ITEM 7. 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 years ended December 31, 2022 and 2021 should be read in conjunction with its audited consolidated financial statements and the related notes to the consolidated financial statements included in this Annual Report on Form 10-K. Certain risks, uncertainties and other factors, including those set forth under “Risk Factors” in Part I, Item 1A, and elsewhere in this Annual Report on Form 10-K may cause actual results to differ materially from the results discussed in the forward-looking statements appearing in this discussion and analysis. Refer to “Management's Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2021 Annual Report on Form 10K filed with the SEC on February 9, 2022, for discussion of the Company’s results of operations for the years ended December 31, 2021 and 2020.
Forward-Looking Statements
Certain statements and financial analysis contained in this report that are not historical facts may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on beliefs, assumptions and expectations of future performance taking into account all information available to us at the time such statements are made. Forward-looking statements 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, guidance, expectations and future plans.
Forward-looking statements may include, among other things and without limitation, statements about the credit quality of loan portfolio, liquidity, general economic conditions in the United States and in the Company’s markets, including with respect to interest rates and the market generally, the continued impact on customers from volatility in oil and gas prices, the material risks and uncertainties for the U.S. and world economies, and for the business, resulting from the COVID-19 pandemic, expectations regarding rates of default and loan losses, volatility in the mortgage industry, business strategies (including new lines of business, products and services) and expectations about future financial performance, future growth and earnings, the appropriateness of the allowance for credit losses and provision for credit losses, the impact of changing regulatory requirements and legislative changes on the business, increased competition, and technologies (including new technologies and information security risks).
Forward-looking statements are subject to various risks and uncertainties, which 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. Important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, the following:
•Deterioration of the credit quality of the loan portfolio or declines in the value of collateral due to external factors or otherwise.
•The unpredictability of economic and business conditions that may impact us or customers.
•The impact of COVID-19 pandemic on us and customers, employees and third-party service providers. This includes related costs and liabilities associated with legal and regulatory proceedings, investigations, inquiries and related matters with respect to the financial services industry, including those directly involving us or the Bank and arising from the participation in government stimulus programs responding to the economic impact of the COVID-19 pandemic.
•The ability to effectively manage liquidity risk and any growth plans and the availability of capital and funding.
•The ability to effectively manage the information technology systems (including external vendors), on which the Company is highly dependent. This also includes the ability to, among other things, manage such risks and to prevent cyber-incidents against us, the customers or third-party vendors, or to manage risks from failures, disruptions or security breaches affecting us, customers or third-party vendors.
•The costs and effects of cyber-incidents or other failures, disruptions or security breaches of systems or those of the third-party providers.
•Changes in interest rates.
•Changes in market risk associated primarily with the Company’s sales and trading activities.
•Changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate.
•Adverse or unexpected economic or market conditions and other factors in Texas, the United States or internationally that could affect the credit quality of the loan portfolio, operating performance or the ability to access the capital markets or other sources of funding to become less advantageous.
•The failure to effectively balance funding sources with cash demands by depositors and borrowers, the failure to maintain capital ratios as a result of adverse changes in operating performance or financial condition or changes in applicable regulations or interpretations of regulations that impact the business or the characterization or risk weight of assets.
•Material failures of accounting estimates and risk management processes based on management judgment, or the supporting assumptions or models.
•The failure to effectively manage interest rate risk.
•The failure of enterprise risk management framework (including risk management strategies and procedures and related controls), the compliance program, or corporate governance and supervisory oversight functions to timely identify and address emerging risks adequately.
•Uncertainty regarding the upcoming transition away from the London Interbank Offered Rate, or LIBOR, toward new interest rate benchmarks and the ability to successfully implement any new interest rate benchmarks.
•The ability to comply with applicable governmental regulations, including legislative and regulatory changes that may impose further restrictions and costs on the business, any regulatory enforcement actions that may be brought against us and the effect of changes in laws, regulations, policies and guidelines (including, among others, those concerning taxes, banking, accounting, securities and monetary and fiscal policies) with which the Company must generally comply.
•Risks related to the U.S. federal government actions impacting us, such as the impact of the Tax Cuts and Jobs Act.
•Claims and litigation that may arise in the ordinary course of business, including those that may not be covered by insurers.
•The failure to successfully execute business strategy, which may include expanding into new markets, developing and launching new lines of business or new products and services, completing planned transactions or to successfully manage the risks related to certain aspects of the business strategy.
•The failure to identify, attract and retain key personnel.
•Increased or more effective competition from banks and other financial service providers in Company markets.
•The susceptibility of fraud on the business.
•The failure to maintain adequate regulatory capital to support the business.
•Environmental liability associated with properties related to lending activities.
•Severe weather, natural disasters, acts of war or terrorism and other external events.
•Climate change and related legislative and regulatory initiatives.
•Risks relating to securities, including the volatility of stock price, trading volume, rights of holders of the indebtedness and preferred stock, the decision to not currently pay dividends on common stock, and other related factors.
Actual outcomes and results may differ materially from what is expressed in the Company’s forward-looking statements and from its historical financial results due to the factors discussed elsewhere in this report or disclosed in the Company’s other SEC filings. Forward-looking statements included herein speak only as of the date hereof and should not be relied upon as representing the Company’s expectations or beliefs as of any date subsequent to the date of this report. Except as required by law, the Company undertakes no obligation to revise any forward-looking statements contained in this report, whether as a result of new information, future events or otherwise. The factors discussed herein are not intended to be a complete summary of all risks and uncertainties that may affect the Company’s businesses. Though management strives to monitor and mitigate risk, the Company cannot anticipate all potential economic, operational and financial developments that may adversely impact its operations and the financial results. Forward-looking statements should not be viewed as predictions and should not be the primary basis upon which investors evaluate an investment in the Company’s securities.
Overview of Business Operations
Early in 2021, the Company embarked on an enterprise-wide transformation which included detailed reviews of the Company’s business lines, operating model, investment spend and overall strategy. On September 1, 2021 management announced key updates to the Company’s long-term strategy, focused on building a Texas-based full-service financial services firm positioned to serve clients in its markets through the entirety of their life cycle. This new plan included focusing on building an operating model organized around client delivery and investing in technology. 2022 was a year focused on strategic alignment, including reorganizing the Company’s operating model around client delivery emphasizing client experience; realigning the expense base and investing in technology; expanding coverage, products and services; and enhancing accountability while maintaining financial resiliency.
On September 6, 2022, the Company announced the sale of BankDirect Capital Finance, LLC (“BDCF”), its insurance premium finance subsidiary, to AFCO Credit Corporation, an indirect wholly-owned subsidiary of Truist Financial Corporation. The sale of BDCF included its business operations and loan portfolio of approximately $3.1 billion. The sale was an all-cash transaction for a purchase price of $3.4 billion, representing a pre-tax gain of $248.5 million. This sale was completed on November 1, 2022.
Results of Operations
Year ended December 31, 2022 compared to year ended December 31, 2021
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) | 2022 | | 2021 | | 2020 |
Net interest income | $ | 875,758 | | | $ | 768,837 | | | $ | 851,321 | |
Provision for credit losses | 66,000 | | | (30,000) | | | 258,000 | |
Non-interest income | 349,529 | | | 138,230 | | | 202,981 | |
Non-interest expense | 727,532 | | | 599,012 | | | 704,356 | |
Income before income taxes | 431,755 | | | 338,055 | | | 91,946 | |
Income tax expense | 99,277 | | | 84,116 | | | 25,657 | |
Net income | 332,478 | | | 253,939 | | | 66,289 | |
Preferred stock dividends | 17,250 | | | 18,721 | | | 9,750 | |
Net income available to common stockholders | $ | 315,228 | | | $ | 235,218 | | | $ | 56,539 | |
Basic earnings per common share | $ | 6.25 | | | $ | 4.65 | | | $ | 1.12 | |
Diluted earnings per common share | $ | 6.18 | | | $ | 4.60 | | | $ | 1.12 | |
Net interest margin | 2.79 | % | | 2.07 | % | | 2.34 | % |
Return on average assets (“ROA”) | 1.04 | % | | 0.67 | % | | 0.18 | % |
Return on average common equity (“ROE”) | 11.33 | % | | 8.35 | % | | 2.10 | % |
Non-interest income to average earning assets | 1.12 | % | | 0.37 | % | | 0.56 | % |
Efficiency ratio(1) | 59.4 | % | | 66.0 | % | | 66.8 | % |
Non-interest expense to average earning assets | 2.34 | % | | 1.61 | % | | 1.93 | % |
(1) Non-interest expense divided by the sum of net interest income and non-interest income.
The Company reported net income of $332.5 million and net income available to common stockholders of $315.2 million, or $6.18 per diluted common share, for the year ended December 31, 2022, compared to net income of $253.9 million and net income available to common stockholders of $235.2 million, or $4.60 per diluted common share, for 2021. ROE was 11.33% and ROA was 1.04% for the year ended December 31, 2022, compared to 8.35% and 0.67%, respectively, for 2021. The increase in net income, ROE and ROA for the year ended December 31, 2022 resulted primarily from a $106.9 million increase in net interest income and a $211.3 million increase in non-interest income, partially offset by a $96.0 million increase in the provision for credit losses and a $128.5 million increase in non-interest expense and a $15.2 million increase in income tax expense.
Details of the changes in the various components of net income are discussed in detail below.
Taxable Equivalent Net Interest Income Analysis(1)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
(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) | $ | 3,525,986 | | $ | 64,021 | | 1.69 | % | | $ | 3,588,565 | | $ | 44,636 | | 1.24 | % | | $ | 885,331 | | $ | 19,432 | | 2.19 | % |
Interest bearing cash and cash equivalents | 5,967,329 | | 97,271 | | 1.63 | % | | 10,549,153 | | 13,233 | | 0.13 | % | | 9,767,270 | | 28,262 | | 0.29 | % |
Loans held for sale | 528,973 | | 23,555 | | 4.45 | % | | 90,066 | | 2,481 | | 2.75 | % | | 1,114,311 | | 36,369 | | 3.26 | % |
Loans held for investment, mortgage finance | 5,285,612 | | 189,843 | | 3.59 | % | | 7,881,791 | | 239,205 | | 3.03 | % | | 8,589,762 | | 285,212 | | 3.32 | % |
Loans held for investment(3) | 16,063,437 | | 770,795 | | 4.80 | % | | 15,328,390 | | 579,213 | | 3.78 | % | | 16,377,733 | | 674,226 | | 4.12 | % |
Less: Allowance for credit losses on loans | 221,639 | | — | | — | | | 234,973 | | — | | — | | | 248,563 | | — | | — | |
Loans held for investment, net | 21,127,410 | | 960,638 | | 4.55 | % | | 22,975,208 | | 818,418 | | 3.56 | % | | 24,718,932 | | 959,438 | | 3.88 | % |
Total earning assets | 31,149,698 | | 1,145,485 | | 3.65 | % | | 37,202,992 | | 878,768 | | 2.36 | % | | 36,485,844 | | 1,043,501 | | 2.86 | % |
Cash and other assets | 900,121 | | | | | 937,264 | | | | | 1,030,357 | | | |
Total assets | $ | 32,049,819 | | | | | $ | 38,140,256 | | | | | $ | 37,516,201 | | | |
Liabilities and Stockholders’ Equity | | | | | | | | | | |
Transaction deposits | $ | 1,659,476 | | $ | 18,099 | | 1.09 | % | | $ | 3,447,849 | | $ | 20,657 | | 0.60 | % | | $ | 4,090,591 | | $ | 32,836 | | 0.80 | % |
Savings deposits | 9,983,571 | | 151,400 | | 1.52 | % | | 11,180,645 | | 36,459 | | 0.33 | % | | 12,346,904 | | 74,950 | | 0.61 | % |
Time deposits | 1,313,483 | | 21,164 | | 1.61 | % | | 1,716,642 | | 8,391 | | 0.49 | % | | 2,867,579 | | 38,331 | | 1.34 | % |
| | | | | | | | | | | |
Total interest bearing deposits | 12,956,530 | | 190,663 | | 1.47 | % | | 16,345,136 | | 65,507 | | 0.40 | % | | 19,305,074 | | 146,117 | | 0.76 | % |
Short-term borrowings | 1,829,751 | | 29,077 | | 1.59 | % | | 2,399,280 | | 4,613 | | 0.19 | % | | 3,115,416 | | 22,006 | | 0.71 | % |
Long-term debt | 927,847 | | 48,739 | | 5.25 | % | | 802,112 | | 37,628 | | 4.69 | % | | 395,705 | | 19,963 | | 5.05 | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total interest bearing liabilities | 15,714,128 | | 268,479 | | 1.71 | % | | 19,546,528 | | 107,748 | | 0.55 | % | | 22,816,195 | | 188,086 | | 0.82 | % |
Non-interest bearing deposits | 12,951,134 | | | | | 15,186,455 | | | | | 11,567,549 | | | |
Other liabilities | 301,251 | | | | | 274,357 | | | | | 295,710 | | | |
Stockholders’ equity | 3,083,306 | | | | | 3,132,916 | | | | | 2,836,747 | | | |
Total liabilities and stockholders’ equity | $ | 32,049,819 | | | | | $ | 38,140,256 | | | | | $ | 37,516,201 | | | |
| | | | | | | | | | | |
Net interest income | | $ | 877,006 | | | | | $ | 771,020 | | | | | $ | 855,415 | | |
Net interest margin | | | 2.79 | % | | | | 2.07 | % | | | | 2.34 | % |
Net interest spread | | | 1.94 | % | | | | 1.81 | % | | | | 2.04 | % |
| | | | | | | | | | | |
(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 $37.2 million, $47.8 million and $43.8 million for the years ended December 31, 2022, 2021 and 2020, respectively.
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, |
| 2022/2021 | | 2021/2020 |
| 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 | $ | 19,385 | | | $ | (752) | | | $ | 20,137 | | | $ | 25,204 | | | $ | 94,581 | | | $ | (69,377) | |
Interest bearing cash and cash equivalents | 84,038 | | | (5,731) | | | 89,769 | | | (15,029) | | | 16,523 | | | (31,552) | |
Loans held for sale | 21,074 | | | 6,995 | | | 14,079 | | | (33,888) | | | (33,403) | | | (485) | |
Loans held for investment, mortgage finance | (49,362) | | | (78,274) | | | 28,912 | | | (46,007) | | | (24,329) | | | (21,678) | |
Loans held for investment | 191,582 | | | 27,721 | | | 163,861 | | | (95,013) | | | (43,539) | | | (51,474) | |
Total interest income | 266,717 | | | (50,041) | | | 316,758 | | | (164,733) | | | 9,833 | | | (174,566) | |
Interest expense: | | | | | | | | | | | |
Transaction deposits | (2,558) | | | (10,747) | | | 8,189 | | | (12,179) | | | (3,451) | | | (8,728) | |
Savings deposits | 114,941 | | | (3,947) | | | 118,888 | | | (38,491) | | | (558) | | | (37,933) | |
Time deposits | 12,773 | | | (2,273) | | | 15,046 | | | (29,940) | | | (14,728) | | | (15,212) | |
Short-term borrowings | 24,464 | | | (1,315) | | | 25,779 | | | (17,393) | | | (4,304) | | | (13,089) | |
Long-term debt | 11,111 | | | 6,287 | | | 4,824 | | | 17,665 | | | 20,103 | | | (2,438) | |
Total interest expense | 160,731 | | | (11,995) | | | 172,726 | | | (80,338) | | | (2,938) | | | (77,400) | |
Net interest income | $ | 105,986 | | | $ | (38,046) | | | $ | 144,032 | | | $ | (84,395) | | | $ | 12,771 | | | $ | (97,166) | |
(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 $875.8 million for the year ended December 31, 2022 compared to $768.8 million for 2021. The increase was primarily due to an increase in yields on average earning assets, partially offset by an increase in funding costs.
Average earning assets for the year ended December 31, 2022 decreased $6.1 billion compared to the same period in 2021, which included a $4.6 billion decrease in average interest bearing cash and cash equivalents and a $1.4 billion decrease in average total loans. The decrease in average interest bearing cash and cash equivalents resulted primarily from the Company’s proactive exit of certain high-cost indexed deposit products beginning in the second half of 2021 and continuing throughout 2022. The decrease in average total loans resulted from declines in loans held for investment, mortgage finance. Average interest bearing liabilities decreased $3.8 billion for the year ended December 31, 2022 compared to the same period in 2021, primarily due to a $3.4 billion decrease in average interest bearing deposits and a $569.5 million decrease in average short-term borrowings, partially offset by a $125.7 million increase in average long-term debt. Average non-interest bearing deposits for the year ended December 31, 2022 decreased to $13.0 billion from $15.2 billion for 2021.
Net interest margin for the year ended December 31, 2022 was 2.79% compared to 2.07% for 2021. The increase was primarily due to an increase in yields on average earning assets and a shift in earning asset composition, partially offset by an increase in funding costs. The increases in yields on earning assets and funding costs are attributed to the impact of rising interest rates during 2022.
The yield on total loans held for investment, net, increased to 4.55% for the year ended December 31, 2022 compared to 3.56% for 2021 and the yield on earning assets increased to 3.65% for the year ended December 31, 2022 compared to 2.36% for 2021. The average cost of total deposits increased to 0.74% for 2022 from 0.21% for 2021 and total funding costs, including all deposits, long-term debt and stockholders' equity, increased to 0.85% for 2022 compared to 0.28% for 2021. The increases in yields on earning assets and cost of funds are attributed to the impact of rising interest rates.
Non-interest Income
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
(in thousands) | 2022 | | 2021 | | 2020 |
Service charges on deposit accounts | $ | 22,876 | | | $ | 18,674 | | | $ | 11,620 | |
Wealth management and trust fee income | 15,036 | | | 13,173 | | | 9,998 | |
Brokered loan fees | 14,159 | | | 27,954 | | | 46,423 | |
Servicing income | 857 | | | 15,513 | | | 27,029 | |
Investment banking and trading income | 35,054 | | | 24,441 | | | 22,687 | |
Net gain/(loss) on sale of loans held for sale | (990) | | | 1,317 | | | 58,026 | |
Gain on disposal of subsidiary | 248,526 | | | — | | | — | |
Other | 14,011 | | | 37,158 | | | 27,198 | |
Total non-interest income | $ | 349,529 | | | $ | 138,230 | | | $ | 202,981 | |
Non-interest income increased by $211.3 million during the year ended December 31, 2022 to $349.5 million, compared to $138.2 million for 2021. The increase was primarily due to a $248.5 million gain recognized on the sale of BDCF and an increase in investment banking and trading income. Offsetting these increases were decreases in brokered loan fees and servicing income as a result of the sale of the Company’s mortgage servicing rights portfolio and transition of the mortgage correspondent aggregation program in 2021, as well as a decrease in other non-interest income.
Non-interest Expense
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
(in thousands) | 2022 | | 2021 | | 2019 |
Salaries and benefits | $ | 436,809 | | | $ | 350,930 | | | $ | 340,529 | |
Occupancy expense | 44,222 | | | 33,232 | | | 34,955 | |
Marketing | 32,388 | | | 10,006 | | | 23,581 | |
Legal and professional | 75,858 | | | 41,152 | | | 52,132 | |
Communications and technology | 69,253 | | | 75,185 | | | 103,054 | |
FDIC insurance assessment | 14,344 | | | 21,027 | | | 25,955 | |
Servicing-related expenses | — | | | 27,765 | | | 64,585 | |
Merger-related expenses | — | | | — | | | 17,756 | |
Other | 54,658 | | | 39,715 | | | 41,809 | |
Total non-interest expense | $ | 727,532 | | | $ | 599,012 | | | $ | 704,356 | |
Non-interest expense for the year ended December 31, 2022 increased $128.5 million compared to 2021. Full-year 2022 included $13.7 million in salaries and benefits expense and $15.9 million in legal and professional expense related to the sale of BDCF. Also contributing to the increase in non-interest expense were increases in salaries and benefits expense, resulting from an increase in headcount, marketing expense and other non-interest expense, which included an $8.0 million charitable contribution to the newly formed Texas Capital Bank Foundation. Offsetting these increases was a decrease in servicing-related expenses related to the 2021 sale of the Company’s MSR portfolio and transition of the mortgage correspondent aggregation (“MCA”) program to a third-party.
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 in the accompanying notes to the consolidated financial statements included elsewhere in this report for details of these portfolio segments.
| | | | | | | | | | | | | | | | | |
| December 31, | | | | | | |
(in thousands) | 2022 | | 2021 | | | | | | |
Commercial | $ | 8,902,948 | | | $ | 9,897,561 | | | | | | | |
Energy | 1,159,296 | | | 721,373 | | | | | | | |
Mortgage finance | 4,090,033 | | | 7,475,497 | | | | | | | |
Real estate | 5,198,643 | | | 4,777,530 | | | | | | | |
Gross loans held for investment | $ | 19,350,920 | | | $ | 22,871,961 | | | | | | | |
Gross loans held for investment were $19.4 billion at December 31, 2022, a decline of $3.5 billion from 2021. The decline in commercial loans in 2022 was impacted by the sale of BDCF and its related $3.1 billion commercial loan portfolio, as well as
declines in mortgage finance loans. Excluding the sale of BDCF and its impact on the loan portfolio, the Company experienced loan growth across all loan categories, except for mortgage finance loans, as the Company executed on its long-term strategy. Mortgage finance loans relate to the mortgage warehouse lending operations in which the Company purchases mortgage loan ownership interests that are typically sold within 10 to 20 days and represent 21% of total loans held for investment at December 31, 2022 compared to 33% at December 31, 2021. 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, 2021 as interest rates have continued to rise during 2022.
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 December 31, 2022, the Company had $3.8 billion in syndicated loans, $903.0 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 December 31, 2022, none 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 December 31, 2022, 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.
The table below summarizes the industry concentrations of loans held for investment on a gross basis at December 31, 2022:
| | | | | | | | | | | |
(dollars in thousands) | Amount | | Percent of Total |
Commercial: | | | |
Financials (excluding banks) | $ | 3,961,002 | | | 20.5 | % |
Real estate related services (not secured by real estate) | 1,032,180 | | | 5.3 | % |
Technology, telecom and media | 718,203 | | | 3.7 | % |
Retail | 498,632 | | | 2.6 | % |
Machinery, equipment and parts manufacturing | 363,696 | | | 1.9 | % |
Commercial services | 326,659 | | | 1.7 | % |
Oil & gas support services | 265,119 | | | 1.4 | % |
Materials and commodities | 253,259 | | | 1.3 | % |
Transportation services | 259,213 | | | 1.3 | % |
Entertainment and recreation | 178,284 | | | 0.9 | % |
Food and beverage manufacturing and wholesale | 177,549 | | | 0.9 | % |
Healthcare and pharmaceuticals | 133,622 | | | 0.7 | % |
Government and education | 100,176 | | | 0.5 | % |
Consumer services | 95,002 | | | 0.5 | % |
Diversified or miscellaneous | 540,352 | | | 2.8 | % |
Total commercial | 8,902,948 | | | 46.0 | % |
Energy | 1,159,296 | | | 6.0 | % |
Mortgage finance | 4,090,033 | | | 21.1 | % |
Real estate | 5,198,643 | | | 26.9 | % |
Total | $ | 19,350,920 | | | 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. The next largest industry concentration of commercial loans held for investment is to commercial borrowers providing services to the real estate industry. Loans in this category are not secured by real property and are generally made to commercial borrowers that operate within the real estate industry, which include developers, contractors, professional service providers (such as architectural and interior design services), leasing, management, and other support type services.
The Company believes the loans it originates are appropriately collateralized under its credit standards. Approximately 96% 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, 2022:
| | | | | | | | | | | |
(dollars in thousands) | Amount | | Percent of Total |
Commercial: | | | |
Business assets | $ | 6,888,901 | | | 35.6 | % |
Other assets | 561,575 | | | 2.9 | % |
Highly liquid assets | 505,505 | | | 2.6 | % |
U. S. Government guaranty | 1,826 | | | — | % |
Municipal tax- and revenue-secured | 61,416 | | | 0.3 | % |
Rolling stock | 20,614 | | | 0.1 | % |
Unsecured | 863,111 | | | 4.5 | % |
Total commercial | 8,902,948 | | | 46.0 | % |
Energy | 1,159,296 | | | 6.0 | % |
Mortgage finance | 4,090,033 | | | 21.1 | % |
Real estate | 5,198,643 | | | 26.9 | % |
Total | $ | 19,350,920 | | | 100.0 | % |
As noted in the tables above, approximately 27% of loans held for investment as of December 31, 2022 are real estate loans that are generally secured by real property. This portfolio primarily includes market risk real estate loans, consisting of commercial real estate loans and loans made to residential builders and developers. Loan amounts are determined in part from an analysis of pro forma cash flows. Loans are also underwritten to comply with product-type specific advance rates against both cost and market value. The Company extends commercial real estate loans, including both construction/development financing and limited term financing, to professional real estate developers and owners/managers of commercial real estate projects and properties who have a demonstrated record of past success with similar properties. Collateral properties generally include office buildings, warehouse/distribution buildings, shopping centers, hotels/motels, senior living, apartment buildings and residential and commercial tract development. The primary source of repayment on these loans is expected to come from the sale, permanent financing or lease of the real property collateral. Loans to residential builders are typically in the form of uncommitted guidance lines and are for the purpose of developing lots into single-family homes, while loans to developers are typically in the form of borrowing base lines extended for the purpose of acquiring and developing raw land into lots that can be further sold to home builders. The table below summarizes the total real estate loan portfolio, which includes real estate loans and construction loans, as segregated by the type of property securing the credit. Property type concentrations are stated as a percentage of year-end total real estate loans as of December 31, 2022:
| | | | | | | | | | | |
(dollars in thousands) | Amount | | Percent of Total |
Property type: | | | |
Market risk | | | |
Apartment/condominium buildings | $ | 1,701,936 | | | 32.7 | % |
Commercial buildings | 463,224 | | | 8.9 | % |
Industrial buildings | 447,593 | | | 8.6 | % |
1-4 Family dwellings (other than condominium) | 385,422 | | | 7.4 | % |
Self-storage building | 220,204 | | | 4.2 | % |
Shopping center/mall buildings | 200,587 | | | 3.9 | % |
Senior housing buildings | 181,527 | | | 3.5 | % |
Residential lots | 152,233 | | | 2.9 | % |
Hotel/motel buildings | 140,825 | | | 2.7 | % |
Commercial lots | 61,499 | | | 1.2 | % |
Other | 117,192 | | | 2.3 | % |
Other than market risk | | | |
Industrial buildings | 393,465 | | | 7.6 | % |
1-4 Family dwellings (other than condominium) | 323,280 | | | 6.2 | % |
Commercial buildings | 215,856 | | | 4.2 | % |
Other | 193,800 | | | 3.7 | % |
Total real estate loans | $ | 5,198,643 | | | 100.0 | % |
The table below summarizes the Company’s market risk real estate portfolio at December 31, 2022 as segregated by the geographic region in which the property is located. Approximately 58% of the market risk real estate collateral is located in Texas.
| | | | | | | | | | | |
(dollars in thousands) | Amount | | Percent of Total |
Texas geographic region: | | | |
Dallas/Fort Worth | $ | 823,670 | | | 20.2 | % |
Houston | 598,010 | | | 14.7 | % |
San Antonio | 371,028 | | | 9.1 | % |
Austin | 459,681 | | | 11.3 | % |
Other Texas cities | 94,596 | | | 2.3 | % |
Total Texas | 2,346,985 | | | 57.6 | % |
Other states | 1,725,257 | | | 42.4 | % |
Total market risk real estate loans | $ | 4,072,242 | | | 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 determine 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.
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 $598.2 million. The Company, however and 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, 2022 | | December 31, 2021 |
| | | Period End Balances | | | | Period End Balances |
(dollars in thousands) | Number of Relationships | | Committed | | Outstanding | | Number of Relationships | | Committed | | Outstanding |
$30.0 million and greater | 315 | | | $ | 16,287,723 | | | $ | 10,515,253 | | | 263 | | | $ | 15,602,603 | | | $ | 11,469,402 | |
$20.0 million to $29.9 million | 216 | | | 5,262,032 | | | 3,485,755 | | | 189 | | | 4,546,986 | | | 2,755,013 | |
Loan Maturities and Interest Rate Sensitivity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
(in thousands) | Total | | Within 1 Year | | 1-5 Years | | 5-15 Years | | After 15 Years |
Loan maturity: | | | | | | | | | |
Commercial | $ | 8,902,948 | | | $ | 2,011,152 | | | $ | 6,180,529 | | | $ | 697,516 | | | $ | 13,751 | |
Energy | 1,159,296 | | | 47,437 | | | 1,111,859 | | | — | | | — | |
Mortgage finance | 4,090,033 | | | 4,090,033 | | | — | | | — | | | — | |
Real estate | 5,198,643 | | | 1,115,349 | | | 3,367,345 | | | 370,795 | | | 345,154 | |
Total loans held for investment | $ | 19,350,920 | | | $ | 7,263,971 | | | $ | 10,659,733 | | | $ | 1,068,311 | | | $ | 358,905 | |
Interest rate sensitivity for selected loans with: | | | | | | | | | |
Fixed interest rates | $ | 1,116,060 | | | $ | 74,586 | | | $ | 407,802 | | | $ | 613,330 | | | $ | 20,342 | |
Floating or adjustable interest rates | 18,234,860 | | | 7,189,385 | | | 10,251,931 | | | 454,981 | | | 338,563 | |
Total loans held for investment | $ | 19,350,920 | | | $ | 7,263,971 | | | $ | 10,659,733 | | | $ | 1,068,311 | | | $ | 358,905 | |
Interest Reserve Loans
As of December 31, 2022 and December 31, 2021, the Company had $854.5 million and $456.1 million, respectively, in loans held for investment that included interest reserve arrangements, representing approximately 46% and 25%, respectively, of outstanding construction loans, which are a component of real estate loans. Interest reserve provisions are common in construction loans. The use of interest reserves 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 conditions precedent 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 retains the right to stop the use of interest reserves. As of December 31, 2022 and December 31, 2021, none of the loans with interest reserves were on non-accrual.
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.
| | | | | | | | | | | |
| As of December 31, |
(dollars in thousands) | 2022 | | 2021 |
Non-accrual loans held for investment(1) | | | |
Commercial: | | | |
Assets of the borrowers | $ | 41,448 | | | $ | 18,366 | |
Accounts receivable and inventory | 1,405 | | | 5,501 | |
Other | 564 | | | 2,045 | |
Total commercial | 43,417 | | | 25,912 | |
Energy: | | | |
Oil and gas properties | 3,658 | | | 28,380 | |
Total energy | 3,658 | | | 28,380 | |
Real estate: | | | |
Assets of the borrowers | — | | | 13,741 | |
Commercial property | 1,263 | | | 2,840 | |
| | | |
Single family residences | — | | | 1,629 | |
| | | |
Total real estate | 1,263 | | | 18,210 | |
Total non-accrual loans held for investment | $ | 48,338 | | | $ | 72,502 | |
Non-accrual loans held for sale | — | | | — | |
Other real estate owned (“OREO”) | — | | | — | |
Total non-performing assets | $ | 48,338 | | | $ | 72,502 | |
| | | |
| | | |
Non-accrual loans held for investment to total loans held for investment | 0.25 | % | | 0.32 | % |
Total non-performing assets to total assets | 0.17 | % | | 0.21 | % |
Allowance for credit losses on loans to non-accrual loans held for investment | 5.2x | | 2.9x |
| | | |
Loans held for investment past due 90 days and accruing | $ | 131 | | | $ | 3,467 | |
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(2) | $ | — | | | $ | 3,986 | |
(1)As of December 31, 2022 and 2021, non-accrual loans held for investment included $531,000 and $19.4 million, respectively, in loans that met the criteria for restructured.
(2)Includes loans guaranteed by U.S. government agencies that were repurchased out of Ginnie Mae securities. Loans are recorded as loans held for sale and carried at fair value on the balance sheet. Interest on these past due loans accrues at the debenture rate guaranteed by the U.S. government.
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 10 - 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 $66.0 million provision for credit losses on loans for the year ended December 31, 2022 compared to a negative provision of $30.0 million for the year ended December 31, 2021. The $66.0 million provision for credit losses resulted from updated views on the downside risks to the economic forecast and an increase in net charge-offs. The Company recorded $19.9 million in net charge-offs during the year ended December 31, 2022 compared to $12.9 million during 2021. Criticized loans totaled $513.2 million at December 31, 2022, compared to $582.9 million at December 31, 2021.
The table below presents key metrics related to the Company’s credit loss experience:
| | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 | |
Allowance for credit losses on loans to total loans held for investment | | 1.31 | % | | 0.93 | % | |
Allowance for credit losses on loans to average total loans held for investment | | 1.19 | % | | 0.91 | % | |
Total allowance for credit losses to total loans held for investment | | 1.43 | % | | 1.00 | % | |
Total provision for credit losses to average total loans held for investment | | 0.31 | % | | (0.13) | % | |
The table below details net charge-offs/(recoveries) as a percentage of average total loans by loan category:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| | Net Charge-offs | | Net Charge-offs to Average Loans | | Net Charge-offs | | Net Charge-offs to Average Loans |
Commercial | | $ | 16,932 | | | 0.17 | % | | $ | 7,592 | | | 0.08 | % |
Energy | | 2,587 | | | 0.27 | % | | 4,451 | | | 0.65 | % |
Mortgage finance | | — | | | — | % | | — | | | — | % |
Real Estate | | 350 | | | 0.01 | % | | 875 | | | 0.02 | % |
Total | | $ | 19,869 | | | 0.09 | % | | $ | 12,918 | | | 0.06 | % |
The allowance for credit losses on loans totaled $253.5 million at December 31, 2022 and $211.9 million at December 31, 2021. 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, | | | | |
| | 2022 | | 2021 | | |
(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 | | $ | 136,841 | | | 46 | % | | $ | 102,202 | | | 43 | % | | | | |
Energy | | 49,000 | | | 6 | % | | 52,568 | | | 3 | % | | | | |
Mortgage finance | | 10,745 | | | 21 | % | | 6,083 | | | 33 | % | | | | |
Real estate | | 56,883 | | | 27 | % | | 51,013 | | | 21 | % | | | | |
| | | | | | | | | | | | |
Total | | $ | 253,469 | | | 100 | % | | $ | 211,866 | | | 100 | % | | | | |
The overall increase in the allowance for credit losses on loans at December 31, 2022 compared to 2021 resulted primarily from management’s continued evaluation of changing market conditions and updated views on the downside risks to the economic forecast.
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.
Loans Held for Sale
On April 20, 2021, the Company entered into an agreement to sell its portfolio of MSRs and to transition the MCA program to a third-party. The sale was completed on June 1, 2021 and the transfer of servicing on the underlying mortgage loans was completed on August 1, 2021. Transition activities began immediately following the execution of the agreement and were complete prior to December 31, 2021. The Company sold the remaining MSR balance of $1.2 million, which represented MSRs from loans sold after the cut-off date for the initial sale mentioned above. The sale of this MSR portfolio and the transfer of servicing on the underlying mortgage loans were completed on October 1, 2021, at which time all remaining MSR hedge positions were closed. During the fourth quarter of 2022, the Company sold the remaining loans held for sale associated to the MCA program and recorded a $990,000 loss on sale of loans held for sale.
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 Company’s 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, 2022 decreased $5.6 billion compared to 2021. Average non-interest bearing deposits for the year ended December 31, 2022 decreased $2.2 billion compared to 2021 and average interest bearing deposits decreased $3.4 billion. The average cost of total deposits increased to 0.74% in 2022 from 0.21% in 2021 primarily due to rising interest rates.
The following table discloses average deposits and weighted-average cost of deposits by type:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | |
(dollars in thousands) | Average Balance | | Average Rate Paid | | Average Balance | | Average Rate Paid | | | | |
Non-interest bearing | $ | 12,951,134 | | | — | % | | $ | 15,186,455 | | | — | % | | | | |
Interest bearing transaction | 1,659,476 | | | 1.09 | % | | 3,447,849 | | | 0.60 | % | | | | |
Savings | 9,983,571 | | | 1.52 | % | | 11,180,645 | | | 0.33 | % | | | | |
Time deposits | 1,313,483 | | | 1.61 | % | | 1,716,642 | | | 0.49 | % | | | | |
| | | | | | | | | | | |
Total | $ | 25,907,664 | | | 0.74 | % | | $ | 31,531,591 | | | 0.21 | % | | | | |
Estimated uninsured deposits at December 31, 2022 were $13.6 billion (59% of total deposits), compared to $16.1 billion (56% of total deposits) at December 31, 2021. The insured deposit data for 2022 and 2021 reflect the deposit insurance impact of “combined ownership segregation” of escrow and other accounts at an aggregate level but do not reflect an evaluation of all of the account styling distinctions that would determine the availability of deposit insurance to individual accounts based on FDIC regulations.
The following table shows scheduled maturities of time deposits greater than $250,000:
| | | | | | | | | | | | | |
| December 31, | | |
(in thousands) | 2022 | | 2021 | | |
Months to maturity: | | | | | |
Three or less | $ | 70,008 | | | $ | 70,736 | | | |
Over three through six | 50,282 | | | 18,013 | | | |
Over six through twelve | 117,435 | | | 86,223 | | | |
Over twelve | 20,715 | | | 11,059 | | | |
Total | $ | 258,440 | | | $ | 186,031 | | | |
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 GSEs to support the liquidity of mortgage finance assets.
During 2020 and into the first half of 2021, the Company significantly increased its interest bearing cash and cash equivalents to ensure that it had the balance sheet strength to serve its clients during the COVID-19 pandemic. In the second half of 2021 and throughout 2022, these balances have run off as the Company purchased investment securities and proactively exited certain high-cost indexed deposit products. The following table summarizes these balances:
| | | | | | | | | | | | | | | | |
| | December 31, | | |
(dollars in thousands) | | 2022 | | 2021 | | |
Interest bearing cash and cash equivalents | | $ | 4,778,623 | | | $ | 7,765,996 | | | |
Interest bearing cash and cash equivalents as a percent of: | | | | | | |
Total loans held for investment | | 24.8 | % | | 34.1 | % | | |
Total earning assets | | 17.4 | % | | 22.9 | % | | |
Total deposits | | 20.9 | % | | 27.6 | % | | |
Liquidity to support growth in loans held for investment has been fulfilled primarily through growth in customer deposits. The Company’s goal is to obtain as much of its funding for loans held for investment and other earning assets as possible from customer deposits, which are generated principally through development of long-term customer relationships, with a significant
focus on treasury management products. In addition, the Company also has access to deposits through brokered channels. The following table summarizes period-end total deposits:
| | | | | | | | | | | | | | | | | |
| December 31, |
(dollars in thousands) | 2022 | | 2021 |
| Balance | % of Total | | Balance | % of Total |
Customer deposits | $ | 21,749,868 | | 95.2 | % | | $ | 25,409,180 | | 90.4 | % |
Brokered deposits | 1,107,012 | | 4.8 | % | | 2,700,185 | | 9.6 | % |
Total deposits | $ | 22,856,880 | | 100.0 | % | | $ | 28,109,365 | | 100.0 | % |
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:
| | | | | | | | | | | | |
| | December 31, |
(in thousands) | | 2022 | 2021 | |
| | | | |
Repurchase agreements | | 1,142 | | 2,832 | | |
FHLB borrowings | | 1,200,000 | | 2,200,000 | | |
| | | | |
Total short-term and other borrowings | | $ | 1,201,142 | | $ | 2,202,832 | | |
| | | | |
The following table summarizes the Company’s short-term borrowing capacities net of balances outstanding:
| | | | | | | | | | | | | |
| December 31, |
(in thousands) | 2022 | | 2021 | | |
FHLB borrowing capacity relating to loans | $ | 2,621,218 | | | $ | 5,190,703 | | | |
FHLB borrowing capacity relating to securities | 3,539,297 | | | 3,352,111 | | | |
Total FHLB borrowing capacity(1) | $ | 6,160,515 | | | $ | 8,542,814 | | | |
Unused federal funds lines available from commercial banks | $ | 1,479,000 | | | $ | 892,000 | | | |
Unused Federal Reserve borrowings capacity | $ | 3,574,762 | | | $ | 2,414,702 | | | |
Unused revolving line of credit(2) | $ | 75,000 | | | $ | 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 2022 or 2021. The line of credit was increased to $100.0 million on February 8, 2023.
The Company has long-term debt outstanding of $931.4 million as of December 31, 2022, 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 9 - 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.
For additional information on short-term borrowings and long-term debt, see Note 9 - Short-Term Borrowings and Long-Term Debt in the accompanying notes to the consolidated financial statements included elsewhere in this report.
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 11 - 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 this report.
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.
As of December 31, 2022, management is not aware of any events that are reasonably likely to have a material adverse effect on liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect.
Capital Resources
The Company’s equity capital averaged $3.1 billion for the year ended December 31, 2022 compared to $3.1 billion in 2021. 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 April 19, 2022, the Company’s board of directors authorized the Company to repurchase up to $150.0 million of its outstanding shares of 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 2022, the Company repurchased 2,083,118 shares of its common stock for an aggregate purchase price of $115.3 million, at a weighted average price of $55.35 per share. 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.
For additional information on the Company’s capital and stockholders’ equity, Note 11 - Regulatory Ratios and Capital and Note 19 - Material Transactions Affecting Stockholders' Equity, respectively, 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 December 31, 2022, the quantitative estimate of the allowance for credit loss would increase by approximately $118.0 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.
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 unaudited financial statements included elsewhere in this report for further discussion of the risk factors considered by management in establishing the allowance for credit losses.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk represents the potential economic loss on trading and non-trading portfolios and financial instruments due to adverse price movements in markets including interest rates, foreign exchange rates, credit spreads, commodity prices and equity and related implied volatility levels.
The Company is subject to market risk primarily through the effect of changes in interest rates on its portfolio of assets held for purposes other than trading and interest rate derivative instruments that are used for managing interest rate risk.
In addition, the Company’s trading desk engages in fixed income and equity securities, derivatives and foreign exchange transactions to support customer’s investing and hedging activities. The Company uses Value-at-Risk (“VaR”) as a means to measure, monitor, and limit aggregate market risk on the trading portfolio. VaR is a statistical risk measure estimating potential loss at the 95th percentile based on a one-year history of market risk factors associated with the trading portfolio. VaR provides a consistent cross-asset measure for risk profiles and allows for diversification benefit based on historical correlations across market moves. All statistical models involve a degree of uncertainty and VaR is calculated at a statistical confidence interval of the 95th percentile based on one-year daily historic market moves. Larger economic losses are possible, particularly during stressed macroeconomic and market conditions.
The responsibility for managing market risk rests with the ALCO, which operates under policy guidelines established by the Company’s board of directors. Oversight of the Company’s compliance with these guidelines is the ongoing responsibility of the ALCO, with exceptions reported to the Executive Risk Committee, and to the board of directors, if necessary, on a quarterly basis.
Interest Rate Risk Management
The Company’s interest rate sensitivity is illustrated in the following table. The table reflects rate-sensitive positions as of December 31, 2022 and is not necessarily indicative of positions on other dates. The table does not take into account the effect of the Company’s derivatives designated as cash flow hedges. The balances of interest rate sensitive assets and liabilities are presented in the periods in which they next reprice to market rates or mature and are aggregated to show the interest rate sensitivity gap. The mismatch between repricings or maturities within a time period is commonly referred to as the “gap” for that period. A positive gap (asset sensitive), where interest rate-sensitive assets exceed interest rate sensitive liabilities, generally will result in the net interest margin increasing in a rising rate environment and decreasing in a falling rate environment. A negative gap (liability sensitive) will generally have the opposite results on the net interest margin. To reflect anticipated prepayments, certain asset and liability categories are shown in the table using estimated cash flows rather than contractual cash flows. Certain variable rate loans have embedded floors which limit the decline in yield on those loans at times when market interest rates are extraordinarily low. The degree of asset sensitivity, spreads on loans and net interest margin may be reduced until rates increase by an amount sufficient to eliminate the effects of floors. The adverse effect of floors as market rates increase may also be offset by the positive gap, the extent to which rates on deposits and other funding sources lag increasing market rates for loans and changes in composition of funding.
Interest Rate Sensitivity Gap Analysis
December 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | 0-3 months Balance | | 4-12 months Balance | | 1-3 years Balance | | 3+ years Balance | | Total Balance |
Assets | | | | | | | | | |
Interest bearing cash and cash equivalents | $ | 4,778,623 | | | $ | — | | | $ | — | | | $ | — | | | $ | 4,778,623 | |
Investment securities(1) | 46,204 | | | 1,121 | | | 495,571 | | | 3,042,218 | | | 3,585,114 | |
Variable loans | 17,747,882 | | | 196,154 | | | 31,252 | | | 295,929 | | | 18,271,217 | |
Fixed loans | 19,974 | | | 54,612 | | | 183,435 | | | 858,039 | | | 1,116,060 | |
Total loans(2) | 17,767,856 | | | 250,766 | | | 214,687 | | | 1,153,968 | | | 19,387,277 | |
Total interest sensitive assets | $ | 22,592,683 | | | $ | 251,887 | | | $ | 710,258 | | | $ | 4,196,186 | | | $ | 27,751,014 | |
Liabilities | | | | | | | | | |
Interest bearing customer deposits | $ | 11,726,220 | | | $ | — | | | $ | — | | | $ | — | | | $ | 11,726,220 | |
CDs | 309,646 | | | 1,172,732 | | | 30,048 | | | 153 | | | 1,512,579 | |
| | | | | | | | | |
Total interest bearing deposits | 12,035,866 | | | 1,172,732 | | | 30,048 | | | 153 | | | 13,238,799 | |
Short-term borrowings | 1,201,142 | | | — | | | — | | | — | | | 1,201,142 | |
Long-term debt | 385,898 | | | — | | | — | | | 545,544 | | | 931,442 | |
Total borrowings | 1,587,040 | | | — | | | — | | | 545,544 | | | 2,132,584 | |
Total interest sensitive liabilities | $ | 13,622,906 | | | $ | 1,172,732 | | | $ | 30,048 | | | $ | 545,697 | | | $ | 15,371,383 | |
GAP | $ | 8,969,777 | | | $ | (920,845) | | | $ | 680,210 | | | $ | 3,650,489 | | | $ | — | |
Cumulative GAP | $ | 8,969,777 | | | $ | 8,048,932 | | | $ | 8,729,142 | | | $ | 12,379,631 | | | $ | 12,379,631 | |
| | | | | | | | | |
Non-interest bearing deposits | | | | | | | | | 9,618,081 | |
Stockholders’ equity | | | | | | | | | 3,055,351 | |
Total | | | | | | | | | $ | 12,673,432 | |
(1)Available-for-sale debt securities and equity securities based on fair market value.
(2)Total loans include gross loans held for investment and loans held for sale.
While a gap interest table is useful in analyzing interest rate sensitivity, an interest rate sensitivity simulation provides a better illustration of the sensitivity of earnings to changes in interest rates. Earnings are also affected by the effects of changing interest rates on the value of funding derived from non-interest bearing deposits and stockholders’ equity. Management performs a sensitivity analysis to identify interest rate risk exposure on net interest income. Management also quantifies and measures interest rate risk exposure using a model to dynamically simulate the effect of changes in net interest income relative to changes in interest rates over the next twelve months based on three interest rate scenarios. These are a static rate scenario and two “shock test” scenarios.
These scenarios are based on interest rates as of the last day of a reporting period published by independent sources and incorporate relevant spreads of instruments that are actively traded in the open market. The Federal Reserve’s federal funds target affects short-term borrowing; the prime lending rate, SOFR, Bloomberg Short Term Yield Index and other alternative indexes are the basis for most of the variable-rate loan pricing. The 10-year treasury rate is also monitored because of its effect on prepayment speeds for mortgage-backed securities. These are the Company’s primary interest rate exposures. Interest rate derivative contracts may be used to manage exposure to adverse fluctuations in these primary interest rate exposures as is discussed in more detail under the heading Use of Derivatives to Manage Interest Rate and Other Risks below.
For modeling purposes, the “shock test” scenarios as of December 31, 2022 assume immediate, sustained 100 and 200 basis point increases in interest rates as well as a 100 basis point decrease in interest rates. As of December 31, 2021, the scenarios assumed a sustained 100 and 200 basis point increase in interest rates. As short-term rates remained low through 2021, the Company did not believe that analysis of an assumed decrease in interest rates would provide meaningful results. The Company will continue to evaluate these scenarios as interest rates change.
The interest rate risk exposure model incorporates assumptions regarding the level of interest rate on indeterminable maturity deposits (non-interest bearing deposits, interest bearing transaction accounts and savings accounts) for a given level of market rate change. In the current environment of changing short-term rates, deposit pricing can vary by product and customer. These assumptions have been developed through a combination of historical analysis and projection of future expected pricing behavior. Changes in prepayment behavior of mortgage-backed securities, residential and commercial mortgage loans in each rate environment are captured using industry estimates of prepayment speeds for various coupon segments of the portfolio. The impact of these changes is factored into the simulation model. This modeling indicated interest rate sensitivity as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Anticipated Impact Over the Next Twelve Months as Compared to Most Likely Scenario |
| December 31, 2022 | | December 31, 2021 |
(in thousands) | 100 bps Increase | | 200 bps Increase | | 100 bps Decrease | | 100 bps Increase | | 200 bps Increase | |
Change in net interest income | $ | 77,282 | | | $ | 140,354 | | | $ | (98,916) | | | $ | 48,802 | | | $ | 124,986 | | |
The simulations used to manage market risk are based on numerous assumptions regarding the effect of changes in interest rates on the timing and extent of repricing characteristics, future cash flows and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions, customer behavior and management strategies, among other factors.
Use of Derivatives to Manage Interest Rate and Other Risks
In the ordinary course of business, the Company enters into derivative transactions to manage various risks and to accommodate the business requirements of its customers.
On the date the Company enters into a derivative contract, the derivative is designated as either a fair value hedge, cash flow hedge, net investment hedge, or a designation is not made as it is a customer-related transaction, an economic hedge for asset/liability risk management purposes or another stand-alone derivative created through the Company’s operations.
To manage the sensitivity of earnings and capital to interest rate, prepayment, credit, price and foreign currency fluctuations (asset and liability management positions), the Company may enter into derivative transactions. In addition, the Company enters into interest rate and foreign exchange derivative contracts to support the business requirements of its customers (customer-related positions).
For additional information regarding derivatives, see Note 15 - Derivative Financial Instruments in the accompanying notes to the consolidated financial statements included elsewhere in this report.
LIBOR Transition
In 2017, the U.K. Financial Conduct Authority announced that it would no longer compel banks to submit rates for the calculation of LIBOR after 2021. The administrator of LIBOR extended publication of the most commonly used U.S. dollar
LIBOR settings to June 30, 2023 and ceased publishing other LIBOR settings on December 31, 2021. The U.S. federal banking agencies issued guidance strongly encouraging banking organizations to cease using U.S. dollar LIBOR as a reference rate in new contracts as soon as practicable and in any event by December 31, 2021. On March 15, 2022, President Biden signed into law the “Adjustable Interest Rate (LIBOR) Act,” as part of the Consolidated Appropriations Act, 2022, which provides for a statutory transition to a replacement rate selected by the Federal Reserve based on the SOFR for contracts referencing LIBOR that contain no fallback provisions or ineffective fallback provisions, unless a replacement rate is selected by a determining person as outlined in the statute. On December 16, 2022, the Federal Reserve adopted a final rule implementing the Adjustable Interest Rate (LIBOR) Act by identifying benchmark rates based on SOFR that will replace LIBOR in certain financial contracts after June 30, 2023. The Company has significant but declining exposure to financial instruments with attributes that are either directly or indirectly dependent on LIBOR to establish their interest rate and/or value, some of which mature after June 30, 2023. The Company established a working group, consisting of key stakeholders from throughout the company, to monitor developments relating to LIBOR changes and to guide the Bank’s response. This team has worked to successfully ensure that technology systems are prepared for the transition, loan documents that reference LIBOR-based rates have been appropriately amended to reference other methods of interest rate determinations and internal and external stakeholders have been apprised of the transition. Based on the transition progress to date, the Company ceased originating LIBOR-based products and began originating alternative indexed products in December 2021. The Company will continue to transition all remaining LIBOR-based products to an alternative benchmark. The Company will also continue to evaluate the transition process and align its trajectory with regulatory guidelines regarding the cessation of LIBOR as well as monitor new developments for transitioning to alternative reference rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Texas Capital Bancshares, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Texas Capital Bancshares, Inc. (the Company) as of December 31, 2022, and 2021, the related consolidated statements of income and other comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 9, 2023, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.
| | | | | |
| Allowance for Credit Losses - Loans |
Description of the Matter | The Company’s loans held for investment portfolio totaled $19.3 billion as of December 31, 2022, and the associated allowance for credit losses (ACL) was $275.3 million. The ACL represents management’s best estimate of expected credit losses over the contractual life of loans and for off-balance sheet commitments. The ACL is estimated using relevant available information relating to past events, current conditions, and reasonable and supportable forecasts, as well as qualitative adjustments using a Portfolio Level Qualitative Factor and/or Portfolio Segment Level Qualitative Factor (collectively the “qualitative factors”). The qualitative factors are used to bring the ACL to the level management believes is appropriate based on factors that are otherwise unaccounted for in the quantitative process. The ACL also includes reserves for loans evaluated on an individual basis, such as certain loans graded substandard or worse. Management applies judgment in the determination and usage of the qualitative factors, and in the use of a single or a blend of forecast scenarios used to calculate the reasonable and supportable forecast. Auditing management’s estimate of the ACL is complex due to the models utilized and involves a high degree of subjectivity due to the judgment required in evaluating management’s determination and usage of the qualitative factors, and in the use of a single or blend of forecast scenarios used to calculate the reasonable and supportable forecast. |
| | | | | |
How We Addressed the Matter in Our Audit | Our considerations and procedures performed included evaluation of the process utilized by management to challenge the model results and determine the best estimate of the ACL as of the balance sheet date. We obtained an understanding of the Company’s process for establishing the ACL, including determination and usage of the qualitative factors and determination of a single or blend of multiple forecast scenarios used to calculate the reasonable and supportable forecast. We evaluated the design and tested the operating effectiveness of the controls associated with the ACL process, including controls around the reliability and accuracy of data used in the model, management’s review and approval of the selected qualitative factors, the single or blend of multiple forecast scenarios used to calculate the reasonable and supportable forecast, the governance of the credit loss methodology, and management’s review and approval of the ACL. We performed specific substantive tests of the models utilized, qualitative factors and the single or blend of forecast scenarios used to calculate the reasonable and supportable forecast. We involved EY specialists to assist in testing management models including evaluating model methodology and key modeling assumptions, as well as the appropriateness of management’s qualitative and reasonable and supportable forecast framework. We evaluated if the qualitative factors were applied based on a comprehensive framework and compared the adjustments utilized by management to both internal portfolio metrics and external macroeconomic data (as applicable) to support the adjustments and evaluate trends in such adjustments. We searched for and evaluated information that corroborates or contradicts management’s reasonable and supportable forecast as well as identification and measurement of qualitative factors. In addition, we evaluated the Company’s estimate of the overall ACL, giving consideration to the Company’s borrowers, loan portfolio, and macroeconomic trends, independently obtained and compared such information to comparable financial institutions and considered whether new or contrary information existed. |
/s/ Ernst & Young LLP
We have served as the Company's auditor since 1999.
Dallas, TX
February 9, 2023
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | |
| December 31, |
(in thousands except share data) | 2022 | | 2021 |
Assets | | | |
Cash and due from banks | $ | 233,637 | | | $ | 180,663 | |
Interest bearing cash and cash equivalents | 4,778,623 | | | 7,765,996 | |
Available-for-sale debt securities | 2,615,644 | | | 3,538,201 | |
Held-to-maturity debt securities | 935,514 | | | — | |
Equity securities | 33,956 | | | 45,607 | |
Investment securities | 3,585,114 | | | 3,583,808 | |
Loans held for sale | 36,357 | | | 8,123 | |
Loans held for investment, mortgage finance | 4,090,033 | | | 7,475,497 | |
Loans held for investment | 15,197,307 | | | 15,331,457 | |
Less: Allowance for credit losses on loans | 253,469 | | | 211,866 | |
Loans held for investment, net | 19,033,871 | | | 22,595,088 | |
| | | |
Premises and equipment, net | 26,382 | | | 20,901 | |
Accrued interest receivable and other assets | 719,162 | | | 559,897 | |
Goodwill and intangible assets, net | 1,496 | | | 17,262 | |
Total assets | $ | 28,414,642 | | | $ | 34,731,738 | |
Liabilities and Stockholders’ Equity | | | |
Liabilities: | | | |
Non-interest bearing deposits | $ | 9,618,081 | | | $ | 13,390,370 | |
Interest bearing deposits | 13,238,799 | | | 14,718,995 | |
Total deposits | 22,856,880 | | | 28,109,365 | |
Accrued interest payable | 24,000 | | | 7,699 | |
Other liabilities | 345,827 | | | 273,488 | |
Short-term borrowings | 1,201,142 | | | 2,202,832 | |
Long-term debt | 931,442 | | | 928,738 | |
Total liabilities | 25,359,291 | | | 31,522,122 | |
Stockholders’ equity: | | | |
Preferred stock, $0.01 par value, $1,000 liquidation value: | | | |
Authorized shares - 10,000,000 | | | |
Issued shares - 300,000 at December 31, 2022 and 2021 | 300,000 | | | 300,000 | |
Common stock, $0.01 par value: | | | |
Authorized shares - 100,000,000 | | | |
Issued shares - 50,867,298 and 50,618,911 at December 31, 2022 and 2021, respectively | 509 | | | 506 | |
Additional paid-in capital | 1,025,593 | | | 1,008,559 | |
Retained earnings | 2,263,502 | | | 1,948,274 | |
Treasury stock shares at cost: 2,083,535 and 417 at December 31, 2022 and 2021, respectively | (115,310) | | | (8) | |
Accumulated other comprehensive loss, net of taxes | (418,943) | | | (47,715) | |
Total stockholders’ equity | 3,055,351 | | | 3,209,616 | |
Total liabilities and stockholders’ equity | $ | 28,414,642 | | | $ | 34,731,738 | |
See accompanying notes to consolidated financial statements.
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND OTHER
COMPREHENSIVE INCOME | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
(in thousands except per share data) | 2022 | | 2021 | | 2020 |
Interest income | | | | | |
Interest and fees on loans | $ | 983,787 | | | $ | 820,532 | | | $ | 993,670 | |
Investment securities | 63,179 | | | 42,820 | | | 17,475 | |
Interest bearing cash and cash equivalents | 97,271 | | | 13,233 | | | 28,262 | |
Total interest income | 1,144,237 | | | 876,585 | | | 1,039,407 | |
Interest expense | | | | | |
Deposits | 190,663 | | | 65,507 | | | 146,117 | |
Short-term borrowings | 29,077 | | | 4,613 | | | 22,006 | |
Long-term debt | 48,739 | | | 37,628 | | | 19,963 | |
| | | | | |
Total interest expense | 268,479 | | | 107,748 | | | 188,086 | |
Net interest income | 875,758 | | | 768,837 | | | 851,321 | |
Provision for credit losses | 66,000 | | | (30,000) | | | 258,000 | |
Net interest income after provision for credit losses | 809,758 | | | 798,837 | | | 593,321 | |
Non-interest income | | | | | |
Service charges on deposit accounts | 22,876 | | | 18,674 | | | 11,620 | |
Wealth management and trust fee income | 15,036 | | | 13,173 | | | 9,998 | |
Brokered loan fees | 14,159 | | | 27,954 | | | 46,423 | |
Servicing income | 857 | | | 15,513 | | | 27,029 | |
Investment banking and trading income | 35,054 | | | 24,441 | | | 22,687 | |
Net gain/(loss) on sale of loans held for sale | (990) | | | 1,317 | | | 58,026 | |
Gain on disposal of subsidiary | 248,526 | | | — | | | — | |
Other | 14,011 | | | 37,158 | | | 27,198 | |
Total non-interest income | 349,529 | | | 138,230 | | | 202,981 | |
Non-interest expense | | | | | |
Salaries and benefits | 436,809 | | | 350,930 | | | 340,529 | |
Occupancy expense | 44,222 | | | 33,232 | | | 34,955 | |
Marketing | 32,388 | | | 10,006 | | | 23,581 | |
Legal and professional | 75,858 | | | 41,152 | | | 52,132 | |
Communications and technology | 69,253 | | | 75,185 | | | 103,054 | |
Federal Deposit Insurance Corporation insurance assessment | 14,344 | | | 21,027 | | | 25,955 | |
Servicing-related expenses | — | | | 27,765 | | | 64,585 | |
Merger-related expenses | — | | | — | | | 17,756 | |
Other | 54,658 | | | 39,715 | | | 41,809 | |
Total non-interest expense | 727,532 | | | 599,012 | | | 704,356 | |
Income before income taxes | 431,755 | | | 338,055 | | | 91,946 | |
Income tax expense | 99,277 | | | 84,116 | | | 25,657 | |
Net income | 332,478 | | | 253,939 | | | 66,289 | |
Preferred stock dividends | 17,250 | | | 18,721 | | | 9,750 | |
Net income available to common stockholders | $ | 315,228 | | | $ | 235,218 | | | $ | 56,539 | |
Other comprehensive income/(loss): | | | | | |
Change in unrealized gain/(loss) | $ | (479,814) | | | $ | (80,366) | | | $ | 8,639 | |
Amounts reclassified into net income | 9,905 | | | — | | | — | |
Other comprehensive income/(loss) | (469,909) | | | (80,366) | | | 8,639 | |
Income tax expense/(benefit) | (98,681) | | | (16,877) | | | 1,815 | |
Other comprehensive income/(loss), net of tax | (371,228) | | | (63,489) | | | 6,824 | |
Comprehensive income/(loss) | $ | (38,750) | | | $ | 190,450 | | | $ | 73,113 | |
Basic earnings per common share | $ | 6.25 | | | $ | 4.65 | | | $ | 1.12 | |
Diluted earnings per common share | $ | 6.18 | | | $ | 4.60 | | | $ | 1.12 | |
See accompanying notes to consolidated financial statements.
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Common Stock | | Additional | | | | Treasury Stock | | Accumulated Other | | |
| Paid-in | | Retained | | Comprehensive | | |
(in thousands except share data) | Shares | | Amount | | Shares | | Amount | | Capital | | Earnings | | Shares | | Amount | | Income/(Loss) | | Total |
Balance at December 31, 2019 | 6,000,000 | | | $ | 150,000 | | | 50,338,158 | | | $ | 503 | | | $ | 978,205 | | | $ | 1,663,671 | | | (417) | | | $ | (8) | | | $ | 8,950 | | | $ | 2,801,321 | |
Impact of adoption of new accounting standards(1) | — | | | — | | | — | | | — | | | — | | | (7,154) | | | — | | | — | | | — | | | (7,154) | |
Comprehensive income/(loss): | | | | | | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 66,289 | | | — | | | — | | | — | | | 66,289 | |
Change in other comprehensive income/(loss), net of taxes | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 6,824 | | | 6,824 | |
Total comprehensive income | | | | | | | | | | | | | | | | | | | 73,113 | |
| | | | | | | | | | | | | | | | | | | |
Stock-based compensation expense recognized in earnings | — | | | — | | | — | | | — | | | 15,681 | | | — | | | — | | | — | | | — | | | 15,681 | |
| | | | | | | | | | | | | | | | | | | |
Preferred stock dividend | — | | | — | | | — | | | — | | | — | | | (9,750) | | | — | | | — | | | — | | | (9,750) | |
Issuance of stock related to stock-based awards | — | | | — | | | 132,709 | | | 1 | | | (1,988) | | | — | | | — | | | — | | | — | | | (1,987) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2020 | 6,000,000 | | | $ | 150,000 | | | 50,470,867 | | | $ | 504 | | | $ | 991,898 | | | $ | 1,713,056 | | | (417) | | | $ | (8) | | | $ | 15,774 | | | $ | 2,871,224 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Comprehensive income/(loss): | | | | | | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 253,939 | | | — | | | — | | | — | | | 253,939 | |
Change in other comprehensive income/(loss), net of taxes | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (63,489) | | | (63,489) | |
Total comprehensive income | | | | | | | | | | | | | | | | | | | 190,450 | |
| | | | | | | | | | | | | | | | | | | |
Stock-based compensation expense recognized in earnings | — | | | — | | | — | | | — | | | 30,061 | | | — | | | — | | | — | | | — | | | 30,061 | |
Issuance of preferred stock | 300,000 | | | 300,000 | | | — | | | — | | | (10,277) | | | — | | | — | | | — | | | — | | | 289,723 | |
Preferred stock dividend | — | | | — | | | — | | | — | | | — | | | (18,721) | | | — | | | — | | | — | | | (18,721) | |
Issuance of stock related to stock-based awards | — | | | — | | | 148,044 | | | 2 | | | (3,123) | | | — | | | — | | | — | | | — | | | (3,121) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Redemption of preferred stock | (6,000,000) | | | (150,000) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (150,000) | |
Balance at December 31, 2021 | 300,000 | | | $ | 300,000 | | | 50,618,911 | | | $ | 506 | | | $ | 1,008,559 | | | $ | 1,948,274 | | | (417) | | | $ | (8) | | | $ | (47,715) | | | $ | 3,209,616 | |
| | | | | | | | | | | | | | | | | | | |
Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 332,478 | | | — | | | — | | | — | | | 332,478 | |
Change in other comprehensive income/(loss), net of taxes | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (371,228) | | | (371,228) | |
Total comprehensive loss | | | | | | | | | | | | | | | | | | | (38,750) | |
| | | | | | | | | | | | | | | | | | | |
Stock-based compensation expense recognized in earnings | — | | | — | | | — | | | — | | | 21,246 | | | — | | | — | | | — | | | — | | | 21,246 | |
| | | | | | | | | | | | | | | | | | | |
Preferred stock dividend | — | | | — | | | — | | | — | | | — | | | (17,250) | | | — | | | — | | | — | | | (17,250) | |
Issuance of stock related to stock-based awards | — | | | — | | | 248,387 | | | 3 | | | (4,212) | | | — | | | — | | | — | | | — | | | (4,209) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Repurchase of common stock | — | | | — | | | — | | | — | | | — | | | — | | | (2,083,118) | | | (115,302) | | | — | | | (115,302) | |
Balance at December 31, 2022 | 300,000 | | | $ | 300,000 | | | 50,867,298 | | | $ | 509 | | | $ | 1,025,593 | | | $ | 2,263,502 | | | (2,083,535) | | | $ | (115,310) | | | $ | (418,943) | | | $ | 3,055,351 | |
(1) Represents the impact of adopting Accounting Standard Update (“ASU”) 2016-13. See Note 1 - Operations and Summary of Significant Accounting Policies to the consolidated financial statements for more information.
See accompanying notes to consolidated financial statements.
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
(in thousands) | 2022 | | 2021 | | 2020 |
Operating activities | | | | | |
Net income | $ | 332,478 | | | $ | 253,939 | | | $ | 66,289 | |
Adjustments to reconcile net income to net cash provided by/(used in) operating activities: | | | | | |
Provision/(benefit) for credit losses | 66,000 | | | (30,000) | | | 258,000 | |
Deferred tax expense/(benefit) | (17,395) | | | (20,253) | | | (7,964) | |
Depreciation and amortization expense | 45,284 | | | 93,406 | | | 74,925 | |
Net (gain)/loss on sale of loans held for sale | 990 | | | (1,317) | | | (58,026) | |
Increase/(decrease) in valuation allowance on mortgage servicing rights | — | | | (16,448) | | | 20,164 | |
| | | | | |
| | | | | |
Stock-based compensation expense | 21,432 | | | 31,326 | | | 17,441 | |
| | | | | |
Purchases and originations of loans held for sale | (37,461) | | | (1,413,899) | | | (11,366,986) | |
Proceeds from sales and repayments of loans held for sale | 8,132 | | | 1,676,601 | | | 13,619,623 | |
Gain on sale of subsidiary | (248,526) | | | — | | | — | |
| | | | | |
| | | | | |
Changes in operating assets and liabilities: | | | | | |
Accrued interest receivable and other assets | (25,482) | | | 154,114 | | | 10,654 | |
Accrued interest payable and other liabilities | 2,518 | | | (70,154) | | | 5,749 | |
Net cash provided by operating activities | 147,970 | | | 657,315 | | | 2,639,869 | |
Investing activities | | | | | |
Purchases of available-for sale debt securities | (920,217) | | | (1,059,897) | | | (3,001,746) | |
Proceeds from maturities, redemptions and pay-downs of available-for-sale debt securities | 432,175 | | | 569,931 | | | 52,609 | |
Proceeds from maturities, redemptions and pay-downs of held-to-maturity debt securities | 87,945 | | | — | | | — | |
Net decrease in equity securities | 11,651 | | | — | | | — | |
Originations of loans held for investment, mortgage finance | (102,438,943) | | | (167,084,439) | | | (216,234,122) | |
Proceeds from pay-offs of loans held for investment, mortgage finance | 105,824,407 | | | 168,688,351 | | | 215,324,562 | |
Proceeds from sale of mortgage servicing rights | — | | | 115,891 | | | — | |
Net (increase)/decrease in loans held for investment, excluding mortgage finance loans | (3,001,340) | | | 7,076 | | | 926,176 | |
Proceeds from sale of subsidiary | 3,324,159 | | | — | | | — | |
Purchase of premises and equipment, net | (11,270) | | | (4,127) | | | (2,796) | |
| | | | | |
| | | | | |
Net cash provided by/(used in) investing activities | 3,308,567 | | | 1,232,786 | | | (2,935,317) | |
Financing activities | | | | | |
Net increase/(decrease) in deposits | (5,252,485) | | | (2,887,224) | | | 4,517,996 | |
Issuance of stock related to stock-based awards | (4,209) | | | (3,121) | | | (1,986) | |
| | | | | |
| | | | | |
Net proceeds from issuance of preferred stock | — | | | 289,723 | | | — | |
Redemption of preferred stock | — | | | (150,000) | | | — | |
Preferred dividends paid | (17,250) | | | (18,721) | | | (9,750) | |
Repurchase of common stock | (115,302) | | | — | | | — | |
Net proceeds from issuance of long-term debt | — | | | 639,440 | | | — | |
Redemption of long-term debt | — | | | (111,000) | | | — | |
Net increase/(decrease) in short-term borrowings | (1,001,690) | | | (908,919) | | | 569,985 | |
| | | | | |
| | | | | |
| | | | | |
Net cash provided by/(used in) financing activities | (6,390,936) | | | (3,149,822) | | | 5,076,245 | |
Net increase/(decrease) in cash and cash equivalents | (2,934,399) | | | (1,259,721) | | | 4,780,797 | |
Cash and cash equivalents at beginning of period | 7,946,659 | | | 9,206,380 | | | 4,425,583 | |
Cash and cash equivalents at end of period | $ | 5,012,260 | | | $ | 7,946,659 | | | $ | 9,206,380 | |
Supplemental disclosures of cash flow information: | | | | | |
Cash paid during the period for interest | $ | 252,178 | | | $ | 111,199 | | | $ | 189,696 | |
Cash paid during the period for income taxes | 128,435 | | | 101,101 | | | 26,152 | |
| | | | | |
Transfers of debt securities from available-for-sale to held-to-maturity | 1,019,365 | | | — | | | — | |
| | | | | |
See accompanying notes to consolidated financial statements.
(1) Operations and Summary of Significant Accounting Policies
Organization and Nature of Business
Texas Capital Bancshares, Inc. (“TCBI” or the “Company”), a Delaware corporation, was incorporated in November 1996 and commenced banking operations in December 1998. The consolidated financial statements include the accounts of TCBI and its wholly owned subsidiary, Texas Capital Bank (the “Bank”).
The Company serves the needs of commercial businesses, entrepreneurs and professionals located in Texas through a custom array of financial products and services with high-quality personal service.
On September 6, 2022, the Company announced the sale of BankDirect Capital Finance, LLC (“BDCF”), its insurance premium finance subsidiary, to AFCO Credit Corporation, an indirect wholly-owned subsidiary of Truist Financial Corporation. The sale of BDCF included its business operations and loan portfolio of approximately $3.1 billion. The sale was an all-cash transaction for a purchase price of $3.4 billion, representing a pre-tax gain of $248.5 million. This transaction did not meet the criteria for discontinued operations reporting, and the sale was completed on November 1, 2022.
Basis of Presentation
The Company’s accounting and reporting policies conform to accounting principles generally accepted in the United States (“GAAP”) and to generally accepted practices within the banking industry. Certain prior period balances have been reclassified to conform to the current period presentation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for credit losses, the fair value of financial instruments and the status of contingencies are particularly susceptible to significant change.
Basic and Diluted Earnings Per Common Share
Basic earnings per common share is based on net income available to common stockholders divided by the weighted-average number of common shares outstanding during the period excluding non-vested stock-settled awards. Diluted earnings per common share include the dilutive effect of non-vested stock-settled awards granted using the treasury stock method.
Cash and Cash Equivalents
Cash equivalents include amounts due from banks, interest bearing deposits in other banks and federal funds sold.
Investment Securities
Investment securities include debt securities and equity securities.
Debt Securities
Debt securities are classified as trading, available-for-sale or held-to-maturity. Debt securities not classified as held-to-maturity or trading are classified as available-for-sale. Management classifies securities at the time of purchase and re-assesses such designation at each balance sheet date.
The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization and accretion are included in interest income from investment securities. Gains or losses realized upon the sale of debt securities is recorded in other non-interest income on the consolidated statements of income and other comprehensive income. The cost of securities sold is based on the specific identification method.
The Company has made a policy election to exclude accrued interest from the amortized cost basis of debt securities and report accrued interest separately in accrued interest and other assets on the consolidated balance sheets. Available-for-sale and held-to-maturity debt securities are placed on non-accrual status when management no longer expects to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on non-accrual status. Accordingly, the Company does not recognize an allowance for credit loss against accrued interest receivable
Trading Account
Debt securities acquired for resale in anticipation of short-term market movements are classified as trading and recorded at fair value, with realized and unrealized gains and losses recognized in income.
Held-to-Maturity
Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, net of any allowance for credit losses.
Management may transfer debt securities classified as available-for-sale to held-to-maturity when upon reassessment it is determined that the Company has both the positive intent and ability to hold these securities to maturity. The debt securities are transferred at fair value resulting in a premium or discount recorded on transfer date. Unrealized gains or losses at the date of transfer continue to be reported as a separate component of accumulated other comprehensive income/loss, net (“AOCI”). The premium or discount and the unrealized gain or loss, net of tax, in AOCI will be amortized to interest income over the remaining life of the securities using the interest method.
Available-for-Sale
Available-for-sale debt securities are recorded at fair value, with unrealized gains and losses, net of tax, reported as a separate component of AOCI. For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more-likely-than-not that it will be required to sell, the securities before recovery of the amortized cost basis. If either of these criteria is met, the securities’ amortized cost basis is written down to fair value as a current period expense recorded on the consolidated statements of income and other comprehensive income. If either of the above criteria is not met, management evaluates whether the decline in fair value is the result of credit losses or other factors. In making this assessment, management may consider various factors including the extent to which fair value is less than amortized cost, performance of any underlying collateral and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit losses, limited to the amount by which the fair value is less than the amortized cost basis. Any impairment not recorded through an allowance for credit losses is recognized in AOCI, net of tax, as a non-credit related impairment.
Included in debt securities available-for-sale are credit risk transfer (“CRT”) securities, which represent unsecured obligations issued by government sponsored entities (“GSEs”) such as Freddie Mac and are designed to transfer mortgage credit risk from the GSE to private investors. CRT securities are structured to be subject to the performance of a reference pool of mortgage loans in which the Company shares in 50% of the first losses with the GSE. If the reference pool incurs losses, the amount the Company will recover on the notes is reduced by its share of the amount of such losses, which could potentially be up to 100% of the amount outstanding. Unrealized losses recognized in AOCI for the CRT securities are primarily related to the difference between the current market rate for similar securities and the stated interest rate and are not considered to be related to credit loss events. The CRT securities are generally interest-only for an initial period of time and may be restricted from being transferred until a future date.
Equity Securities
Equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in income. Equity securities without readily determinable fair values are recorded at cost less any impairment.
Loans
Loans Held for Sale
The Company transitioned its mortgage correspondent aggregation (“MCA”) program to a third party in 2021. Prior to transition, the Company committed to purchase residential mortgage loans from independent correspondent lenders and delivered those loans into the secondary market via whole loan sales to independent third parties or in securitization transactions to third parties such as Ginnie Mae or to GSEs. In some cases, the Company retained the mortgage servicing rights. Once purchased, these loans were classified as held for sale and carried at fair value pursuant to the election of the fair value option in accordance with Accounting Standards Codification (“ASC”) 825, Financial Instruments. At the commitment date, the Company entered into a corresponding forward sale commitment with a third party, typically Ginnie Mae or a GSE, to deliver the loans within a specified timeframe. The estimated gain/(loss) for the entire transaction (from initial purchase commitment to final delivery of loans) was recorded as an asset or liability.
The fair value of loans held for sale is derived from observable current market prices, when available, and includes the fair value of the mortgage servicing rights. Adjustments to reflect unrealized gains and losses resulting from changes in fair value and realized gains and losses upon ultimate sale of the loans are classified as gain/(loss) on sale of loans held for sale on the consolidated statements of income and other comprehensive income. Residential mortgage loans held for sale are subject to both credit and interest rate risk. Credit risk is managed through underwriting policies and procedures, including collateral requirements, which are generally accepted by the secondary loan markets. Exposure to interest rate fluctuations is partially managed through forward sales contracts, which set the price for loans that will be delivered in the next 60 to 90 days.
From time to time the Company holds for sale certain commercial loans and also the guaranteed portion of Small Business Administration 7(a) loans, which are carried at lower of cost or fair value.
Loans Held for Investment
Loans held for investment (including financing leases) are stated at the amount of unpaid principal reduced by unearned income, net of direct loan origination costs. Interest on loans is recognized using the simple interest method on the daily balances of the principal amounts outstanding. Loan origination fees, net of direct loan origination costs, and commitment fees are deferred and amortized as an adjustment to yield over the life of the loan, or over the commitment period, as applicable.
Restructured loans are loans on which, due to the borrower’s financial difficulties, the Company has granted a concession that it would not otherwise consider for borrowers of similar credit quality. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two. Modifications of terms that could potentially qualify as a restructuring include reduction of contractual interest rate, extension of the maturity date at a contractual interest rate lower than the current rate for new debt with similar risk, an adjustment to payment terms, a reduction of the face amount of debt or forgiveness of either principal or accrued interest. A loan continues to qualify as restructured until a consistent payment history or change in the borrower’s financial condition has been evidenced, generally for no less than twelve months. If the restructuring agreement specifies an interest rate at the time of the restructuring that is greater than or equal to the rate that the Company is willing to accept for a new extension of credit with comparable risk, then the loan is no longer considered a restructuring if it is in compliance with the modified terms in calendar years after the year of the restructure.
A loan is considered past due when a contractually due payment has not been received by the contractual due date. The Company places a loan on non-accrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed as a reduction of current period interest income. Interest income is subsequently recognized on a cash basis as long as the remaining book balance of the asset is deemed to be collectible. If collectability is questionable, then cash payments are applied to principal. A loan is placed back on accrual status when both principal and interest are current and it is probable that all amounts due will be collected (both principal and interest) according to the terms of the loan agreement.
Loans held for investment includes legal ownership interests in mortgage loans that the Company purchases through its mortgage finance division. The ownership interests are purchased from unaffiliated mortgage originators who are seeking additional liquidity to facilitate their ability to originate loans. The mortgage originator has no obligation to offer and the Company has no obligation to purchase these interests. The originator closes mortgage loans consistent with underwriting standards established by approved investors, and, at the time of the sale to the investor, the Company’s ownership interest and that of the originator are delivered to the investor selected by the originator and approved. The Company typically purchases up to a 99% ownership interest in each mortgage with the originator owning the remaining percentage. These mortgage ownership interests are generally held for a period of less than 30 days and more typically 10-20 days. Because of conditions in agreements with originators designed to reduce transaction risks, under ASC 860, Transfers and Servicing of Financial Assets (“ASC 860”), the ownership interests do not qualify as participating interests. Under ASC 860, the ownership interests are deemed to be loans to the originators and payments received from investors are deemed to be payments made by or on behalf of the originator to repay the loan. Because the Company has an actual, legal ownership interest in the underlying residential mortgage loan, these interests are reported as extensions of credit to the originators that are secured by the mortgage loans as collateral.
Due to market conditions or events of default by the investor or the originator, the Company could be required to purchase the remaining interests in the mortgage loans and hold them beyond the expected 10-20 days. Mortgage loans acquired under these conditions would require mark-to-market adjustments to income and could require further allocations of the allowance for credit losses or be subject to charge-off in the event the loans become impaired.
Allowance for Credit Losses
On January 1, 2020, the Company adopted ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"), which uses the current expected credit loss ("CECL") model to determine the allowance for credit losses. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with ASU 2016-02 "Leases (Topic 842)".
The following is discussion of the allowance for credit losses on loans held for investment. See “Investment Securities - Debt Securities” above for discussion of the allowance for credit losses on available-for-sale and held-to maturity debt securities.
The CECL methodology recognizes lifetime expected credit losses immediately when a financial asset is originated or purchased. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance
when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
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. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, credit quality, or term, as well as for changes in macroeconomic conditions, such as changes in unemployment rates, crude oil prices, property values or other relevant factors.
The allowance for credit losses is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Reserves on loans that do not share risk characteristics are evaluated on an individual basis. In order to determine the allowance for credit losses, all loans are assigned a credit grade. Loans graded substandard or worse and greater than $500,000 are specifically reviewed for loss potential and when deemed appropriate are assigned a reserve based on an individual evaluation. For purposes of determining the pool-basis reserve, the remainder of the portfolio, representing all loans not assigned an individual reserve, is segregated first by portfolio segment, then by product type, to recognize differing risk profiles within portfolio segments, and finally by credit grade. Each credit grade within each product type is assigned a historical loss rate. These historical loss rates are then modified to incorporate a 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”). These modified historical loss rates are multiplied by the outstanding principal balance of each loan to calculate a required reserve. A similar process is employed to calculate a reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and letters of credit, and any needed reserve is recorded in other liabilities on the consolidated balance sheets. 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. The PLQF is used to apply a qualitative adjustment across the entire portfolio of loans, while the SLQF is designed to apply a qualitative adjustment across a single portfolio segment. Even though portions of the allowance may be allocated to specific loans, the entire allowance is available for any credit that, in management’s judgment, should be charged off.
The Company generally uses a two-year forecast period, based on a single forecast scenario or a blend of multiple forecast scenarios, using variables management believes are most relevant to each portfolio segment. For periods beyond which management is able to develop reasonable and supportable forecasts, they immediately revert to the average historical loss rate. The forecast period and scenario(s) used are reviewed on a quarterly basis and may be adjusted based on management's view of the current economic conditions and level of predictability the forecast can provide.
Portfolio segments are used to pool loans with similar risk characteristics and align with the Company’s methodology for measuring expected credit losses. A summary of the primary portfolio segments is as follows:
Commercial. The commercial loan portfolio is comprised of lines of credit for working capital, term loans and leases to finance equipment and other business assets across a variety of industries. These loans are used for general corporate purposes including financing working capital, internal growth, acquisitions and business insurance premiums and are generally secured by accounts receivable, inventory, equipment and other assets of clients’ businesses. The commercial loan portfolio also includes consumer loans because the Company’s small portfolio of consumer loans is largely comprised of accommodation loans to individuals associated with its commercial clients.
Energy. The energy loan portfolio is primarily comprised of loans to exploration and production companies that are generally collateralized with proven reserves based on appropriate valuation standards that take into account the risk of oil and gas price volatility. The majority of this portfolio is first lien, senior secured, reserve-based lending, which the Company believes is the lowest-risk form of energy lending. Energy loans are impacted by commodity price volatility, as well as changes in consumer and business demand.
Mortgage finance. Mortgage finance loans relate to mortgage warehouse lending operations in which the Company purchases mortgage loan ownership interests from unaffiliated mortgage originators that are generally held for a period of less than 30 days and more typically 10-20 days before they are sold to an approved investor. 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 housing demand and tend to peak at the end of each month. Mortgage finance loans are consistently underwritten based on standards established by the approved investors. Market conditions or events of default by an investor or originator could require that the Company repurchases the remaining interests in the mortgage loans and hold them beyond the expected 10-20 days.
Real estate. The real estate portfolio is comprised of the following types of loans:
Commercial real estate (“CRE”). The CRE portfolio is comprised of both construction/development financing and limited term financing provided to professional real estate developers and owners/managers of commercial real estate
projects and properties who have a demonstrated record of past success with similar properties. Collateral properties include office buildings, warehouse/distribution buildings, shopping centers, hotels/motels, senior living, apartment buildings and residential and commercial tract development. The primary source of repayment on these loans is expected to come from the sale, permanent financing or lease of the real property collateral. CRE loans are impacted by fluctuations in collateral values, as well as the ability of the borrower to obtain permanent financing.
Residential homebuilder finance (“RBF”). The RBF portfolio is comprised of loans made to residential builders and developers. Loans to residential builders are typically in the form of uncommitted guidance lines and are for the purpose of developing lots into single-family homes, while loans to developers are typically in the form of borrowing base lines extended for the purpose of acquiring and developing raw land into lots that can be further sold to home builders. RBF loans, if not structured and monitored correctly, can be impacted by volatility in consumer demand, as well as fluctuation in housing prices.
Secured by 1-4 family. This category of loans includes both first and second lien loans made for the purpose of purchasing or constructing 1-4 family residential dwellings, as well as home equity revolving lines of credit and loans to purchase lots for future construction of 1-4 family residential dwellings.
Other. The “other” category is primarily comprised of real estate loans originated through a Small Business Administration (SBA) program where repayment is partially guaranteed by the SBA, as well as other loans secured by real estate where the primary source of repayment is not expected to come from the sale or lease of the real property collateral.
The Company has several pass credit grades that are assigned to loans based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to watch credits which have all the characteristics of an acceptable credit risk but warrant more than the normal level of monitoring. Within the criticized/classified credit grades are special mention, substandard and doubtful. Special mention loans are those that are currently protected by the sound worth and paying capacity of the borrower, but that are potentially weak and constitute an additional credit risk. These loans have the potential to deteriorate to a substandard grade due to the existence of financial or administrative deficiencies. Substandard loans have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Some substandard loans are inadequately protected by the sound worth and paying capacity of the borrower and of the collateral pledged and may be considered impaired. Substandard loans can be accruing or can be on non-accrual depending on the circumstances of the individual loans. Loans classified as doubtful have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection in full highly questionable and improbable. The possibility of loss is extremely high. All doubtful loans are on non-accrual.
The methodology used in the estimation of the allowance, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and forecasted economic conditions. Changes are reflected in the pool-basis allowance and in reserves assigned on an individual basis as the collectability of classified loans is evaluated with new information. As the Company’s portfolio has matured, historical loss ratios have been closely monitored. The review of the appropriateness of the allowance is performed by executive management and presented to the audit and risk committees of the board of directors for their review. The committees report to the board as part of the board's quarterly review of the Company’s consolidated financial statements.
When management determines that foreclosure is probable, and for certain collateral-dependent loans where foreclosure is not considered probable, expected credit losses are based on the estimated fair value of the collateral adjusted for selling costs, when appropriate. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless either of the following applies: management has a reasonable expectation that a loan will be restructured or the extension or renewal options are included in the borrower contract and are not unconditionally cancellable.
The Company does not measure an allowance for credit losses on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when loans are placed on non-accrual status as discussed above.
Other Real Estate Owned
Other real estate owned (“OREO”), which is included in other assets on the consolidated balance sheet, consists of real estate that has been foreclosed. When foreclosure occurs, the acquired asset is recorded at fair value less selling costs, generally based on appraised value, which may result in partial charge-off of the loan through a charge to the allowance for credit losses, if necessary. Subsequent write-downs required for declines in value are recorded through a valuation allowance, or taken directly
to the asset, and are recorded in other non-interest expense on the consolidated statements of income and other comprehensive income. Gains or losses on sale of OREO are recorded in other non-interest income on the consolidated statements of income and other comprehensive income.
Goodwill and Other Intangible Assets, Net
Intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. The Company’s goodwill and intangible assets relate primarily to customer relationships purchased as part of business acquisitions. Intangible assets with definite useful lives are amortized over their estimated life. Goodwill and intangible assets are tested for impairment at least annually or whenever changes in circumstances indicate the carrying amount of the assets may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Premises and Equipment, Net
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Furniture and equipment is generally depreciated over three to five years, while leasehold improvements are generally depreciated over the term of their respective lease. Gains or losses on disposals of premises and equipment are included in other non-interest income on the consolidated statements of income and other comprehensive income.
Software
Costs incurred in connection with development or purchase of internal use software and cloud computing arrangements, including in-substance software licenses, are capitalized. Amortization is computed on a straight-line basis over the estimated useful life of the asset, which generally ranges from one to five years. Capitalized software is included in other assets on the consolidated balance sheets.
Financial Instruments with Off-Balance Sheet Risk
The Company has undertaken certain guarantee obligations in the ordinary course of business which include liabilities with off-balance sheet risk. The Company considers the following arrangements to be guarantees: commitments to extend credit, standby letters of credit and indemnification agreements included within third party contractual arrangements.
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit that involve varying degrees of credit risk in excess of the amount recognized on the consolidated balance sheets. The Company’s exposure to credit loss in the event of non-performance by the other party to these financial instruments is represented by the contractual amount of the instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the borrower.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. Commitments to extend credit do not include mortgage finance arrangements with mortgage loan originators through the mortgage warehouse lending division, which are established as uncommitted “guidance” purchase and sale facilities under which the mortgage originator has no obligation to offer and the Company has no obligation to purchase interests in the mortgage loans subject to the arrangements.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
In conjunction with the sale and securitization of loans held for sale and their related servicing rights, the Company may be exposed to liability resulting from recourse, repurchase and make-whole agreements. If it is determined subsequent to the sale of a loan or its related servicing rights that a breach of the representations or warranties made in the applicable sale agreement has occurred, which may include guarantees that prepayments will not occur within a specified and customary time frame, the Company may have an obligation to either (a) repurchase the loan for the unpaid principal balance, accrued interest and related advances, (b) indemnify the purchaser against any loss it suffers or (c) make the purchaser whole for the economic benefits of the loan and its related servicing rights. The repurchase, indemnification and make-whole obligations vary based upon the terms of the applicable agreements, the nature of the asserted breach and the status of the mortgage loan at the time a claim is made. The Company establishes reserves for estimated losses of this nature inherent in the sale of mortgage loans by estimating the
losses inherent in the population of all loans sold based on trends in claims and actual loss severities experienced. The reserve will include accruals for probable contingent losses in addition to those identified in the pipeline of claims received.
Leases
Right of use (“ROU”) assets represent the Company’s right to use an underlying asset during the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Lease agreements may contain extension options which typically provide for an extension of a lease term at the then fair market rental rates. As these extension options are not generally considered reasonably certain of exercise, they are not included in the lease term. Operating leases relate primarily to real estate used for corporate offices and bank branches and finance leases relate primarily to equipment. The Company does not separate lease and non-lease components for real estate leases.
For those leases with a term greater than one year, ROU assets and lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the incremental borrowing rate on the effective date of the lease, which is based on the Company’s collateralized borrowing capabilities over a similar term as the related lease payments. ROU assets are further adjusted for lease incentives.
Operating leases in which the Company is the lessee are recorded as operating lease ROU assets and operating lease liabilities, and are included in other assets and other liabilities, respectively, on the consolidated balance sheets. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term and recorded in net occupancy expense on the consolidated statements of income and other comprehensive income.
Finance leases in which the Company is the lessee are recorded as finance lease ROU assets and finance lease liabilities and are included in premises and equipment, net, and other liabilities, respectively, on the consolidated balance sheets. Finance lease expense is comprised of amortization of the ROU asset, which is recognized on a straight-line basis over the lease term and recorded in net occupancy expense on the consolidated statements of income and other comprehensive income, and the implicit interest accreted on the operating lease liability, which is recognized using the effective interest method over the lease term and recorded in interest expense on the consolidated statements of income and other comprehensive income.
Revenue Recognition
ASC 606, Revenue from Contracts with Customers (“ASC 606”), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.
The majority of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as loans, letters of credit, derivatives and investment securities, as well as revenue related to mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within the Company’s disclosures. Descriptions of revenue-generating activities that are within the scope of ASC 606, which are presented in the income statements as components of non-interest income are as follows:
•Service charges on deposit accounts - these represent general service fees for monthly account maintenance and activity- or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when the performance obligation is completed, which is generally monthly for account maintenance services or when a transaction has been completed (such as a stop payment). Payments for these activities are generally received at the time the performance obligations are satisfied.
•Wealth management and trust fee income - this represents monthly fees due from wealth management customers as consideration for managing the customers' assets. Wealth management and trust services include custody of assets, investment management, escrow services, fees for trust services and similar fiduciary activities. These fees are typically paid on a quarterly basis and recognized ratably throughout the quarter as the performance obligation is satisfied each month.
•Brokered loan fees - these represent fees for the administration and funding of purchased mortgage loan interests as well as facility renewal and application fees received from mortgage originator customers in the mortgage warehouse lending business. Also included are fees received from independent correspondent mortgage lenders as consideration for the purchase of individual residential mortgage loans through the Company’s MCA business. Revenue related to the mortgage warehouse lending business is recognized when the related loan interest is disposed (i.e., through sale or payoff) or upon receipt of the facility renewal or application. Revenue related to the MCA business is recognized at the time a loan is purchased.
•Investment banking and trading income - these include fees for merger, acquisition, divestiture and restructuring advisory services, fees for securities underwriting activities, loan syndication fees, and swap fees. Advisory fees are generally earned as performance obligations of the advisory service are satisfied. Underwriting fees are generally recognized upon execution of the client’s issuance of debt or equity instruments. Loan syndication fees are generally recognized upon closing of a loan syndication transaction.
•Other non-interest income includes items such as letter of credit fees, bank owned life insurance income, dividends on FHLB and FRB stock and other general operating income, none of which are subject to the requirements of ASC 606. Also included in other-non-interest income are interchange fees earned when commercial credit card clients process transactions through card networks. The Company’s performance obligations are generally complete when the transactions generating the fees are processed.
Stock-based Compensation
The Company accounts for all stock-based compensation transactions in accordance with ASC 718, Compensation — Stock Compensation (“ASC 718”), which requires that stock compensation transactions be recognized as compensation expense on the consolidated statements of income and other comprehensive income based on their fair values on the measurement date, which is generally the date of the grant.
Income Taxes
The Company and its subsidiary file a consolidated federal income tax return. The Company utilizes the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based upon the difference between the values of the assets and liabilities as reflected in the financial statements and their related tax basis using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. As changes in tax law or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance is provided against deferred tax assets unless it is more likely than not that such deferred tax assets will be realized. Deferred tax assets, net, are included in other assets on the consolidated balance sheets.
The tax effect of unrealized gains and losses on available-for-sale debt securities is recorded to other comprehensive income and is not a component of income tax expense/(benefit).
GAAP does not permit the adjustment of tax amounts in AOCI for changes in tax rates; as a result the effects become “stranded” in AOCI. Stranded tax effects caused by the revaluation of deferred taxes are reclassified from AOCI to retained earnings in accordance with ASU 2018-02 “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”
Unrecognized tax benefits for the uncertain portion of recorded tax benefits and related interest may result from the application of complex tax laws, rules, regulations and interpretations. Unrecognized tax benefits, as well as estimated penalties and interest, are assessed quarterly and may be adjusted through current income tax expense in future periods based on changing facts and circumstances, completion of examinations by taxing authorities or expiration of a statute of limitations.
Fair Values of Financial Instruments
ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. The standard describes three levels of inputs that may be used to measure fair value as provided below.
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair values requires significant management judgment or estimation.
Also required are disclosures of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The disclosure of fair value information about financial instruments does not and is not intended to represent the fair value of the Company.
The following are descriptions of the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents, Variable Rate Loans, Variable Rate Short-term Borrowings and Variable Rate Long-term Debt
The fair value of these financial instruments approximates carrying value.
Investment Securities
The fair value of the Company’s U.S. Treasury, U.S. government agency and residential mortgage-backed securities are based on prices obtained from independent pricing services. The Company’s U.S. Treasury securities are valued based on quoted market prices for identical securities in an active market and are classified as Level 1 assets in the fair value hierarchy, while the Company’s U.S. government agency and residential mortgage-backed securities are valued based on quoted market prices for the same or similar securities and are characterized as Level 2 assets in the fair value hierarchy. Management obtains documentation from the primary independent pricing service regarding the processes and controls applicable to pricing investment securities, and on a quarterly basis independently verify the prices that were received from the service provider using two additional independent pricing sources. Tax-exempt asset-backed securities and CRT securities are valued using a discounted cash flow model, which utilizes Level 3 inputs, and are classified as Level 3 assets in the fair value hierarchy.
Within the investment securities portfolio, the Company holds equity securities that consist of investments that qualify for consideration under the regulations implementing the Community Reinvestment Act and investments related to non-qualified deferred compensation plan. Some of these equity securities are valued using quoted market prices for identical equity securities in an active market and are classified as Level 1 assets in the fair value hierarchy and others are traded in less active markets and are classified as Level 2 assets in the fair value hierarchy.
Loans Held for Sale
The fair value for loans held for sale is derived from quoted market prices for similar loans, in which case they are characterized as Level 2 assets in the fair value hierarchy, or is derived from third party pricing models, in which case they are characterized as Level 3 assets in the fair value hierarchy.
Derivative Assets and Liabilities
The estimated fair value of derivative assets and liabilities is obtained from independent pricing services based on quoted market prices for similar derivative contracts and these financial instruments are characterized as Level 2 assets and liabilities in the fair value hierarchy. On a quarterly basis, management independently verifies the fair value using an additional independent pricing source.
Derivative Financial Instruments
All contracts that satisfy the definition of a derivative are recorded at fair value in other assets and other liabilities on the consolidated balance sheets, and the related cash flows are recorded in the operating activities section of the consolidated statement of cash flows. The Company records the derivatives on a net basis when a right of offset exists with a single counterparty that is subject to a legally enforceable master netting agreement.
Non-Hedging Derivatives
The Company enters into an interest rate swap, cap and/or floor derivative instruments with customers while at the same time entering into offsetting interest rate swap, cap and/or floor derivative instruments with another financial institution. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the customer to effectively convert a variable rate loan to a fixed rate. Because the Company acts as an intermediary for its customers, changes in the fair value of the underlying derivative instruments substantially offset each other and do not have a material impact on the Company’s results of operations.
The Company offers forward contract derivative instruments, such as to-be-announced U.S. agency residential mortgage-back securities, to its mortgage banking customers to allow the customers to mitigate exposure to market risks associated with the purchase or origination of mortgage loans. To mitigate the Company’s exposure to these forward contracts, the Company will enter offsetting forward contracts, most typically with a financial institution. Any changes in fair value to the forward contract derivative instruments are recorded in investment banking and trading income on the consolidated statements of income and other comprehensive income.
The Company also offers foreign currency forward contracts derivative instruments in which the Company enters into a contract with a customer to buy or sell a foreign currency at a future date for a specified price while at the same time entering into an offsetting contract with a financial institution to buy or sell the same currency at the same future date for a specified
price. The transaction allows the customer to manage their exposure to foreign currency exchange rate fluctuations. Because the Company acts as an intermediary for its customers, changes in the fair value of the underlying derivative instruments substantially offset each other and do not have a material impact on the Company’s results of operations.
Prior to the transition of its MCA program to a third party in 2021, the Company entered into loan purchase commitment contracts with mortgage originators to purchase residential mortgage loans at a future date, as well as forward sales commitment contracts to sell residential mortgage loans or to deliver mortgage-backed securities at a future date. The objective of these transactions was to mitigate the Company’s exposure to interest rate risk associated with the purchase of mortgage loans held for sale. Any changes in fair value were recorded in gain/(loss) on sale of loans held for sale on the consolidated statements of income and other comprehensive income.
Prior to the sale of its portfolio of MSRs to a third party in 2021, the Company entered into interest rate derivative contracts, primarily interest rate swap futures and forward sale commitments of mortgage-backed securities, in order to mitigate exposure to potential impairment losses from adverse changes in the fair value of the Company’s residential MSR portfolio. These derivative instruments were considered highly liquid and could be settled daily, which allowed the Company to dynamically manage its exposure. The derivative instruments were used to economically hedge the fair value of the residential MSR portfolio impacted by changes in anticipated prepayments resulting from mortgage interest rate movements and were classified as other assets and other liabilities on the consolidated balance sheets. Any unrealized or realized gains/(losses) related to derivatives economically hedging the residential MSR portfolio were recognized in servicing-related expenses along with changes to the MSR valuation allowance.
Derivatives Designated as Hedges
The Company enters into interest rate derivative contracts that are designated as qualifying cash flow hedges to hedge the exposure to variability in expected future cash flows attributable to changes in a contractually specified interest rate. To qualify for hedge accounting, a formal assessment is prepared to determine whether the hedging relationship, both at inception and on an ongoing basis, is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the hedge if a cash flow hedge. At inception a statistical regression analysis is prepared to determine hedge effectiveness. At each reporting period thereafter, a statistical regression or qualitative analysis is performed. If it is determined that hedge effectiveness has not been or will not continue to be highly effective, then hedge accounting ceases and any gain or loss in AOCI is recognized in earnings immediately. The cash flow hedges are recorded at fair value in other assets and other liabilities on the consolidated balance sheets with changes in fair value recorded in AOCI, net of tax. Amounts recorded to AOCI are reclassified into earnings in the same period in which the hedged asset or liability affects earnings and are presented in the same income statement line item as the earnings effect of the hedged asset or liability.
Segment Reporting
The Company has determined that all of its banking divisions and subsidiaries meet the aggregation criteria of ASC 280, Segment Reporting, as its current operating model is structured whereby banking divisions and subsidiaries serve a similar base of primarily commercial clients utilizing a company-wide offering of similar products and services managed through similar processes and platforms that are collectively reviewed by the chief operating decision maker.
(2) Earnings Per Share
The following table presents the computation of basic and diluted earnings per share:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Year ended December 31, |
(in thousands except share and per share data) | | | | | | | | | 2022 | | 2021 | | 2020 |
Numerator: | | | | | | | | | | | | | |
Net income | | | | | | | | | $ | 332,478 | | | $ | 253,939 | | | $ | 66,289 | |
Preferred stock dividends | | | | | | | | | 17,250 | | | 18,721 | | | 9,750 | |
Net income available to common stockholders | | | | | | | | | $ | 315,228 | | | $ | 235,218 | | | $ | 56,539 | |
Denominator: | | | | | | | | | | | | | |
Denominator for basic earnings per common share—weighted average common shares | | | | | | | | | 50,457,746 | | | 50,580,660 | | | 50,430,326 | |
Effect of dilutive outstanding stock-settled awards | | | | | | | | | 588,996 | | | 560,314 | | | 152,653 | |
Denominator for dilutive earnings per common share—weighted average diluted common shares | | | | | | | | | 51,046,742 | | | 51,140,974 | | | 50,582,979 | |
Basic earnings per common share | | | | | | | | | $ | 6.25 | | | $ | 4.65 | | | $ | 1.12 | |
Diluted earnings per common share | | | | | | | | | $ | 6.18 | | | $ | 4.60 | | | $ | 1.12 | |
Anti-dilutive outstanding stock-settled awards | | | | | | | | | 311,226 | | 93,945 | | 453,024 |
(3) Investment Securities
The following is a summary of the Company’s investment securities:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Amortized Cost(1) | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
December 31, 2022 | | | | | | | |
Available-for-sale debt securities: | | | | | | | |
U.S. Treasury securities | $ | 698,769 | | | $ | — | | | $ | (28,187) | | | $ | 670,582 | |
U.S. government agency securities | 125,000 | | | — | | | (22,846) | | | 102,154 | |
Residential mortgage-backed securities | 2,162,364 | | | 3 | | | (331,320) | | | 1,831,047 | |
| | | | | | | |
Tax-exempt asset-backed securities | — | | | — | | | — | | | — | |
CRT securities | 14,713 | | | — | | | (2,852) | | | 11,861 | |
Total available-for-sale debt securities | 3,000,846 | | | 3 | | | (385,205) | | | 2,615,644 | |
Held-to-maturity debt securities: | | | | | | | |
Residential mortgage-backed securities | 935,514 | | | — | | | (118,600) | | | 816,914 | |
Total held-to-maturity debt securities | 935,514 | | | — | | | (118,600) | | | 816,914 | |
Equity securities | | | | | | | 33,956 | |
Total investment securities(2) | | | | | | | $ | 3,585,114 | |
December 31, 2021 | | | | | | | |
Available-for-sale debt securities: | | | | | | | |
U.S. government agency securities | $ | 125,000 | | | $ | — | | | $ | (4,056) | | | $ | 120,944 | |
Residential mortgage-backed securities | 3,288,261 | | | 156 | | | (63,039) | | | 3,225,378 | |
| | | | | | | |
Tax-exempt asset-backed securities | 170,626 | | | 9,407 | | | — | | | 180,033 | |
CRT securities | 14,713 | | | — | | | (2,867) | | | 11,846 | |
Total available-for-sale debt securities | 3,598,600 | | | 9,563 | | | (69,962) | | | 3,538,201 | |
Equity securities | | | | | | | 45,607 | |
Total investment securities(2) | | | | | | | $ | 3,583,808 | |
(1) Excludes accrued interest receivable of $6.6 million and $6.6 million at December 31, 2022 and December 31, 2021, respectively, related to available-for-sale debt securities and $1.5 million at December 31, 2022 related to held-to-maturity debt securities that is recorded in accrued interest receivable and other assets on the consolidated balance sheets.
(2) Includes available-for-sale debt securities and equity securities at estimated fair value and held-to-maturity debt securities at amortized cost.
Debt Securities
In the first quarter of 2022, the Company transferred $1.0 billion of available-for-sale debt securities to held-to-maturity at fair value. The transfer was the result of deliberate actions taken to execute on asset-liability management strategies in response to rising interest rates. Management determined that it has both the positive intent and ability to hold these securities to maturity. There were no gains or losses recognized as a result of this transfer.
In the second quarter of 2022, the Company’s tax-exempt asset-backed securities were redeemed at par. The outstanding certificates were cancelled and related trusts were terminated. Unrealized gains and losses previously recorded, net of tax, in AOCI were reversed and no additional gains or losses were recognized as a result of the redemption.
The amortized cost and estimated fair value as of December 31, 2022, excluding accrued interest receivable, of available-for-sale and held-to-maturity debt securities are presented below by contractual maturity. Actual maturities may differ from contractual maturities of mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
| | | | | | | | | | | | | | | | | | | | | | | |
| Available-for-sale | | Held-to-maturity |
(in thousands) | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| | | | | | | |
Due within one year | $ | 14 | | | $ | 14 | | | $ | — | | | $ | — | |
Due after one year through five years | 698,769 | | | 670,582 | | | — | | | — | |
Due after five years through ten years | 156,551 | | | 128,026 | | | — | | | — | |
Due after ten years | 2,145,512 | | | 1,817,022 | | | 935,514 | | | 816,914 | |
Total | $ | 3,000,846 | | | $ | 2,615,644 | | | $ | 935,514 | | | $ | 816,914 | |
The following table discloses the Company’s available-for-sale debt securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less Than 12 Months | | 12 Months or Longer | | Total |
(in thousands) | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
December 31, 2022 | | | | | | | | | | | |
U.S. Treasury securities | $ | 670,582 | | | $ | (28,187) | | | $ | — | | | $ | — | | | $ | 670,582 | | | $ | (28,187) | |
U.S. government agency securities | — | | | — | | | 102,154 | | | (22,846) | | | 102,154 | | | (22,846) | |
Residential mortgage-backed securities | 261,502 | | | (9,481) | | | 1,569,107 | | | (321,839) | | | 1,830,609 | | | (331,320) | |
CRT securities | — | | | — | | | 11,861 | | | (2,852) | | | 11,861 | | | (2,852) | |
Total | $ | 932,084 | | | $ | (37,668) | | | $ | 1,683,122 | | | $ | (347,537) | | | $ | 2,615,206 | | | $ | (385,205) | |
December 31, 2021 | | | | | | | | | | | |
U.S. government agency securities | $ | 24,085 | | | $ | (915) | | | $ | 96,859 | | | $ | (3,141) | | | $ | 120,944 | | | $ | (4,056) | |
Residential mortgage-backed securities | 2,871,052 | | | (50,721) | | | 303,491 | | | (12,318) | | | 3,174,543 | | | (63,039) | |
CRT securities | — | | | — | | | 11,846 | | | (2,867) | | | 11,846 | | | (2,867) | |
Total | $ | 2,895,137 | | | $ | (51,636) | | | $ | 412,196 | | | $ | (18,326) | | | $ | 3,307,333 | | | $ | (69,962) | |
At December 31, 2022, the Company had 103 available-for-sale debt securities in an unrealized loss position, comprised of 13 U.S. Treasury securities, five U.S. government agency securities, 83 residential mortgage-backed securities and two CRT securities. The unrealized losses on the available-for-sale debt securities were the result of changes in market interest rates compared to the date the securities were acquired rather than the credit quality of the issuers or underlying loans. The Company does not intend to sell and it is not more likely than not that the Company will be required to sell these available-for-sale debt securities before recovery of the amortized cost of such securities in an unrealized loss position and has, therefore recorded the unrealized losses related to this portfolio in AOCI. Held-to-maturity securities consist of government guaranteed securities for which no loss is expected. At December 31, 2022 and December 31, 2021, no allowance for credit losses was established for available-for-sale or held-to-maturity debt securities.
Debt securities with carrying values of approximately $16.1 million and $1.4 million were pledged to secure certain customer repurchase agreements and deposits, respectively, at December 31, 2022. The comparative amounts at December 31, 2021 were $22.0 million and $2.0 million, respectively.
Equity Securities
Equity securities consist of investments that qualify for consideration under the regulations implementing the Community Reinvestment Act and investments related to the Company’s non-qualified deferred compensation plan. The following is a summary of unrealized and realized gains/(losses) recognized on equity securities included in other non-interest income on the consolidated statements of income and other comprehensive income:
| | | | | | | | | | | | | | |
| | Year Ended December 31, 2022 |
(in thousands) | | 2022 | | 2021 |
Net gains/(losses) recognized during the period | $ | (7,876) | | | 2,277 | |
Less: Realized net gains/(losses) recognized on securities sold | | 714 | | | 1,065 | |
Unrealized net gains/(losses) recognized on securities still held | $ | (8,590) | | | 1,212 | |
(4) Loans and Allowance for Credit Losses on Loans
Loans are summarized by portfolio segment as follows:
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2022 | | 2021 |
Loans held for investment(1): | | | |
Commercial | $ | 8,902,948 | | | $ | 9,897,561 | |
Energy | 1,159,296 | | | 721,373 | |
Mortgage finance | 4,090,033 | | | 7,475,497 | |
Real estate | 5,198,643 | | | 4,777,530 | |
| | | |
| | | |
| | | |
Gross loans held for investment | 19,350,920 | | | 22,871,961 | |
Unearned income (net of direct origination costs) | (63,580) | | | (65,007) | |
Total loans held for investment | 19,287,340 | | | 22,806,954 | |
Allowance for credit losses on loans | (253,469) | | | (211,866) | |
Total loans held for investment, net | $ | 19,033,871 | | | $ | 22,595,088 | |
Loans held for sale: | | | |
Mortgage loans, at fair value | $ | — | | | $ | 8,123 | |
Non-mortgage loans, at lower of cost or fair value | 36,357 | | | — | |
Total loans held for sale | $ | 36,357 | | | $ | 8,123 | |
(1) Excludes accrued interest receivable of $100.4 million and $50.9 million at December 31, 2022 and December 31, 2021, respectively, that is recorded in accrued interest receivable and other assets on the consolidated balance sheets.
The following tables summarize gross loans held for investment by year of origination and internally assigned credit grades:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 and prior | | Revolving lines of credit | | Revolving lines of credit converted to term loans | | Total |
December 31, 2022 | | | | | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | | | | |
(1-7) Pass | | $ | 1,903,529 | | | $ | 671,459 | | | $ | 244,568 | | | $ | 255,444 | | | $ | 325,201 | | | $ | 244,373 | | | $ | 4,877,753 | | | $ | 21,063 | | | $ | 8,543,390 | |
(8) Special mention | | 9,141 | | | 7,740 | | | 3,628 | | | 37,794 | | | 11,998 | | | 4,975 | | | 95,310 | | | 2,250 | | | 172,836 | |
(9) Substandard - accruing | | 18,670 | | | 71,147 | | | 514 | | | 1,666 | | | 14,933 | | | 6,305 | | | 30,070 | | | — | | | 143,305 | |
(9+) Non-accrual | | 376 | | | 512 | | | 751 | | | 30,425 | | | 6,226 | | | 2,520 | | | 2,607 | | | — | | | 43,417 | |
Total commercial | | $ | 1,931,716 | | | $ | 750,858 | | | $ | 249,461 | | | $ | 325,329 | | | $ | 358,358 | | | $ | 258,173 | | | $ | 5,005,740 | | | $ | 23,313 | | | $ | 8,902,948 | |
Energy | | | | | | | | | | | | | | | | | | |
(1-7) Pass | | $ | 124,691 | | | $ | 12,517 | | | $ | — | | | $ | — | | | $ | — | | | $ | 3,317 | | | $ | 1,007,776 | | | $ | — | | | $ | 1,148,301 | |
(8) Special mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
(9) Substandard - accruing | | — | | | — | | | — | | | — | | | — | | | — | | | 7,337 | | | — | | | 7,337 | |
(9+) Non-accrual | | — | | | — | | | — | | | — | | | — | | | — | | | 3,658 | | | — | | | 3,658 | |
Total energy | | $ | 124,691 | | | $ | 12,517 | | | $ | — | | | $ | — | | | $ | — | | | $ | 3,317 | | | $ | 1,018,771 | | | $ | — | | | $ | 1,159,296 | |
Mortgage finance | | | | | | | | | | | | | | | | | | |
(1-7) Pass | | $ | 30,485 | | | $ | 482,477 | | | $ | 197,045 | | | $ | 267,758 | | | $ | 464,753 | | | $ | 2,647,515 | | | $ | — | | | $ | — | | | $ | 4,090,033 | |
(8) Special mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
(9) Substandard - accruing | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
(9+) Non-accrual | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total mortgage finance | | $ | 30,485 | | | $ | 482,477 | | | $ | 197,045 | | | $ | 267,758 | | | $ | 464,753 | | | $ | 2,647,515 | | | $ | — | | | $ | — | | | $ | 4,090,033 | |
Real estate | | | | | | | | | | | | | | | | | | |
CRE | | | | | | | | | | | | | | | | | | |
(1-7) Pass | | $ | 1,085,254 | | | $ | 756,180 | | | $ | 563,341 | | | $ | 447,346 | | | $ | 183,634 | | | $ | 284,698 | | | $ | 97,337 | | | $ | 11,944 | | | $ | 3,429,734 | |
(8) Special mention | | 2,765 | | | 6,524 | | | 37,791 | | | 5,295 | | | 19,350 | | | 3,652 | | | — | | | — | | | 75,377 | |
(9) Substandard - accruing | | — | | | 17,850 | | | — | | | — | | | 11,458 | | | 17,698 | | | — | | | — | | | 47,006 | |
(9+) Non-accrual | | — | | | — | | | — | | | — | | | — | | | 182 | | | — | | | — | | | 182 | |
RBF | | | | | | | | | | | | | | | | | | |
(1-7) Pass | | 94,066 | | | 70,951 | | | 12,161 | | | 6,106 | | | 2,655 | | | — | | | 326,164 | | | — | | | 512,103 | |
(8) Special mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
(9) Substandard - accruing | | 7,840 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 7,840 | |
(9+) Non-accrual | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Other | | | | | | | | | | | | | | | | | | |
(1-7) Pass | | 182,840 | | | 131,538 | | | 94,611 | | | 67,518 | | | 76,951 | | | 163,838 | | | 42,333 | | | 31,293 | | | 790,922 | |
(8) Special mention | | 729 | | | — | | | 8,721 | | | — | | | — | | | 386 | | | — | | | — | | | 9,836 | |
(9) Substandard - accruing | | — | | | — | | | — | | | 247 | | | — | | | 1,035 | | | — | | | — | | | 1,282 | |
(9+) Non-accrual | | — | | | — | | | 1,081 | | | — | | | — | | | — | | | — | | | — | | | 1,081 | |
Secured by 1-4 family | | | | | | | | | | | | | | | | | | |
(1-7) Pass | | 64,050 | | | 89,967 | | | 53,003 | | | 24,314 | | | 16,953 | | | 70,082 | | | 4,911 | | | — | | | 323,280 | |
(8) Special mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
(9) Substandard - accruing | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
(9+) Non-accrual | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total real estate | | $ | 1,437,544 | | | $ | 1,073,010 | | | $ | 770,709 | | | $ | 550,826 | | | $ | 311,001 | | | $ | 541,571 | | | $ | 470,745 | | | $ | 43,237 | | | $ | 5,198,643 | |
Total | | $ | 3,524,436 | | | $ | 2,318,862 | | | $ | 1,217,215 | | | $ | 1,143,913 | | | $ | 1,134,112 | | | $ | 3,450,576 | | | $ | 6,495,256 | | | $ | 66,550 | | | $ | 19,350,920 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 and prior | | Revolving lines of credit | | Revolving lines of credit converted to term loans | | Total |
December 31, 2021 | | | | | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | | | | |
(1-7) Pass | | $ | 1,133,013 | | | $ | 3,157,150 | | | $ | 546,520 | | | $ | 319,246 | | | $ | 200,478 | | | $ | 289,795 | | | $ | 3,960,706 | | | $ | 41,377 | | | $ | 9,648,285 | |
(8) Special mention | | 2,650 | | | 5,277 | | | 23,129 | | | 8,697 | | | 39 | | | 5,322 | | | 5,120 | | | 7,883 | | | 58,117 | |
(9) Substandard - accruing | | — | | | 7,705 | | | 102,619 | | | 25,010 | | | 6,202 | | | 6,962 | | | 14,742 | | | 2,007 | | | 165,247 | |
(9+) Non-accrual | | 736 | | | 1,191 | | | 49 | | | 12,955 | | | 1,166 | | | 6,196 | | | 3,619 | | | — | | | 25,912 | |
Total commercial | | $ | 1,136,399 | | | $ | 3,171,323 | | | $ | 672,317 | | | $ | 365,908 | | | $ | 207,885 | | | $ | 308,275 | | | $ | 3,984,187 | | | $ | 51,267 | | | $ | 9,897,561 | |
Energy | | | | | | | | | | | | | | | | | | |
(1-7) Pass | | $ | 71,750 | | | $ | — | | | $ | — | | | $ | 3 | | | $ | — | | | $ | 7,188 | | | $ | 577,988 | | | $ | — | | | $ | 656,929 | |
(8) Special mention | | — | | | — | | | — | | | — | | | — | | | — | | | 27,421 | | | — | | | 27,421 | |
(9) Substandard - accruing | | — | | | — | | | — | | | — | | | — | | | 8,643 | | | — | | | — | | | 8,643 | |
(9+) Non-accrual | | — | | | — | | | — | | | — | | | — | | | — | | | 28,380 | | | — | | | 28,380 | |
Total energy | | $ | 71,750 | | | $ | — | | | $ | — | | | $ | 3 | | | $ | — | | | $ | 15,831 | | | $ | 633,789 | | | $ | — | | | $ | 721,373 | |
Mortgage finance | | | | | | | | | | | | | | | | | | |
(1-7) Pass | | $ | 289,042 | | | $ | 590,616 | | | $ | 656,445 | | | $ | 754,507 | | | $ | 332,001 | | | $ | 4,852,886 | | | $ | — | | | $ | — | | | $ | 7,475,497 | |
(8) Special mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
(9) Substandard - accruing | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
(9+) Non-accrual | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total mortgage finance | | $ | 289,042 | | | $ | 590,616 | | | $ | 656,445 | | | $ | 754,507 | | | $ | 332,001 | | | $ | 4,852,886 | | | $ | — | | | $ | — | | | $ | 7,475,497 | |
Real estate | | | | | | | | | | | | | | | | | | |
CRE | | | | | | | | | | | | | | | | | | |
(1-7) Pass | | $ | 497,462 | | | $ | 576,344 | | | $ | 600,005 | | | $ | 294,005 | | | $ | 155,252 | | | $ | 451,042 | | | $ | 73,988 | | | $ | 25,970 | | | $ | 2,674,068 | |
(8) Special mention | | — | | | — | | | 291 | | | 8,827 | | | 20,089 | | | 26,344 | | | — | | | — | | | 55,551 | |
(9) Substandard - accruing | | 17,850 | | | — | | | — | | | 40,900 | | | 37,393 | | | 38,188 | | | — | | | 2,308 | | | 136,639 | |
(9+) Non-accrual | | — | | | — | | | — | | | — | | | — | | | 198 | | | — | | | — | | | 198 | |
RBF | | | | | | | | | | | | | | | | | | |
(1-7) Pass | | 155,595 | | | 44,362 | | | 9,693 | | | 8,565 | | | — | | | 12,732 | | | 460,888 | | | — | | | 691,835 | |
(8) Special mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
(9) Substandard - accruing | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
(9+) Non-accrual | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Other | | | | | | | | | | | | | | | | | | |
(1-7) Pass | | 166,202 | | | 148,811 | | | 119,017 | | | 106,343 | | | 61,723 | | | 139,723 | | | 47,653 | | | 29,595 | | | 819,067 | |
(8) Special mention | | — | | | 7,365 | | | — | | | — | | | 845 | | | 4,982 | | | — | | | — | | | 13,192 | |
(9) Substandard - accruing | | — | | | 6,424 | | | — | | | — | | | 16,922 | | | 20,184 | | | — | | | — | | | 43,530 | |
(9+) Non-accrual | | — | | | — | | | — | | | — | | | 2,641 | | | 1,450 | | | — | | | 13,741 | | | 17,832 | |
Secured by 1-4 family | | | | | | | | | | | | | | | | | | |
(1-7) Pass | | 96,899 | | | 60,659 | | | 40,586 | | | 22,976 | | | 31,826 | | | 65,910 | | | 4,535 | | | — | | | 323,391 | |
(8) Special mention | | — | | | 553 | | | — | | | — | | | — | | | 291 | | | — | | | — | | | 844 | |
(9) Substandard - accruing | | — | | | — | | | — | | | — | | | — | | | 1,203 | | | — | | | — | | | 1,203 | |
(9+) Non-accrual | | — | | | — | | | — | | | — | | | — | | | 180 | | | — | | | — | | | 180 | |
Total real estate | | $ | 934,008 | | | $ | 844,518 | | | $ | 769,592 | | | $ | 481,616 | | | $ | 326,691 | | | $ | 762,427 | | | $ | 587,064 | | | $ | 71,614 | | | $ | 4,777,530 | |
Total | | $ | 2,431,199 | | | $ | 4,606,457 | | | $ | 2,098,354 | | | $ | 1,602,034 | | | $ | 866,577 | | | $ | 5,939,419 | | | $ | 5,205,040 | | | $ | 122,881 | | | $ | 22,871,961 | |
The following table details activity in the allowance for credit losses on loans. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
| | | | | | | | | | | | | | | | | | |
(in thousands) | Commercial | Energy | Mortgage Finance | Real Estate | | Total |
Year Ended December 31, 2022 | | | | | | |
Beginning balance | $ | 102,202 | | $ | 52,568 | | $ | 6,083 | | $ | 51,013 | | | $ | 211,866 | |
| | | | | | |
Provision for credit losses on loans | 51,571 | | (981) | | 4,662 | | 6,220 | | | 61,472 | |
Charge-offs | 17,614 | | 5,605 | | — | | 350 | | | 23,569 | |
Recoveries | 682 | | 3,018 | | — | | — | | | 3,700 | |
Net charge-offs (recoveries) | 16,932 | | 2,587 | | — | | 350 | | | 19,869 | |
Ending balance | $ | 136,841 | | $ | 49,000 | | $ | 10,745 | | $ | 56,883 | | | $ | 253,469 | |
Year Ended December 31, 2021 | | | | | | |
Beginning balance | $ | 73,061 | | $ | 84,064 | | $ | 4,699 | | $ | 92,791 | | | $ | 254,615 | |
Provision for credit losses on loans | 36,733 | | (27,045) | | 1,384 | | (40,903) | | | (29,831) | |
Charge-offs | 11,987 | | 6,418 | | — | | 1,192 | | | 19,597 | |
Recoveries | 4,395 | | 1,967 | | — | | 317 | | | 6,679 | |
Net charge-offs (recoveries) | 7,592 | | 4,451 | | — | | 875 | | | 12,918 | |
Ending balance | $ | 102,202 | | $ | 52,568 | | $ | 6,083 | | $ | 51,013 | | | $ | 211,866 | |
The Company recorded a $61.5 million provision for credit losses for the year ended December 31, 2022, compared to a $29.8 million negative provision for the same period of 2021. The $61.5 million provision for credit losses resulted primarily from updated views on the downside risks to the economic forecast and an increase in net charge-offs during 2022. Net charge-offs for the year ended December 31, 2022 were $19.9 million, compared to $12.9 million during the same period of 2021. Criticized loans totaled $513.2 million at December 31, 2022 and $582.9 million at December 31, 2021.
A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. There were no loans that met these criteria at December 31, 2022.
The table below provides an age analysis of loans held for investment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due | | Total Past Due | | Non-accrual(2) | | Current | | Total | | Non-accrual With No Allowance |
December 31, 2022 | | | | | | | | | | | | | | | |
Commercial | $ | 6,714 | | | $ | 3,041 | | | $ | 131 | | | $ | 9,886 | | | $ | 43,417 | | | $ | 8,849,645 | | | $ | 8,902,948 | | | $ | 41,476 | |
Energy | — | | | — | | | — | | | — | | | 3,658 | | | 1,155,638 | | | 1,159,296 | | | 3,658 | |
Mortgage finance | — | | | — | | | — | | | — | | | — | | | 4,090,033 | | | 4,090,033 | | | — | |
Real estate | | | | | | | | | | | | | | | |
CRE | 440 | | | — | | | — | | | 440 | | | 182 | | | 3,551,677 | | | 3,552,299 | | | — | |
RBF | — | | | — | | | — | | | — | | | — | | | 519,943 | | | 519,943 | | | — | |
Other | 2,438 | | | — | | | — | | | 2,438 | | | 1,081 | | | 799,602 | | | 803,121 | | | — | |
Secured by 1-4 family | — | | | — | | | — | | | — | | | — | | | 323,280 | | | 323,280 | | | — | |
Total | $ | 9,592 | | | $ | 3,041 | | | $ | 131 | | | $ | 12,764 | | | $ | 48,338 | | | $ | 19,289,818 | | | $ | 19,350,920 | | | $ | 45,134 | |
(1)As of December 31, 2022 $2.2 million of non-accrual loans were earning interest income on a cash basis compared to none as of December 31, 2021. Additionally, $801,000 and $624,000 of interest income was recognized on non-accrual loans for the years ended December 31, 2022 and 2021, respectively. Accrued interest of $1.6 million and $1.2 million was reversed during the years ended December 31, 2022 and 2021, respectively.
As of December 31, 2022 and December 31, 2021, the Company did not have any loans considered restructured that were not on non-accrual. Of the non-accrual loans at December 31, 2022 and 2021, $531,000 and $19.4 million, respectively, met the criteria for restructured. These loans had no unfunded commitments at their respective balance sheet dates.
The following table details the recorded investment at December 31, 2022 of loans restructured during the year ended December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Extended Maturity | | Adjusted Payment Schedule | | Total |
(dollars in thousands) | | Number of Contracts | Balance at Period End | | Number of Contracts | Balance at Period End | | Number of Contracts | Balance at Period End |
Year Ended December 31, 2022 | | | | | | | | | |
Commercial | | — | | $ | — | | | 1 | | $ | 531 | | | 1 | | $ | 531 | |
| | | | | | | | | |
Total | | — | | — | | | 1 | | 531 | | | 1 | | 531 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
The Company did not have any loans that were restructured during the year ended December 31, 2021.
The restructuring of these loans did not have a significant impact on the allowance for credit losses at December 31, 2022 or 2021. As of December 31, 2022 and 2021, the Company did not have any loans that were restructured within the last 12 months that subsequently defaulted.
(5) Leases
The following table presents ROU assets and lease liabilities: | | | | | | | | | | | |
| Year Ended December 31, |
(in thousands) | 2022 | | 2021 |
| | | |
| | | |
| | | |
| | | |
ROU assets: | | | |
Finance leases | $ | 2,865 | | | $ | 259 | |
Operating leases | 79,889 | | | 55,330 | |
Total | $ | 82,754 | | | $ | 55,589 | |
Lease liabilities | | | |
Finance leases | $ | 2,877 | | | $ | 259 | |
Operating leases | 103,814 | | | 69,184 | |
Total | $ | 106,691 | | | $ | 69,443 | |
As of December 31, 2022, operating leases had remaining lease terms of generally 1 year to 17 years, while finance leases had remaining terms of generally 2 years.
The table below summarizes the Company’s net lease cost:
| | | | | | | | | | | |
| Year Ended December 31, |
(in thousands) | 2022 | | 2021 |
| | | |
| | | |
| | | |
| | | |
Finance lease cost: | | | |
Amortization of ROU assets | $ | 1,108 | | | $ | 32 | |
Interest on lease liabilities | 34 | | | 1 | |
Operating lease cost | 23,463 | | | 15,608 | |
Short-term lease cost | 19 | | | 19 | |
Variable lease cost | 5,122 | | | 4,747 | |
Sublease income | (18) | | | (107) | |
Net lease cost | $ | 29,728 | | | $ | 20,299 | |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from finance leases | $ | 34 | | | $ | 1 | |
Operating cash flows from operating leases | 21,910 | | | 17,666 | |
Financing cash flows from finance leases | 1,096 | | | 32 | |
| | | |
| | | |
ROU assets obtained in exchange for new finance leases | 3,714 | | | 291 | |
ROU assets obtained in exchange for new operating leases | 57,544 | | | 2,109 | |
The table below summarizes other information related to operating and finance leases:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Weighted-average remaining lease term - finance leases, in years | 2.2 | | 2.7 |
Weighted-average remaining lease term - operating leases, in years | 11.5 | | 5.9 |
Weighted-average discount rate - finance leases | 1.74 | % | | 0.77 | % |
Weighted-average discount rate - operating leases | 4.16 | % | | 2.30 | % |
The table below summarizes the maturity of remaining lease liabilities as of December 31, 2022:
| | | | | | | | | | | | | | | | | |
(in thousands) | Finance Leases | | Operating Leases | | Total |
2023 | $ | 1,367 | | | $ | 16,993 | | | $ | 18,360 | |
2024 | 1,334 | | | 13,130 | | | 14,464 | |
2025 | 237 | | | 9,756 | | | 9,993 | |
2026 | — | | | 10,022 | | | 10,022 | |
2027 | — | | | 9,921 | | | 9,921 | |
2028 and thereafter | — | | | 78,306 | | | 78,306 | |
Total lease payments | 2,938 | | | 138,128 | | | 141,066 | |
Less: Interest | (61) | | | (34,314) | | | (34,375) | |
Present value of lease liabilities | $ | 2,877 | | | $ | 103,814 | | | $ | 106,691 | |
(6) Goodwill and Other Intangible Assets
Goodwill and other intangible assets are summarized as follows:
| | | | | | | | | | | | | | | | | |
(in thousands) | Goodwill and Intangible Assets | | Accumulated Amortization | | Goodwill and Intangible Assets, Net |
December 31, 2022 | | | | | |
Goodwill | $ | 1,870 | | | $ | (374) | | | $ | 1,496 | |
Intangible assets—customer relationships and trademarks | — | | | — | | | — | |
Total goodwill and intangible assets | $ | 1,870 | | | $ | (374) | | | $ | 1,496 | |
December 31, 2021 | | | | | |
Goodwill | $ | 15,468 | | | $ | (374) | | | $ | 15,094 | |
Intangible assets—customer relationships and trademarks | 9,006 | | | (6,838) | | | 2,168 | |
Total goodwill and intangible assets | $ | 24,474 | | | $ | (7,212) | | | $ | 17,262 | |
On November 1, 2022, the sale of BDCF was completed, resulting in the removal of goodwill and other intangible assets, net of accumulated amortization, of $15.4 million.
In 2022 and 2021, the annual test of goodwill impairment was performed, and in both periods, no impairment was indicated.
Amortization expense related to intangible assets totaled $338,000 in 2022, $405,000 in 2021 and $432,000 in 2020.
(7) Premises & Equipment
Premises and equipment are summarized as follows:
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2022 | | 2021 |
Premises | $ | 34,930 | | | $ | 32,609 | |
Furniture and equipment | 54,581 | | | 43,852 | |
Total cost | 89,511 | | | 76,461 | |
Accumulated depreciation | (63,129) | | | (55,560) | |
Total premises and equipment, net | $ | 26,382 | | | $ | 20,901 | |
Depreciation and amortization expense for the above premises and equipment was approximately $9.5 million, $8.1 million and $9.5 million in 2022, 2021 and 2020, respectively.
(8) Deposits
Deposits are summarized as follows:
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2022 | | 2021 |
Non-interest bearing deposits | $ | 9,618,081 | | | $ | 13,390,370 | |
Interest bearing deposits: | | | |
Transaction | 683,562 | | | 2,837,521 | |
Savings | 11,042,658 | | | 10,682,768 | |
Time | 1,512,579 | | | 1,198,706 | |
| | | |
Total interest bearing deposits | 13,238,799 | | | 14,718,995 | |
Total deposits | $ | 22,856,880 | | | $ | 28,109,365 | |
The scheduled maturities of interest bearing time deposits were as follows at December 31, 2022:
| | | | | |
(in thousands) | |
2023 | $ | 1,482,377 | |
2024 | 26,777 | |
2025 | 3,272 | |
2026 | 52 | |
2027 | 101 | |
2028 and after | — | |
Total | $ | 1,512,579 | |
At December 31, 2022 and 2021, interest bearing time deposits greater than $250,000 were approximately $258.4 million and $186.0 million, respectively.
(9) Short-Term Borrowings and Long-Term Debt
The table below presents a summary of the Company’s short-term borrowings, all of which mature within one year:
| | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | Federal Funds Purchased | | Customer Repurchase Agreements | | FHLB Borrowings |
December 31, 2022 | | | | | | |
Amount outstanding at year-end | | $ | — | | | $ | 1,142 | | | $ | 1,200,000 | |
Interest rate at year-end | | — | % | | 0.25 | % | | 4.25 | % |
Average balance outstanding during the year | | $ | 30,741 | | | $ | 1,928 | | | $ | 1,797,082 | |
Weighted-average interest rate during the year | | 1.17 | % | | 0.28 | % | | 1.60 | % |
Maximum month-end outstanding during the year | | $ | 525,000 | | | $ | 2,320 | | | $ | 2,650,000 | |
December 31, 2021 | | | | | | |
Amount outstanding at year-end | | $ | — | | | $ | 2,832 | | | $ | 2,200,000 | |
Interest rate at year-end | | — | % | | 0.25 | % | | 0.13 | % |
Average balance outstanding during the year | | $ | 88,916 | | | $ | 4,199 | | | $ | 2,306,165 | |
Weighted-average interest rate during the year | | 0.15 | % | | 0.28 | % | | 0.19 | % |
Maximum month-end outstanding during the year | | $ | 302,301 | | | $ | 5,487 | | | $ | 2,600,000 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
The table below presents a summary of long-term debt:
| | | | | | | | | | | | | | |
| | December 31, |
(in thousands) | | 2022 | | 2021 |
Bank-issued floating rate senior unsecured credit-linked notes due 2024 | | $ | 272,492 | | | $ | 270,487 | |
Bank-issued 5.25% fixed rate subordinated notes due 2026 | | 174,196 | | | 173,935 | |
Company-issued 4.00% fixed rate subordinated notes due 2031 | | 371,348 | | | 370,910 | |
Trust preferred floating rate subordinated debentures due 2032 to 2036 | | 113,406 | | | 113,406 | |
Total long-term debt | | $ | 931,442 | | | $ | 928,738 | |
The following table summarizes the significant terms of the Company’s trust preferred subordinated debentures:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | Texas Capital Statutory Trust I | | Texas Capital Statutory Trust II | | Texas Capital Statutory Trust III | | Texas Capital Statutory Trust IV | | Texas Capital Statutory Trust V |
Date issued | November 19, 2002 | | April 10, 2003 | | October 6, 2005 | | April 28, 2006 | | September 29, 2006 |
Trust preferred securities issued | $10,310 | | $10,310 | | $25,774 | | $25,774 | | $41,238 |
Floating or fixed rate securities | Floating | | Floating | | Floating | | Floating | | Floating |
Interest rate on subordinated debentures | 3 month LIBOR + 3.35% | | 3 month LIBOR + 3.25% | | 3 month LIBOR + 1.51% | | 3 month LIBOR + 1.60% | | 3 month LIBOR + 1.71% |
Maturity date | November 2032 | | April 2033 | | December 2035 | | June 2036 | | December 2036 |
(10) Financial Instruments with Off-Balance Sheet Risk
The table below presents the Company’s financial instruments with off-balance sheet risk, as well as the activity in the allowance for off-balance sheet credit losses related to those financial instruments: | | | | | | | | | | | |
| Year Ended December 31, |
(in thousands) | 2022 | | 2021 |
Beginning balance of allowance for off-balance sheet credit losses | $ | 17,265 | | | $ | 17,434 | |
| | | |
Provision for off-balance sheet credit losses | 4,528 | | | (169) | |
Ending balance of allowance for off-balance sheet credit losses | $ | 21,793 | | | $ | 17,265 | |
| | | |
| December 31, |
(in thousands) | 2022 | | 2021 |
Commitments to extend credit - period end balance | $ | 9,673,082 | | | $ | 9,445,763 | |
Standby letters of credit - period end balance | 417,896 | | | 357,672 | |
(11) Regulatory Ratios and Capital
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The Basel III regulatory capital framework (the “Basel III Capital Rules”) adopted by U.S. federal regulatory authorities, among other things, (i) establishes the capital measure called “Common Equity Tier 1” (“CET1”), (ii) specifies that Tier 1 capital consist of CET1 and “Additional Tier 1 Capital” instruments meeting stated requirements, (iii) requires that most deductions/adjustments to regulatory capital measures be made to CET1 and not to other components of capital and (iv) defines the scope of the deductions/adjustments to the capital measures.
Additionally, the Basel III Capital Rules require that the Company maintains a 2.5% capital conservation buffer with respect to each of CET1, Tier 1 and total capital to risk-weighted assets, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers. No dividends were declared or paid on the Company’s common stock during 2022, 2021 or 2020. On April 19, 2022, the Company’s board of directors authorized the Company to repurchase up to $150.0 million in shares of its outstanding common stock. During the year ended December 31, 2022, the Company repurchased 2,083,118 shares
of its common stock for an aggregate price of $115.3 million, at a weighted average price of $55.35 per share. 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.
In February 2019, the federal bank regulatory agencies issued a final rule (the “2019 CECL Rule”) that revised certain capital regulations to account for changes to credit loss accounting under GAAP. The 2019 CECL Rule included a transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of adopting the new accounting standard related to the measurement of current expected credit losses on their regulatory capital ratios (three-year transition option). In March 2020, the federal bank regulatory agencies issued an interim final rule that maintains the three-year transition option of the 2019 CECL Rule and also provides banking organizations that were required under GAAP to implement CECL before the end of 2020 the option to delay for two years an estimate of the effect of CECL on regulatory capital, relative to the incurred loss methodology's effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company adopted CECL on January 1, 2020 and have elected to utilize the five-year transition option.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of CET1, Tier 1 and total capital to risk-weighted assets, and of Tier 1 capital to average assets, each as defined in the regulations. Management believes, as of December 31, 2022, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
Financial institutions are categorized as well capitalized based on total risk-based, Tier 1 risk-based, CET1 and Tier 1 leverage ratios. As shown in the table below, the Company’s and Bank’s capital ratios exceeded the regulatory definition of well capitalized as of December 31, 2022 and 2021. The regulatory authorities can apply changes in classification of assets and such changes may retroactively subject the Company and the Bank to changes in capital ratios. Any such change could reduce one or more capital ratios below well capitalized status. In addition, a change may result in imposition of additional assessments by the FDIC or could result in regulatory actions that could have a material effect on the Bank’s condition and results of operations.
Because the Bank had less than $15.0 billion in total consolidated assets as of December 31, 2009, it is allowed to continue to classify the trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1 capital.
At the beginning of each of the last five years of the life of the Bank issued fixed rate subordinated notes due 2026, the amount that is eligible to be included in Tier 2 capital is reduced by 20% of the original amount of the notes (net of redemptions). In 2022, the amount of the notes that qualify as Tier 2 capital has been reduced by 40%.
The table below summarizes the Company’s and the Bank’s actual and required capital ratios under the Basel III Capital Rules. The ratios presented below include the effects of the election to utilize the five-year CECL transition described above.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual | | Minimum Capital Required(2) | | Capital Required to be Well Capitalized |
(dollars in thousands) | | Capital Amount | Ratio | | Capital Amount | Ratio | | Capital Amount | Ratio |
December 31, 2022 | | | | | | | | | |
CET1 | | | | | | | | | |
Company | | $ | 3,180,208 | | 13.00 | % | | $ | 1,712,608 | | 7.00 | % | | N/A | N/A |
Bank | | 3,408,178 | | 13.95 | % | | 1,710,056 | | 7.00 | % | | 1,587,909 | | 6.50 | % |
Total capital (to risk-weighted assets) | | | | | | | | | |
Company | | 4,331,098 | | 17.70 | % | | 2,568,912 | | 10.50 | % | | 2,446,583 | | 10.00 | % |
Bank | | 3,987,720 | | 16.32 | % | | 2,565,083 | | 10.50 | % | | 2,442,937 | | 10.00 | % |
Tier 1 capital (to risk-weighted assets) | | | | | | | | | |
Company | | 3,590,208 | | 14.67 | % | | 2,079,595 | | 8.50 | % | | 1,467,950 | | 6.00 | % |
Bank | | 3,568,178 | | 14.61 | % | | 2,076,496 | | 8.50 | % | | 1,954,349 | | 8.00 | % |
Tier 1 capital (to average assets)(1) | | | | | | | | | |
Company | | 3,590,208 | | 11.54 | % | | 1,244,494 | | 4.00 | % | | N/A | N/A |
Bank | | 3,568,178 | | 11.48 | % | | 1,243,232 | | 4.00 | % | | 1,554,039 | | 5.00 | % |
December 31, 2021 | | | | | | | | | |
CET1 | | | | | | | | | |
Company | | $ | 2,949,785 | | 11.06 | % | | $ | 1,866,444 | | 7.00 | % | | N/A | N/A |
Bank | | 3,013,170 | | 11.30 | % | | 1,866,303 | | 7.00 | % | | 1,732,996 | | 6.50 | % |
Total capital (to risk-weighted assets) | | | | | | | | | |
Company | | 4,085,540 | | 15.32 | % | | 2,799,666 | | 10.50 | % | | 2,666,348 | | 10.00 | % |
Bank | | 3,578,014 | | 13.42 | % | | 2,799,455 | | 10.50 | % | | 2,666,148 | | 10.00 | % |
Tier 1 capital (to risk-weighted assets) | | | | | | | | | |
Company | | 3,359,785 | | 12.60 | % | | 2,266,396 | | 8.50 | % | | 1,599,809 | | 6.00 | % |
Bank | | 3,173,170 | | 11.90 | % | | 2,266,225 | | 8.50 | % | | 2,132,918 | | 8.00 | % |
Tier 1 capital (to average assets)(1) | | | | | | | | | |
Company | | 3,359,785 | | 9.01 | % | | 1,490,902 | | 4.00 | % | | N/A | N/A |
Bank | | 3,173,170 | | 8.51 | % | | 1,490,677 | | 4.00 | % | | 1,863,346 | | 5.00 | % |
(1) The Tier 1 capital ratio (to average assets) is not impacted by the Basel III Capital Rules; however, the Federal Reserve Board and the FDIC may require the Company and the Bank, respectively, to maintain a Tier 1 capital ratio (to average assets) above the required minimum.
(2) Percentages represent the minimum capital ratios plus, as applicable, the fully phased-in 2.5% CET1 capital buffer under the Basel III Capital Rules.
The Company is required to maintain reserve balances in cash and on deposit with the Federal Reserve based on a percentage of transactional deposits; however, the Federal Reserve reduced the reserve requirement ratio to zero effective March 26, 2020, therefore the total requirement was zero at both December 31, 2022 and 2021.
(12) Stock-Based Compensation and Employee Benefits
The Company has a qualified retirement plan with a salary deferral feature designed to qualify under Section 401 of the Internal Revenue Code (“the 401(k) Plan”). The 401(k) Plan permits employees to defer a portion of their compensation. Matching contributions may be made in amounts and at times determined by the Company. These contributions were approximately $13.3 million, $10.2 million and $10.3 million for the years ended December 31, 2022, 2021 and 2020, respectively. Employees are eligible to participate in the 401(k) Plan when they meet certain requirements concerning minimum age and period of credited service. All contributions to the 401(k) Plan are invested in accordance with participant elections among certain investment options.
The Company also offers a non-qualified deferred compensation plan for executives and key members of management in order to assist in attracting and retaining these individuals. Participants in the plan may elect to defer up to 75% of their annual salary and/or short-term incentive payout into deferral accounts that mirror the gains or losses of investments selected by the participants. The plan allows the Company to make discretionary contributions on behalf of a participant as well as matching contributions. The Company did not make a matching contribution in 2022, compared to matching contributions of $274,000 in 2021 and $1.0 million in 2020. All participant contributions to the plan and any related earnings are immediately vested and may be withdrawn upon the participant's separation from service, death or disability or upon a date specified by the participant.
Salary deferrals are recorded as salaries and employee benefits expense on the consolidated statements of income with an offsetting payable to participants in other liabilities on the consolidated balance sheets.
The Company has an Employee Stock Purchase Plan (“ESPP”). Employees are eligible for the ESPP when they meet certain requirements concerning period of credited service and minimum hours worked. Eligible employees may contribute between 1% and 10% of eligible compensation up to the Section 423 of the Internal Revenue Code limit of $25,000. Employee contributions to the ESPP were temporarily suspended throughout 2020. On January 1, 2021, the suspension was removed and employee contributions commenced. In 2006, stockholders approved the ESPP, which allocated 400,000 shares for purchase. As of December 31, 2022, 2021 and 2020, 184,263, 164,033 and 155,933 shares, respectively, had been purchased on behalf of employees under the ESPP.
The Company has stock-based compensation plans under which equity-based compensation grants are made by the board of directors, or its designated committee. Grants are subject to vesting requirements and may be settled in shares of common stock or paid in cash. Under the plans, the Company may grant, among other things, non-qualified stock options, incentive stock options, restricted stock, restricted stock units (“RSUs”), stock appreciation rights (“SARs”), performance awards or any combination thereof to employees and non-employee directors. A total of 1,400,000 shares are authorized for grant under the current plan. Total shares remaining available for grant under the current plan at December 31, 2022 were 1,143,773.
A summary of the Company’s SAR activity and related information is as follows. Grants of SARs include time-based vesting conditions that generally vest ratably over a period of five years.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
| SARs | | Weighted Average Exercise Price | | SARs | | Weighted Average Exercise Price | | SARs | | Weighted Average Exercise Price |
Outstanding at beginning of year | 3,000 | | | $ | 44.20 | | | 12,400 | | | $ | 43.48 | | | 21,200 | | | $ | 33.95 | |
| | | | | | | | | | | |
Exercised | (3,000) | | | 44.20 | | | (9,400) | | | 43.24 | | | (8,800) | | | 20.52 | |
| | | | | | | | | | | |
Outstanding at year-end | — | | | $ | — | | | 3,000 | | | $ | 44.20 | | | 12,400 | | | $ | 43.48 | |
Vested and exercisable at year-end | — | | | $ | — | | | 3,000 | | | $ | 44.20 | | | 12,400 | | | $ | 43.48 | |
Weighted average remaining contractual life of vested (in years) | | | 0.00 | | | | 1.66 | | | | 2.26 |
Weighted average remaining contractual life of outstanding (in years) | | | 0.00 | | | | 1.66 | | | | 2.26 |
Compensation expense | $ | — | | | | | $ | — | | | | | $ | — | | | |
Unrecognized compensation expense | $ | — | | | | | $ | — | | | | | $ | — | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Intrinsic value of exercised | $ | 64,000 | | | | | $ | 302,000 | | | | | $ | 294,000 | | | |
A summary of the Company’s RSU activity and related information is as follows. Grants of RSUs include time-based vesting conditions that generally vest ratably over a period of three to five years. Additionally, from time to time, grants of RSUs with both time-based and performance-based vesting conditions are made that generally vest at the end of a three or four year period.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
| RSUs | | Weighted Average Grant Date Fair Value | | RSUs | | Weighted Average Grant Date Fair Value | | RSUs | | Weighted Average Grant Date Fair Value |
Outstanding at beginning of year | 1,206,862 | | | $ | 56.06 | | | 955,594 | | | $ | 48.76 | | | 558,312 | | | $ | 64.95 | |
Granted | 454,314 | | | 68.15 | | | 677,472 | | | 66.31 | | | 631,092 | | | 39.37 | |
Vested | (308,771) | | | 54.51 | | | (187,530) | | | 58.82 | | | (171,494) | | | 65.17 | |
Forfeited | (196,753) | | | 58.42 | | | (238,674) | | | 53.76 | | | (62,316) | | | 56.92 | |
Outstanding at year-end | 1,155,652 | | | $ | 61.12 | | | 1,206,862 | | | $ | 56.06 | | | 955,594 | | | $ | 48.76 | |
Compensation expense | $ | 21,246,000 | | | | | $ | 30,060,000 | | | | | $ | 15,655,000 | | | |
Unrecognized compensation expense | $ | 32,148,000 | | | | | $ | 32,525,000 | | | | | $ | 29,146,000 | | | |
Weighted average years over which unrecognized compensation expense is expected to be recognized | | | 2.31 | | | | 2.79 | | | | 2.83 |
The Company may make grants of restricted common stock to various non-employee directors as to which restrictions lapse ratably over a period of three years. No grants of restricted stock were made during 2022, 2021 or 2020 and no compensation expense was recorded during 2022, compared to compensation expense of $1,000 and $26,000 for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2022, there were no remaining restrictions on any grants of restricted common stock.
Total compensation cost for grants of stock-settled units was $21.2 million, $30.1 million and $15.7 million for the years ended December 31, 2022, 2021 and 2020, respectively.
The Company did not have cash-settled RSUs outstanding at December 31, 2022. No grants of cash-settled RSUs were made in 2022, 2021 or 2020. Since these units have a cash payout feature, they are accounted for under the liability method with related expense based on the stock price at period end. Compensation cost for the cash-settled units was $186,000, $1.3 million and $1.8 million for the years ended December 31, 2022, 2021 and 2020, respectively.
(13) Income Taxes
Income tax expense/(benefit) consists of the following: | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
(in thousands) | 2022 | | 2021 | | 2020 |
Current: | | | | | |
Federal | $ | 109,370 | | | $ | 97,608 | | | $ | 32,701 | |
State | 7,302 | | | 6,761 | | | 920 | |
Total | 116,672 | | | 104,369 | | | 33,621 | |
Deferred: | | | | | |
Federal | (16,178) | | | (19,020) | | | (7,964) | |
State | (1,217) | | | (1,233) | | | — | |
Total | (17,395) | | | (20,253) | | | (7,964) | |
Total expense: | | | | | |
Federal | 93,192 | | | 78,588 | | | 24,737 | |
State | 6,085 | | | 5,528 | | | 920 | |
Total | $ | 99,277 | | | $ | 84,116 | | | $ | 25,657 | |
The reconciliation of income tax at the U.S. federal statutory tax rate to income tax expense and effective tax rate is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
(dollars in thousands) | Amount | | Rate | | Amount | | Rate | | Amount | | Rate |
U.S. statutory rate | $ | 90,669 | | | 21 | % | | $ | 70,992 | | | 21 | % | | $ | 19,309 | | | 21 | % |
State taxes | 6,822 | | | 2 | % | | 4,108 | | | 1 | % | | 726 | | | 1 | % |
Tax-exempt income | (1,061) | | | — | % | | (1,855) | | | (1) | % | | (3,356) | | | (4) | % |
Tax credits | (128) | | | — | % | | (179) | | | — | % | | (1,216) | | | (1) | % |
Disallowed FDIC | 1,491 | | | — | % | | 2,936 | | | 1 | % | | 3,920 | | | 4 | % |
Disallowed compensation | 2,771 | | | 1 | % | | 6,377 | | | 2 | % | | 3,098 | | | 3 | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Other | (1,287) | | | (1) | % | | 1,737 | | | 1 | % | | 3,176 | | | 4 | % |
Total | $ | 99,277 | | | 23 | % | | $ | 84,116 | | | 25 | % | | $ | 25,657 | | | 28 | % |
At December 31, 2022, 2021 and 2020, the Company had unrecognized tax benefits of $889,000, $722,000 and $1.1 million, respectively.
The Company is no longer subject to U.S. federal income tax examinations for years before 2019 or state and local income tax examinations for years before 2018.
The table below summarizes significant components of deferred tax assets and liabilities utilizing the federal corporate income tax rate of 21%. Management believes it is more likely than not that all of the deferred tax assets will be realized.
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2022 | | 2021 |
Deferred tax assets: | | | |
Allowance for credit losses | $ | 62,154 | | | $ | 51,738 | |
Lease liabilities | 24,091 | | | 15,615 | |
Loan origination fees | 14,385 | | | 11,204 | |
Stock compensation | 5,031 | | | 4,649 | |
| | | |
| | | |
Non-accrual interest | 1,132 | | | 1,874 | |
Non-qualified deferred compensation | 4,782 | | | 6,705 | |
| | | |
| | | |
| | | |
Net unrealized losses in AOCI | 111,365 | | | 12,684 | |
Other | 4,678 | | | 1,671 | |
Total deferred tax assets | 227,618 | | | 106,140 | |
Deferred tax liabilities: | | | |
Loan origination costs | (3,217) | | | (3,110) | |
Leases | (12,863) | | | (8,414) | |
Lease ROU assets | (19,807) | | | (14,266) | |
| | | |
Depreciation | (9,034) | | | (10,567) | |
| | | |
Other | (284) | | | (3,446) | |
Total deferred tax liabilities | (45,205) | | | (39,803) | |
Net deferred tax asset | $ | 182,413 | | | $ | 66,337 | |
(14) Fair Value Disclosures
The Company determines the fair market values of its assets and liabilities measured at fair value on a recurring and nonrecurring basis using the fair value hierarchy as prescribed in ASC 820. See Note 1 - Operations and Summary of Significant Accounting Policies for information regarding the fair value hierarchy and a description of the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial statements.
Assets and liabilities measured at fair value are as follows:
| | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using |
(in thousands) | Level 1 | | Level 2 | | Level 3 |
December 31, 2022 | | | | | |
Available-for-sale debt securities:(1) | | | | | |
U.S. Treasury securities | $ | 670,582 | | | $ | — | | | $ | — | |
U.S. government agency securities | — | | | 102,154 | | | — | |
Residential mortgage-backed securities | — | | | 1,831,047 | | | — | |
| | | | | |
| | | | | |
CRT securities | — | | | — | | | 11,861 | |
Equity securities(1)(2) | 22,879 | | | 11,077 | | | — | |
| | | | | |
| | | | | |
| | | | | |
Derivative assets(4) | — | | | 13,504 | | | — | |
Derivative liabilities(4) | — | | | 91,758 | | | — | |
Non-qualified deferred compensation plan liabilities(5) | 21,177 | | | — | | | — | |
December 31, 2021 | | | | | |
Available-for-sale debt securities:(1) | | | | | |
U.S. government agency securities | $ | — | | | $ | 120,944 | | | $ | — | |
Residential mortgage-backed securities | — | | | 3,225,378 | | | — | |
| | | | | |
Tax-exempt asset-backed securities | — | | | — | | | 180,033 | |
CRT securities | — | | | — | | | 11,846 | |
Equity securities(1)(2) | 33,589 | | | 12,018 | | | — | |
Mortgage loans held for sale(3) | — | | | 465 | | | 7,658 | |
| | | | | |
Derivative assets(4) | — | | | 37,788 | | | — | |
Derivative liabilities(4) | — | | | 37,788 | | | — | |
Non-qualified deferred compensation plan liabilities(5) | 29,695 | | | — | | | — | |
(1)Investment securities are measured at fair value on a recurring basis, generally monthly, except for tax-exempt asset-backed securities and CRT securities, which are measured quarterly.
(2)Equity securities consist of investments that qualify for consideration under the regulations implementing the Community Reinvestment Act and investments related to non-qualified deferred compensation plan.
(3)Mortgage loans held for sale measured at fair value on a recurring basis, generally monthly.
(4)Derivative assets and liabilities are measured at fair value on a recurring basis, generally quarterly.
(5)Non-qualified deferred compensation plan liabilities represent the fair value of the obligation to the employee, which generally corresponds to the fair value of the invested assets, and are measured at fair value on a recurring basis, generally monthly.
Level 3 Valuations
The following table presents a reconciliation of the level 3 fair value category measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Net Realized/Unrealized Gains (Losses) | | |
(in thousands) | Balance at Beginning of Period | | Purchases / Additions | | Sales / Reductions | | Realized | | Unrealized | | Balance at End of Period |
Year Ended December 31, 2022 | | | | | | | | | | | |
Available-for-sale debt securities:(1) | | | | | | | | | | | |
Tax-exempt asset-backed securities | $ | 180,033 | | | $ | — | | | $ | (170,626) | | | $ | — | | | $ | (9,407) | | | $ | — | |
CRT securities | 11,846 | | | — | | | — | | | — | | | 15 | | | 11,861 | |
Loans held for sale(2) | 7,658 | | | 1,569 | | | (8,132) | | | (1,095) | | | — | | | — | |
Year Ended December 31, 2021 | | | | | | | | | | | |
Available-for-sale debt securities:(1) | | | | | | | | | | | |
Tax-exempt asset-backed securities | $ | 199,176 | | | $ | — | | | $ | (14,314) | | | $ | — | | | $ | (4,829) | | | $ | 180,033 | |
CRT securities | 11,417 | | | — | | | — | | | — | | | 429 | | | 11,846 | |
Loans held for sale(2) | 6,933 | | | 2,125 | | | (1,428) | | | 5 | | | 23 | | | 7,658 | |
(1)Unrealized gains/(losses) on available-for-sale debt securities are recorded in AOCI. Realized gains/(losses) are recorded in other non-interest income on the consolidated statements of income and other comprehensive income/(loss).
(2)Realized and unrealized gains/(losses) on loans held for sale are recorded in gain/(loss) on sale of loans held for sale on the consolidated statements of income and other comprehensive income/(loss).
Tax-exempt asset-backed securities
The fair value of tax-exempt asset-backed securities is based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs, the most significant of which were a discount rate and weighted-average life. The securities were redeemed in full in the second quarter of 2022. At December 31, 2021, the combined weighted-average discount rate and weighted-average life utilized were 2.60% and 4.61 years, respectively.
CRT securities
The fair value of CRT securities is based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs, the most significant of which were a discount rate and weighted-average life. At December 31, 2022, the discount rates utilized ranged from 6.67% to 11.37% and the weighted-average life ranged from 5.06 years to 8.67 years. On a combined amortized cost weighted-average basis a discount rate of 8.24% and a weighted-average life of 6.26 years were utilized to determine the fair value of these securities at December 31, 2022. At December 31, 2021, the combined weighted-average discount rate and weighted-average life utilized were 4.97% and 6.35 years, respectively.
Loans held for sale
The fair value of mortgage loans held for sale using Level 3 inputs include loans that cannot be sold through normal sale channels and thus require significant management judgment or estimation when determining the fair value. The fair value of such loans is generally based upon quoted prices of comparable loans with a liquidity discount applied. There were no loans held for sale that were measured at fair value on a recurring basis at December 31, 2022. At December 31, 2021, the fair value of loans held for sale was calculated using a weighted-average discounted price of 97.8%.
Fair Value of Financial Instruments
A summary of the carrying amounts and estimated fair values of financial instruments is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Carrying Amount | | Estimated Fair Value |
(in thousands) | | Total | | Level 1 | | Level 2 | | Level 3 |
December 31, 2022 | | | | | | | | | |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | $ | 5,012,260 | | | $ | 5,012,260 | | | $ | 5,012,260 | | | $ | — | | | $ | — | |
Available-for-sale debt securities | 2,615,644 | | | 2,615,644 | | | 670,582 | | | 1,933,201 | | | 11,861 | |
Held-to-maturity debt securities | 935,514 | | | 816,914 | | | — | | | 816,914 | | | — | |
Equity securities | 33,956 | | | 33,956 | | | 22,879 | | | 11,077 | | | — | |
Loans held for sale | 36,357 | | | 36,357 | | | — | | | — | | | 36,357 | |
Loans held for investment, net | 19,033,871 | | | 18,969,922 | | | — | | | — | | | 18,969,922 | |
Derivative assets | 13,504 | | | 13,504 | | | — | | | 13,504 | | | — | |
Financial liabilities: | | | | | | | | | |
Total deposits | 22,856,880 | | | 22,857,949 | | | — | | | — | | | 22,857,949 | |
Short-term borrowings | 1,201,142 | | | 1,201,142 | | | — | | | 1,201,142 | | | — | |
Long-term debt | 931,442 | | | 881,716 | | | — | | | 881,716 | | | — | |
Derivative liabilities | 91,758 | | | 91,758 | | | — | | | 91,758 | | | — | |
December 31, 2021 | | | | | | | | | |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | $ | 7,946,659 | | | $ | 7,946,659 | | | $ | 7,946,659 | | | $ | — | | | $ | — | |
Available-for-sale debt securities | 3,538,201 | | | 3,538,201 | | | — | | | 3,346,322 | | | 191,879 | |
| | | | | | | | | |
Equity securities | 45,607 | | | 45,607 | | | 33,589 | | | 12,018 | | | — | |
Loans held for sale | 8,123 | | | 8,123 | | | — | | | 465 | | | 7,658 | |
| | | | | | | | | |
Loans held for investment, net | 22,595,088 | | | 22,631,252 | | | — | | | — | | | 22,631,252 | |
Derivative assets | 37,788 | | | 37,788 | | | — | | | 37,788 | | | — | |
Financial liabilities: | | | | | | | | | |
Total deposits | 28,109,365 | | | 28,109,762 | | | — | | | — | | | 28,109,762 | |
Short-term borrowings | 2,202,832 | | | 2,202,832 | | | — | | | 2,202,832 | | | — | |
Long-term debt | 928,738 | | | 952,404 | | | — | | | 952,404 | | | — | |
Derivative liabilities | 37,788 | | | 37,788 | | | — | | | 37,788 | | | — | |
(15) Derivative Financial Instruments
The notional amounts and estimated fair values of derivative positions outstanding are presented in the following table.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| | | Estimated Fair Value | | | | Estimated Fair Value |
(in thousands) | Notional Amount | | Asset Derivative | Liability Derivative | | Notional Amount | | Asset Derivative | Liability Derivative |
Derivatives designated as hedges | | | | | | | | | |
Cash flow hedges: | | | | | | | | | |
Interest rate contracts: | | | | | | | | | |
Swaps hedging loans | $ | 3,000,000 | | | $ | — | | $ | 86,378 | | | $ | — | | | $ | — | | $ | — | |
Non-hedging derivatives | | | | | | | | | |
Customer-initiated and other derivatives: | | | | | | | | | |
Interest rate contracts: | | | | | | | | | |
Swaps | 4,396,367 | | | 83,529 | | 83,529 | | | 3,536,090 | | | 40,922 | | 40,922 | |
Caps and floors written | 220,142 | | | — | | 2,583 | | | 191,291 | | | 94 | | — | |
Caps and floors purchased | 220,142 | | | 2,583 | | — | | | 191,291 | | | — | | 94 | |
Forward contracts | 1,569,326 | | | 4,431 | | 4,053 | | | — | | | — | | — | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Gross derivatives | | | 90,543 | | 176,543 | | | | | 41,016 | | 41,016 | |
Netting adjustment - offsetting derivative assets/liabilities | | | (5,164) | | (5,164) | | | | | (3,228) | | (3,228) | |
Netting adjustment - cash collateral received/posted | | | (71,875) | | (79,621) | | | | | — | | — | |
Net derivatives included on the consolidated balance sheets | | | $ | 13,504 | | $ | 91,758 | | | | | $ | 37,788 | | $ | 37,788 | |
The Company’s credit exposure on derivative instruments is limited to the net favorable value and interest payments by each counterparty. In some cases collateral may be required from the counterparties involved if the net value of the derivative instruments exceeds a nominal amount. The Company’s credit exposure associated with these instruments, net of any collateral pledged, was approximately $13.5 million at December 31, 2022 and approximately $37.8 million at December 31, 2021. Collateral levels are monitored and adjusted on a regular basis for changes in the value of derivative instruments. At December 31, 2022, the Company had $89.2 million in cash collateral pledged to counterparties included in interest bearing cash and cash equivalents on the consolidated balance sheet and $72.5 million in cash collateral received from counterparties included in interest bearing deposits on the consolidated balance sheet. The comparative amounts at December 31, 2021, were $40.3 million in cash collateral pledged to counterparties and no cash collateral received from counterparties.
The Company also enters into credit risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which the Company is either a participant or a lead bank. The risk participation agreements entered into by the Company as a participant bank provide credit protection to the financial institution counterparty should the borrower fail to perform on its interest rate derivative contract with that financial institution. The Company is party to 19 risk participation agreements where it acts as a participant bank with a notional amount of $291.2 million at December 31, 2022, compared to seven risk participation agreements with a notional amount of $79.2 million at December 31, 2021. The maximum estimated exposure to these agreements, assuming 100% default by all obligors, was approximately $8.9 million at December 31, 2022 and $2.3 million at December 31, 2021. The fair value of these exposures was insignificant to the consolidated financial statements at both December 31, 2022 and December 31, 2021. Risk participation agreements entered into by the Company as the lead bank provide credit protection should the borrower fail to perform on its interest rate derivative contract. The Company is party to 18 risk participation agreements where the Company acts as the lead bank having a notional amount of $222.0 million at December 31, 2022, compared to 15 agreements having a notional amount of $156.1 million at December 31, 2021.
Derivatives Designated as Cash Flow Hedges
During 2022, the Company entered into interest rate derivative contracts that were designated as qualifying cash flow hedges to hedge the exposure to variability in expected future cash flows attributable to changes in a contractually specified interest rate.
During 2022, the Company recorded $85.8 million in unrealized losses to adjust its cash flow hedges to fair value, which was recorded net of tax to AOCI, and reclassified $1.8 million from AOCI into interest income on loans. Based on current market conditions, the Company estimates that during the next 12 months, an additional $50.9 million will be reclassified from AOCI as a decrease to interest income. As of December 31, 2022, the maximum length of time over which forecasted transactions are hedged is 3.75 years.
(16) Accumulated Other Comprehensive Income
The following table provides the change in AOCI by component:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Cash Flow Hedges | | Available-for-Sale Securities | | Held-to-Maturity Securities | | Total |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
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| | | | | | | |
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| | | | | | | |
| | | | | | | |
| | | | | | | |
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| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Year Ended December 31, 2022 | | | | | | | |
Beginning balance | $ | — | | | $ | (47,715) | | | $ | — | | | $ | (47,715) | |
Change in unrealized gain/(loss) | (85,846) | | | (324,803) | | | (69,165) | | | (479,814) | |
Amounts reclassified into net income | 1,803 | | | — | | | 8,102 | | | 9,905 | |
Total other comprehensive income/(loss) | (84,043) | | | (324,803) | | | (61,063) | | | (469,909) | |
Income tax expense/(benefit) | (17,649) | | | (68,209) | | | (12,823) | | | (98,681) | |
Total other comprehensive income/(loss), net of tax | (66,394) | | | (256,594) | | | (48,240) | | | (371,228) | |
Ending balance | $ | (66,394) | | | $ | (304,309) | | | $ | (48,240) | | | $ | (418,943) | |
Year Ended December 31, 2021 | | | | | | | |
Beginning balance | $ | — | | | $ | 15,774 | | | $ | — | | | $ | 15,774 | |
Change in unrealized gain/(loss) | — | | | (80,366) | | | — | | | (80,366) | |
Amounts reclassified into net income | — | | | — | | | — | | | — | |
Total other comprehensive income/(loss) | — | | | (80,366) | | | — | | | (80,366) | |
Income tax expense/(benefit) | — | | | (16,877) | | | — | | | (16,877) | |
Total other comprehensive income/(loss), net of tax | — | | | (63,489) | | | — | | | (63,489) | |
Ending balance | $ | — | | | $ | (47,715) | | | $ | — | | | $ | (47,715) | |
(17) Related Party Transactions
During 2022 and 2021, the Company has had transactions with its directors, executive officers and their affiliates and its employees. These transactions were made in the ordinary course of business and include extensions of credit and deposit transactions, all made on the same terms as the then prevailing market and credit terms extended to other customers. The Bank had approximately $23.1 million in deposits from related parties, including directors, stockholders and their affiliates at December 31, 2022 and $10.2 million at December 31, 2021.
(18) Parent Company Only
Summarized financial information for Texas Capital Bancshares, Inc. are as follows:
Balance Sheet
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2022 | | 2021 |
Assets | | | |
Cash and cash equivalents | $ | 245,777 | | | $ | 438,761 | |
Investment in subsidiaries | 3,183,767 | | | 3,155,954 | |
Other assets | 93,395 | | | 91,301 | |
Total assets | $ | 3,522,939 | | | $ | 3,686,016 | |
Liabilities and Stockholders’ Equity | | | |
Liabilities: | | | |
Other liabilities | $ | 6,754 | | | $ | 3,668 | |
| | | |
Long-term debt | 484,754 | | | 484,316 | |
| | | |
| | | |
Total liabilities | 491,508 | | | 487,984 | |
Stockholders’ Equity: | | | |
Preferred stock | 300,000 | | | 300,000 | |
Common stock | 509 | | | 506 | |
Additional paid-in capital | 1,025,593 | | | 1,018,711 | |
Retained earnings | 2,239,582 | | | 1,926,538 | |
Treasury stock | (115,310) | | | (8) | |
Accumulated other comprehensive income/(loss) | (418,943) | | | (47,715) | |
Total stockholders’ equity | 3,031,431 | | | 3,198,032 | |
Total liabilities and stockholders’ equity | $ | 3,522,939 | | | $ | 3,686,016 | |
Statement of Income
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
(in thousands) | 2022 | | 2021 | | 2020 |
Interest on notes receivable | $ | 3,250 | | | $ | 3,404 | | | $ | 3,402 | |
Dividend income | 10,529 | | | 10,472 | | | 10,496 | |
Other income | 9 | | | 5 | | | 3 | |
Total income | 13,788 | | | 13,881 | | | 13,901 | |
| | | | | |
Interest expense | 19,721 | | | 15,946 | | | 10,515 | |
Salaries and employee benefits | 782 | | | 720 | | | 725 | |
Legal and professional | 1,583 | | | 1,803 | | | 3,238 | |
Other non-interest expense | 1,636 | | | 4,375 | | | 4,553 | |
Total expense | 23,722 | | | 22,844 | | | 19,031 | |
Loss before income taxes and equity in undistributed income of subsidiary | (9,934) | | | (8,963) | | | (5,130) | |
Income tax benefit | (2,282) | | | (2,179) | | | (1,135) | |
Loss before equity in undistributed income of subsidiary | (7,652) | | | (6,784) | | | (3,995) | |
Equity in undistributed income of subsidiary | 337,946 | | | 258,539 | | | 68,100 | |
Net income | 330,294 | | | 251,755 | | | 64,105 | |
Preferred stock dividends | 17,250 | | | 18,721 | | | 9,750 | |
Net income available to common stockholders | $ | 313,044 | | | $ | 233,034 | | | $ | 54,355 | |
Statements of Cash Flows
| | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | |
(in thousands) | 2022 | | 2021 | | 2020 | | |
Operating Activities | | | | | | | |
Net income | $ | 330,294 | | | $ | 251,755 | | | $ | 64,105 | | | |
Adjustments to reconcile net income to net cash provided by/(used in) operating activities: | | | | | | | |
Equity in undistributed income of subsidiary | (337,946) | | | (258,539) | | | (68,100) | | | |
Amortization expense | 438 | | | 2,469 | | | 101 | | | |
Changes in operating assets and liabilities: | | | | | | | |
Accrued interest receivable and other assets | (2,095) | | | (1,750) | | | (912) | | | |
| | | | | | | |
Accrued interest payable and other liabilities | 3,086 | | | 2,348 | | | (448) | | | |
Net cash used in operating activities | (6,223) | | | (3,717) | | | (5,254) | | | |
Investing Activities | | | | | | | |
Net decrease in loans held for investment | — | | | 7,500 | | | 3,000 | | | |
Investments in and advances to subsidiaries | (50,000) | | | — | | | — | | | |
Net cash provided by/(used in) investing activities | (50,000) | | | 7,500 | | | 3,000 | | | |
Financing Activities | | | | | | | |
Issuance of stock related to stock-based awards | (4,209) | | | (3,121) | | | (1,986) | | | |
| | | | | | | |
Net proceeds from issuance of preferred stock | — | | | 289,723 | | | — | | | |
Redemption of preferred stock | — | | | (150,000) | | | — | | | |
Preferred stock dividends paid | (17,250) | | | (18,721) | | | (9,750) | | | |
Repurchase of common stock | (115,302) | | | — | | | — | | | |
Redemption of long-term debt | — | | | (111,000) | | | — | | | |
Net proceeds from Issuance of long-term debt | — | | | 370,625 | | | — | | | |
| | | | | | | |
| | | | | | | |
Net cash provided by/(used in) financing activities | (136,761) | | | 377,506 | | | (11,736) | | | |
Net increase/(decrease) in cash and cash equivalents | (192,984) | | | 381,289 | | | (13,990) | | | |
Cash and cash equivalents at beginning of year | 438,761 | | | 57,472 | | | 71,462 | | | |
Cash and cash equivalents at end of year | $ | 245,777 | | | $ | 438,761 | | | $ | 57,472 | | | |
(19) Material Transactions Affecting Stockholders' Equity
On April 19, 2022, the Company’s board of directors authorized the Company to repurchase up to $150.0 million in shares of its outstanding common stock. During the year ended December 31, 2022, the Company repurchased 2,083,118 shares of its common stock for an aggregate price of $115.3 million, at a weighted average price of $55.35 per share. 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.
On March 3, 2021, the Company completed an issuance of 5.75% fixed rate non-cumulative perpetual preferred stock, Series B, with a liquidation preference of $1,000 per share (equivalent to $25 per depositary share) (the “Series B Preferred Stock”) and an issuance and sale of 12,000,000 depositary shares, each representing a 1/40th interest in a share of the Series B Preferred Stock. Dividends on the Series B Preferred Stock are not cumulative and will be paid when declared by the board of directors to the extent that the Company has legally available funds to pay dividends. If declared, dividends will accrue and be payable quarterly, in arrears, on the liquidation preference amount, on a non-cumulative basis, at a rate of 5.75% per annum. Holders of preferred stock will not have voting rights, except with respect to certain changes in the terms of the preferred stock, certain dividend non-payments and as otherwise required by applicable law. Net proceeds from the sale totaled $289.7 million, providing additional capital to be used for general corporate purposes. A portion of the proceeds were also used to redeem, in whole, the 6.50% non-cumulative perpetual preferred stock Series A, par value $0.01 per share, in accordance with its terms. The redemption of the Series A preferred stock occurred on June 15, 2021.
(20) Quarterly Financial Data (unaudited)
The tables below summarize quarterly financial information:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 Selected Quarterly Financial Data |
(in thousands except per share data) | Fourth | | Third | | Second | | First |
Interest income | $ | 371,287 | | | $ | 322,071 | | | $ | 242,349 | | | $ | 208,530 | |
Interest expense | 123,687 | | | 82,991 | | | 36,818 | | | 24,983 | |
Net interest income | 247,600 | | | 239,080 | | | 205,531 | | | 183,547 | |
Provision for credit losses | 34,000 | | | 12,000 | | | 22,000 | | | (2,000) | |
Net interest income after provision for credit losses | 213,600 | | | 227,080 | | | 183,531 | | | 185,547 | |
Non-interest income | 277,672 | | | 25,333 | | | 26,242 | | | 20,282 | |
Non-interest expense | 213,090 | | | 197,047 | | | 164,303 | | | 153,092 | |
Income before income taxes | 278,182 | | | 55,366 | | | 45,470 | | | 52,737 | |
Income tax expense | 60,931 | | | 13,948 | | | 11,311 | | | 13,087 | |
Net income | 217,251 | | | 41,418 | | | 34,159 | | | 39,650 | |
Preferred stock dividends | 4,312 | | | 4,313 | | | 4,312 | | | 4,313 | |
Net income available to common stockholders | $ | 212,939 | | | $ | 37,105 | | | $ | 29,847 | | | $ | 35,337 | |
Basic earnings per share | $ | 4.28 | | | $ | 0.74 | | | $ | 0.59 | | | $ | 0.70 | |
Diluted earnings per share | $ | 4.23 | | | $ | 0.74 | | | $ | 0.59 | | | $ | 0.69 | |
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| 2021 Selected Quarterly Financial Data |
(in thousands except per share data) | Fourth | | Third | | Second | | First |
Interest income | $ | 219,892 | | | $ | 216,589 | | | $ | 216,953 | | | $ | 223,151 | |
Interest expense | 25,860 | | | 26,053 | | | 27,496 | | | 28,339 | |
Net interest income | 194,032 | | | 190,536 | | | 189,457 | | | 194,812 | |
Provision for credit losses | (10,000) | | | 5,000 | | | (19,000) | | | (6,000) | |
Net interest income after provision for credit losses | 204,032 | | | 185,536 | | | 208,457 | | | 200,812 | |
Non-interest income | 31,459 | | | 24,779 | | | 37,639 | | | 44,353 | |
Non-interest expense | 146,649 | | | 152,987 | | | 149,060 | | | 150,316 | |
Income before income taxes | 88,842 | | | 57,328 | | | 97,036 | | | 94,849 | |
Income tax expense | 23,712 | | | 13,938 | | | 23,555 | | | 22,911 | |
Net income | 65,130 | | | 43,390 | | | 73,481 | | | 71,938 | |
Preferred stock dividends | 4,313 | | | 4,312 | | | 6,317 | | | 3,779 | |
Net income available to common stockholders | $ | 60,817 | | | $ | 39,078 | | | $ | 67,164 | | | $ | 68,159 | |
Basic earnings per share | $ | 1.20 | | | $ | 0.76 | | | $ | 1.31 | | | $ | 1.33 | |
Diluted earnings per share | $ | 1.19 | | | $ | 0.76 | | | $ | 1.31 | | | $ | 1.33 | |
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(21) New Accounting Standards
ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326)” (“ASU 2022-02”) eliminates the guidance on troubled debt restructurings and requires entities to evaluate all loan modifications to determine if they result in a new loan or a continuation of the existing loan. ASU 2022-02 also requires that entities disclose current-period gross charge-offs by year of origination for loans and leases. ASU 2022-02 is effective January 1, 2023 and is not expected to have a significant impact on the Company’s financial statements.
Accounting Standard Update 2022-04, “Liabilities - Supplier Finance Programs (Subtopic 405-50)” (“ASU 2022-04”) enhances the transparency of supplier finance programs and the related financial statement disclosures. The amendments require that a buyer in a supplier finance program disclose information about the key terms of the program, outstanding confirmed amounts as of the end of the period, a rollforward of such amounts during each annual period and a description of where in the financial statements outstanding amounts are presented. ASU 2022-04 is effective January 1, 2023, except for the disclosure of rollforward information, which is effective January 1, 2024, and is not expected to have an impact on the Company’s consolidated financial statements.
ASU 2022-06, “Reference Rate Reform (Topic 848)” (“ASU 2022-06”) provides optional guidance to ease the potential burden in account for (or recognizing the effects of) reference rate reform on financial reporting. The objective of the guidance is to provide temporary relief during the transition period away from LIBOR toward new interest rate benchmarks. The amendments in ASU 2022-06 defer the sunset date provision from December 31, 2022 to December 31, 2024. ASU 2022-06 was effective immediately upon issuance and is not expected to have an impact on the Company’s financial statements or disclosures.