past due 90 days to total loans held for investment | 0.02% | —% |
| 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. Below is a discussion of provision for credit losses on loans. See Note 6 - Financial Instruments with Off-Balance Sheet Risk in the accompanying notes to the consolidated financial statements included elsewhere in this report for presentation of the activity in the allowance for credit losses for off-balance asset credit losses.

The Company recorded a $27.4 million provision for credit losses on loans for the three months ended March 31, 2023 compared to a negative provision of $1.2 million for the three months ended March 31, 2022. The $27.4 million provision for credit losses on loans resulted from updated views on the downside risks to the economic forecast and increases in net charge-offs and criticized loans. The Company recorded $19.9 million in net charge-offs, related primarily to a single commercial loan, during the three months ended March 31, 2023 compared to $512,000 in net recoveries during the same period in 2022. Criticized loans totaled $561.1 million at March 31, 2023, compared to $513.2 million and $476.1 million at December 31, 2022 and March 31, 2022, respectively.

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

|  | March 31, 2023 | March 31, 2022 |
| --- | ---: | ---: |
| Allowance for credit losses on loans to total loans held for investment | 1.30% | 0.97% |
| Allowance for credit losses on loans to average total loans held for investment(1) | 1.38% | 0.99% |
| Total allowance for credit losses to total loans held for investment | 1.41% | 1.05% |
| Total provision for credit losses to average total loans held for investment(1)(2) | 0.60% | (0.04)% |

(1) Ratios are calculated using average balance for the three months ended March 31, 2023 and 2022, respectively.

(2) Ratios are annualized utilizing provision for credit losses for the three months ended March 31, 2023 and 2022, respectively.

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

|  | Three Months Ended March 31, 2023 Net Charge-offs | Net Charge-offs to Average Loans(1) | 2022 Net Charge-offs | Net Charge-offs to Average Loans(1) |
| --- | ---: | ---: | ---: | ---: |
| Commercial | $19,916 | 0.88% | $(107) | —% |
| Energy | (6) | —% | (755) | (0.40)% |
| Mortgage finance | — | —% | — | —% |
| Real Estate | — | —% | 350 | 0.03% |
| Total | $19,910 | 0.43% | $(512) | (0.01)% |

(1) Ratios are annualized utilizing net charge-offs for the three months ended March 31, 2023 and 2022, 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 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 the 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, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Interest bearing cash and cash equivalents | $3,385,494 | $4,778,623 |
| Interest bearing cash and cash equivalents as a percent of: |  |  |
| Total loans held for investment | 16.9% | 24.8% |
| Total earning assets | 12.3% | 17.4% |
| Total deposits | 15.3% | 20.9% |

Liquidity to support growth in loans held for investment has been fulfilled primarily through growth in customer deposits. The Company’s goal is to obtain as much of its funding for loans held for investment and other earning assets as possible from customer deposits, which are generated principally through development of long-term customer relationships, with a significant focus on treasury management products. As of March 31, 2023, estimated uninsured deposits represented 45% of total deposits. In addition, the Company also has access to deposits through brokered channels. The following table summarizes period-end total deposits:

*(dollars in thousands)*

|  | March 31, 2023 Balance | % of Total | December 31, 2022 Balance | % of Total |
| --- | ---: | ---: | ---: | ---: |
| Customer deposits | $20,795,335 | 93.8% | $21,247,999 | 93.0% |
| Brokered deposits | 1,384,362 | 6.2% | 1,608,881 | 7.0% |
| Total deposits | $22,179,697 | 100.0% | $22,856,880 | 100.0% |

28

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, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Repurchase agreements | $— | $1,142 |
| FHLB borrowings | 2,100,000 | 1,200,000 |
| Total short-term and other borrowings | $2,100,000 | $1,201,142 |

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

*(in thousands)*

|  | March 31, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| FHLB borrowing capacity relating to loans and pledged securities | $3,175,863 | $2,621,218 |
| FHLB borrowing capacity relating to unencumbered securities | 2,635,859 | 3,539,297 |
| Total FHLB borrowing capacity(1) | $5,811,722 | $6,160,515 |
| Unused federal funds lines available from commercial banks | $1,471,000 | $1,479,000 |
| Unused Federal Reserve borrowings capacity | $3,858,755 | $3,574,762 |
| Unused revolving line of credit(2) | $100,000 | $75,000 |

(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, 2024. 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, 2023.

The Company has long-term debt outstanding of $932.1 million as of March 31, 2023, comprised of trust preferred securities, subordinated notes and senior unsecured credit linked notes with maturity dates ranging from September 2024 to December 2036. 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 2022 Form 10-K.

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

#### Capital Resources

The Company’s equity capital averaged $3.1 billion for the three months ended March 31, 2023 compared to $3.2 billion for the same period in 2022. The decrease relates to the shares of Company stock that have been repurchased during the previous 12 months. The Company has not paid any cash dividends on common stock since operations commenced and has no plans to do so in the foreseeable future.

In January 2023, the Company completed the full $150,0 million of repurchases authorized by the Company’s board of directors on April 19, 2022. On January 18, 2023, the Company’s board of directors authorized a new share repurchase program under which the Company may repurchase up to $150.0 million in shares of outstanding common stock. Any repurchases under the repurchase program have been made in accordance with applicable securities laws in open market or private transactions. The extent to which the Company repurchases shares, and the timing of such repurchases, will be at management’s discretion and will depend upon a variety of factors, including market conditions, capital position and amount of retained earnings, regulatory requirements and other considerations. No time limit was set for the completion of the share repurchase program, and the program may be suspended or discontinued at any time. During the three months ended March 31, 2023, the Company repurchased 1,011,909 shares of its common stock for an aggregate purchase price of $59.7 million, at a weighted average price of $58.98 per share. The aggregate purchase price and weighted average price per share does not include the effect of excise tax expense incurred on net stock repurchases.

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 elsewhere in this report. Not all significant accounting policies require management to make difficult, subjective or complex judgments. However, the policy noted below could be deemed to meet the SEC’s definition of a critical accounting policy.

#### Allowance for Credit Losses

Management considers the policies related to the allowance for credit losses as the most critical to the financial statement presentation. The total allowance for credit losses includes activity related to allowances calculated in accordance with Accounting Standards Codification 326, *Credit Losses*. The allowance for credit losses is established through a provision for credit losses charged to current earnings. The amount maintained in the allowance reflects management’s continuing evaluation of the credit losses expected to be recognized over the life of the loans in the Company’s portfolio. The allowance for credit losses on loans is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. For purposes of determining the allowance for credit losses, the loan portfolio is segregated by product types in order to recognize differing risk profiles among categories, and then further segregated by credit grades. Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective 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. Adjustments to historical loss information are made to incorporate the reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments using a Portfolio Level Qualitative Factor (“PLQF”) and/or a Portfolio Segment Level Qualitative Factor (“SLQF”). 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, 2023, the quantitative estimate of the allowance for credit loss would increase by approximately $143.0 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.

## Controls and procedures

As filed, 1,456 characters.

### Evaluation of Disclosure Controls and Procedures

Our management, with the supervision and participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, we have concluded that, as of the end of such period, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to the Company's management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

### Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 3,983 characters.

Other than the risk factors set forth below, there have been no material changes in the risk factors previously disclosed in the 2022 Form 10-K.

*Recent negative developments affecting the banking industry, and resulting media coverage, have eroded customer confidence in the banking system.* The recent high-profile bank failures involving Silicon Valley Bank and Signature Bank have generated significant market volatility among publicly traded bank holding companies and, in particular, regional banks like the Company. These market developments have negatively impacted customer confidence in the safety and soundness of regional banks. As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact the Company’s liquidity, loan funding capacity, net interest margin, capital and results of operations. While the Department of the Treasury, the Federal Reserve, and the FDIC have made statements ensuring that depositors of these recently failed banks would have access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in regional banks and the banking system more broadly.

*Rising interest rates have decreased the value of the Company’s held-to-maturity securities portfolio, and the Company would realize losses if it were required to sell such securities to meet liquidity needs.* As a result of inflationary pressures and the resulting rapid increases in interest rates over the last year, the trading value of previously issued government and other fixed income securities has declined significantly. These securities make up a majority of the securities portfolio of most banks in the U.S., including the Company’s, resulting in unrealized losses embedded in the held-to-maturity portion of U.S. banks’ securities portfolios. While the Company does not currently intend to sell these securities, if the Company were required to sell such securities to meet liquidity needs, it may incur losses, which could impair the Company’s capital, financial condition, and results of operations and require the Company to raise additional capital on unfavorable terms, thereby negatively impacting its profitability. While the Company has taken actions to maximize its funding sources, there is no guarantee that such actions will be successful or sufficient in the event of sudden liquidity needs. Furthermore, while the Federal Reserve Board has announced a Bank Term Funding Program available to eligible depository institutions secured by U.S. treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral at par, to mitigate the risk of potential losses on the sale of such instruments, there is no guarantee that such programs will be effective in addressing liquidity needs as they arise.

*Any regulatory examination scrutiny or new regulatory requirements arising from the recent events in the banking industry could increase the Company’s expenses and affect the Company’s operations.* The Company also anticipates increased regulatory scrutiny – in the course of routine examinations and otherwise – and new regulations directed towards banks of similar size to the Bank, designed to address the recent negative developments in the banking industry, all of which may increase the Company’s costs of doing business and reduce its profitability. Among other things, there may be an increased focus by both regulators and investors on deposit composition and the level of uninsured deposits. As primarily a commercial bank, the Bank has a high degree of uninsured deposits compared to larger national banks or smaller community banks with a stronger focus on retail deposits. As a result, the Bank could face increased scrutiny or be viewed as higher risk by regulators and the investor community.

Filed Apr 20, 2023.
Source: SEC EDGAR, the filing index for accession 0001077428-23-000079. Last ingested by Listed: Nov 5, 2026, 14:39 ET. No prices; not investment advice.