Texas Capital Bancshares(TCBI) - 2023 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This section provides unaudited consolidated financial statements and management's analysis for the period ended September 30, 2023 ITEM 1. FINANCIAL STATEMENTS - UNAUDITED This section presents unaudited consolidated financial statements, including balance sheets, income statements, cash flows, and detailed accounting notes Consolidated Balance Sheets This chapter summarizes the Company's financial position, detailing assets, liabilities, and equity as of September 30, 2023 Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Assets | | | | Total assets | $29,628,249 | $28,414,642 | | Loans held for investment, net | $20,368,469 | $19,033,871 | | Investment securities | $4,069,717 | $3,585,114 | | Liabilities | | | | Total deposits | $23,878,978 | $22,856,880 | | Non-interest bearing deposits | $9,352,883 | $9,618,081 | | Interest bearing deposits | $14,526,095 | $13,238,799 | | Total liabilities | $26,550,549 | $25,359,291 | | Stockholders' Equity | | | | Total stockholders' equity | $3,077,700 | $3,055,351 | - Total assets increased by $1.21 billion (4.27%) from December 31, 2022, to September 30, 2023, driven by growth in loans held for investment and investment securities[7] - Total deposits increased by $1.02 billion (4.47%) from December 31, 2022, to September 30, 2023, with interest-bearing deposits increasing and non-interest-bearing deposits decreasing[7] Consolidated Statements of Income and Other Comprehensive Income/(Loss) This chapter presents the Company's financial performance, detailing revenues, expenses, and net income for the periods ended September 30, 2023 Consolidated Statements of Income Highlights (in thousands, except per share data) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total interest income | $425,769 | $322,072 | $1,212,851 | $772,952 | | Total interest expense | $193,698 | $82,991 | $513,445 | $144,792 | | Net interest income | $232,071 | $239,081 | $699,406 | $628,160 | | Provision for credit losses | $18,000 | $12,000 | $53,000 | $32,000 | | Total non-interest income | $46,872 | $25,332 | $130,286 | $71,855 | | Total non-interest expense | $179,891 | $197,047 | $555,562 | $514,442 | | Net income | $61,679 | $41,418 | $168,991 | $115,227 | | Net income available to common stockholders | $57,366 | $37,105 | $156,053 | $102,289 | | Basic earnings per common share | $1.19 | $0.74 | $3.24 | $2.03 | | Diluted earnings per common share | $1.18 | $0.74 | $3.20 | $2.00 | - Net income for the three months ended September 30, 2023, increased by $20.26 million (48.9%) YoY, primarily due to higher non-interest income and lower non-interest expense, despite a decrease in net interest income[9] - For the nine months ended September 30, 2023, net income increased by $53.76 million (46.6%) YoY, driven by increases in net interest income and non-interest income, partially offset by higher provision for credit losses and non-interest expense[9] Consolidated Statements of Stockholders' Equity This chapter outlines changes in the Company's equity, including retained earnings, treasury stock, and comprehensive income Stockholders' Equity Changes (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Total stockholders' equity | $3,077,700 | $3,055,351 | | Retained earnings | $2,419,555 | $2,263,502 | | Treasury stock (shares) | (3,095,444) | (2,083,535) | | Treasury stock (amount) | $(175,528) | $(115,310) | | Accumulated other comprehensive loss, net of taxes | $(505,912) | $(418,943) | - Total stockholders' equity increased by $22.35 million from December 31, 2022, to September 30, 2023, primarily due to net income, partially offset by an increase in treasury stock and accumulated other comprehensive loss[7][11][12] - The Company repurchased 1,011,909 shares of common stock for $60.2 million during the nine months ended September 30, 2023[12] Consolidated Statements of Cash Flows This chapter details the Company's cash flows from operating, investing, and financing activities for the periods presented Consolidated Cash Flow Highlights (in thousands) | Activity | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $186,073 | $214,100 | | Net cash used in investing activities | $(2,073,892) | $(341,189) | | Net cash provided by/(used in) financing activities | $1,068,335 | $(4,179,323) | | Net decrease in cash and cash equivalents | $(819,484) | $(4,306,412) | | Cash and cash equivalents at end of period | $4,192,776 | $3,640,247 | - Net cash provided by operating activities decreased by $28.03 million YoY for the nine months ended September 30, 2023[13] - Net cash used in investing activities significantly increased to $(2.07) billion in 2023 from $(341.19) million in 2022, primarily due to higher originations of loans held for investment and purchases of available-for-sale securities[13] - Financing activities shifted from a net cash outflow of $(4.18) billion in 2022 to a net cash inflow of $1.07 billion in 2023, mainly driven by a net increase in deposits[13] Notes to Consolidated Financial Statements This chapter provides detailed explanations of the Company's accounting policies and specific financial statement line items (1) Operations and Summary of Significant Accounting Policies This section details the Company's business operations and outlines its key accounting policies, including the CECL model - The Company updated its current expected credit loss (CECL) model in Q2 2023, incorporating more granular historical loss rates, probability of default, and loss severities, and adjusting portfolio segments and reversion speeds for forecasts[18][19][20] - The CECL methodology recognizes lifetime expected credit losses immediately upon asset origination or purchase, applying to financial assets at amortized cost and off-balance sheet credit exposures[22] - The loan portfolio is segregated into pools by segment and credit grade for collective allowance measurement, with individual evaluations for loans not sharing risk characteristics. A two-year forecast period is generally used, reverting to historical loss rates over 1-2 years for periods beyond reasonable forecasts[24][25] (2) Earnings Per Share This section provides a breakdown of basic and diluted earnings per common share for the reported periods Earnings Per Share (EPS) (in thousands except share and per share data) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income available to common stockholders | $57,366 | $37,105 | $156,053 | $102,289 | | Basic earnings per common share | $1.19 | $0.74 | $3.24 | $2.03 | | Diluted earnings per common share | $1.18 | $0.74 | $3.20 | $2.00 | | Basic weighted average common shares | 48,007,466 | 49,891,727 | 48,168,486 | 50,506,364 | | Diluted weighted average common shares | 48,528,698 | 50,417,884 | 48,724,028 | 51,090,515 | - Diluted EPS increased significantly to $1.18 for Q3 2023 from $0.74 for Q3 2022, and to $3.20 for the nine months ended September 30, 2023, from $2.00 for the same period in 2022[36] (3) Investment Securities This section details the Company's investment securities portfolio, including available-for-sale and held-to-maturity debt Investment Securities Summary (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Total available-for-sale debt securities (Fair Value) | $3,147,865 | $2,615,644 | | Total held-to-maturity debt securities (Amortized Cost) | $881,352 | $935,514 | | Total investment securities | $4,069,717 | $3,585,114 | | Total unrealized loss on AFS debt securities | $(478,209) | $(385,205) | | Total unrealized loss on HTM debt securities (Fair Value) | $(150,094) | $(118,600) | - Available-for-sale debt securities increased by $532.2 million from December 31, 2022, to September 30, 2023, while held-to-maturity debt securities decreased by $54.16 million[37] - Unrealized losses on available-for-sale debt securities increased by $93.0 million, primarily due to changes in market interest rates, not credit quality. The Company does not intend to sell these securities before recovery of amortized cost[37][43] (4) Loans and Allowance for Credit Losses on Loans This section details the Company's loan portfolio by segment and the allowance for credit losses, including provision and charge-offs Loans Held for Investment by Portfolio Segment (in thousands) | Portfolio Segment | Sep 30, 2023 | Dec 31, 2022 | | :------------------------ | :----------- | :----------- | | Commercial | $10,365,650 | $9,832,676 | | Mortgage finance | $4,429,489 | $4,090,033 | | Commercial real estate | $5,358,770 | $4,875,363 | | Consumer | $537,229 | $552,848 | | Gross loans held for investment | $20,691,138 | $19,350,920 | | Allowance for credit losses on loans | $(244,902) | $(253,469) | | Total loans held for investment, net | $20,368,469 | $19,033,871 | - Gross loans held for investment increased by $1.34 billion (6.9%) from December 31, 2022, to September 30, 2023, with growth across all categories except consumer loans[48][130] Allowance for Credit Losses on Loans (in thousands) | Metric | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | | Beginning balance | $253,469 | $211,866 | | Provision for credit losses on loans | $28,523 | $27,617 | | Net charge-offs | $37,090 | $4,870 | | Ending balance | $244,902 | $234,613 | - The provision for credit losses on loans increased slightly to $28.5 million for the nine months ended September 30, 2023, from $27.6 million in the prior year, driven by increases in criticized loans and total loans held for investment[52][137] - Net charge-offs significantly increased to $37.1 million for the nine months ended September 30, 2023, compared to $4.9 million for the same period in 2022[52][137] (5) Short-Term Borrowings and Long-Term Debt This section details the Company's short-term borrowings and long-term debt obligations as of the reporting dates Short-Term Borrowings (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :------------------------ | :----------- | :----------- | | Customer repurchase agreements | $0 | $1,142 | | Federal Home Loan Bank borrowings | $1,400,000 | $1,200,000 | | Total short-term borrowings | $1,400,000 | $1,201,142 | Long-Term Debt (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :------------------------ | :----------- | :----------- | | Bank-issued floating rate senior unsecured credit-linked notes due 2024 | $198,997 | $272,492 | | Bank-issued 5.25% fixed rate subordinated notes due 2026 | $174,392 | $174,196 | | Company-issued 4.00% fixed rate subordinated notes due 2031 | $371,676 | $371,348 | | Trust preferred floating rate subordinated debentures due 2032 to 2036 | $113,406 | $113,406 | | Total long-term debt | $858,471 | $931,442 | - Short-term borrowings increased by $198.86 million from December 31, 2022, to September 30, 2023, primarily due to an increase in FHLB borrowings[59] - Long-term debt decreased by $72.97 million, mainly due to a partial paydown of $75.0 million of senior unsecured credit-linked notes in Q2 2023[60] (6) Financial Instruments with Off-Balance Sheet Risk This section discusses the Company's off-balance sheet financial instruments and related credit loss allowances Off-Balance Sheet Credit Losses (in thousands) | Metric | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | | Beginning balance | $21,793 | $17,265 | | Provision for off-balance sheet credit losses | $24,477 | $4,383 | | Ending balance | $46,270 | $21,648 | - The allowance for off-balance sheet credit losses significantly increased to $46.27 million at September 30, 2023, from $21.79 million at the beginning of the period, primarily due to a higher allocation of losses to off-balance sheet financial instruments following changes in the CECL model[61][62] Off-Balance Sheet Commitments (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Commitments to extend credit | $9,704,070 | $9,673,082 | | Standby letters of credit | $515,651 | $417,896 | (7) Regulatory Ratios and Capital This section presents the Company's regulatory capital ratios and compliance with 'well capitalized' requirements Regulatory Capital Ratios (Company) (as of Sep 30, 2023) | Capital Ratio | Actual Ratio | Minimum Required Ratio | Capital Required to be Well Capitalized | | :----------------------------------- | :----------- | :--------------------- | :------------------------------------ | | CET1 | 12.70 % | 7.00 % | N/A | | Total capital (to risk-weighted assets) | 17.09 % | 10.50 % | 10.00 % | | Tier 1 capital (to risk-weighted assets) | 14.28 % | 8.50 % | 6.00 % | | Tier 1 capital (to average assets) | 12.14 % | 4.00 % | N/A | - The Company and the Bank exceeded all 'well capitalized' regulatory capital requirements as of September 30, 2023, with CET1 and total capital ratios of 12.70% and 17.09% respectively for the Company[68][69][73] - The Company utilizes the five-year transition option for the CECL accounting standard's effect on regulatory capital[67] - During the nine months ended September 30, 2023, the Company repurchased 1,011,909 shares of common stock for $59.7 million under a new $150.0 million share repurchase program authorized in January 2023[65][66] (8) Stock-Based Compensation This section details the Company's stock-based compensation expense and unrecognized compensation related to awards Stock-Based Compensation Expense (in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | RSUs | $4,441 | $5,376 | $17,948 | $15,805 | | Cash-settled units | $0 | $3 | $0 | $186 | | Total | $4,441 | $5,379 | $17,948 | $15,991 | - Total stock-based compensation expense for the nine months ended September 30, 2023, increased to $17.95 million from $15.99 million in the prior year, primarily from RSUs[77] - Unrecognized compensation expense related to unvested stock-settled awards was $33.77 million at September 30, 2023, with a weighted average recognition period of 2.1 years[78] (9) Fair Value Disclosures This section provides fair value measurements for assets and liabilities, categorized by valuation input levels Assets and Liabilities Measured at Fair Value (in thousands) - Sep 30, 2023 | Item | Level 1 | Level 2 | Level 3 | | :----------------------------------- | :-------- | :-------- | :-------- | | Available-for-sale debt securities | $623,448 | $2,512,326 | $12,091 | | Equity securities | $29,689 | $10,811 | $0 | | Mortgage loans held for sale | $0 | $706 | $0 | | Loans held for investment | $0 | $0 | $32,847 | | Derivative assets | $0 | $12,347 | $0 | | Securities sold not yet purchased | $9,532 | $0 | $0 | | Derivative liabilities | $0 | $119,481 | $0 | | Non-qualified deferred compensation plan liabilities | $18,488 | $0 | $0 | - At September 30, 2023, $32.8 million of loans held for investment were measured at fair value on a nonrecurring basis, based on collateral valuations utilizing Level 3 inputs[88] - The fair value of CRT securities, a Level 3 valuation, was $12.09 million at September 30, 2023, determined using a discounted cash flow model with discount rates ranging from 6.89% to 10.61% and weighted-average life from 5.14 to 7.92 years[87] (10) Derivative Financial Instruments This section details the Company's derivative positions, including notional amounts and fair values, and their impact Derivative Positions (in thousands) | Metric | Sep 30, 2023 Notional Amount | Sep 30, 2023 Estimated Fair Value (Asset) | Sep 30, 2023 Estimated Fair Value (Liability) | | :----------------------------------- | :-------------------------- | :--------------------------------------- | :---------------------------------------- | | Swaps hedging loans | $3,100,000 | $0 | $111,760 | | Customer-initiated and other derivatives (total) | $19,522,344 | $137,333 | $248,285 | | Net derivatives included on consolidated balance sheets | N/A | $12,347 | $119,481 | - The Company's credit exposure on derivative instruments, net of collateral, was approximately $12.3 million at September 30, 2023[92] - During the nine months ended September 30, 2023, the Company recorded $66.1 million in unrealized losses to adjust cash flow hedges to fair value (net of tax to AOCI) and reclassified $43.4 million from AOCI as a decrease to interest income on loans[95] (11) Accumulated Other Comprehensive Income This section outlines changes in accumulated other comprehensive income (AOCI) by component, including cash flow hedges and securities Change in AOCI by Component (in thousands) - 9 Months Ended Sep 30, 2023 | Component | Beginning Balance | Change in Unrealized Gain/(Loss) | Amounts Reclassified into Net Income | Ending Balance | | :----------------------------------- | :---------------- | :------------------------------- | :--------------------------------- | :------------- | | Cash Flow Hedges | $(66,394) | $(66,101) | $43,426 | $(84,308) | | Available-for-Sale Securities | $(304,309) | $(93,007) | $0 | $(377,784) | | Held-to-Maturity Securities | $(48,240) | $0 | $5,594 | $(43,820) | | Total AOCI (net of tax) | $(418,943) | $(159,108) | $49,020 | $(505,912) | - Total accumulated other comprehensive loss (AOCI) increased to $(505.9) million at September 30, 2023, from $(418.9) million at the beginning of the nine-month period, primarily due to changes in unrealized losses on available-for-sale securities and cash flow hedges[96] (12) New Accounting Standards This section discusses recently issued accounting standards and their anticipated impact on the Company's financials - ASU 2023-05, effective January 1, 2025, requires certain joint ventures to apply a new basis of accounting upon formation, recognizing and initially measuring most assets and liabilities at fair value. This is not expected to impact the Company's financial statements[97] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's analysis of financial condition and results of operations for the nine months ended September 30, 2023 Overview This chapter provides a high-level summary of the Company's financial performance, liquidity, and capital position - Despite significant banking industry volatility and high-profile bank failures in the first nine months of 2023, the Company maintained a robust liquidity position and strong capital levels[102] - The Company's CET1 and total capital ratios were 12.7% and 17.1%, respectively, as of September 30, 2023, exceeding regulatory requirements[102] - Total deposits increased by 4% to $23.9 billion at September 30, 2023, compared to December 31, 2022[102] Results of Operations This chapter analyzes the Company's key financial performance indicators, including net income, ROA, and ROE Key Performance Indicators | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net interest margin | 3.13 % | 3.05 % | 3.25 % | 2.64 % | | Return on average assets ("ROA") | 0.81 % | 0.52 % | 0.77 % | 0.47 % | | Return on average common equity ("ROE") | 8.08 % | 5.36 % | 7.46 % | 4.90 % | | Efficiency ratio | 64.5 % | 74.5 % | 67.0 % | 73.5 % | - Net income available to common stockholders increased to $57.4 million for Q3 2023 (from $37.1 million in Q3 2022) and to $156.1 million for the nine months ended September 30, 2023 (from $102.3 million in the prior year)[104][105] - ROE improved to 8.08% for Q3 2023 (from 5.36% in Q3 2022) and to 7.46% for the nine months ended September 30, 2023 (from 4.90% in the prior year)[104][105] Net Interest Income This chapter analyzes the Company's net interest income and net interest margin, detailing the impact of interest rates Net Interest Income and Margin | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net interest income | $232.1 million | $239.1 million | $699.4 million | $628.2 million | | Net interest margin | 3.13 % | 3.05 % | 3.25 % | 2.64 % | | Yield on total loans held for investment | 6.58 % | 4.91 % | 6.53 % | 4.15 % | | Total cost of deposits | 2.62 % | 0.93 % | 2.36 % | 0.48 % | - Net interest income decreased by $7.0 million YoY for Q3 2023, primarily due to increased funding costs and decreased average earning assets, partially offset by higher yields on earning assets[117] - Net interest income increased by $71.2 million YoY for the nine months ended September 30, 2023, driven by higher yields on average earning assets, despite rising funding costs and decreased average earning assets[121] - Net interest margin improved to 3.13% for Q3 2023 (from 3.05% in Q3 2022) and to 3.25% for the nine months ended September 30, 2023 (from 2.64% in the prior year), reflecting the impact of rising interest rates on asset yields[119][123] Non-interest Income This chapter examines the Company's non-interest income sources, including investment banking and trading income Non-interest Income (in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total non-interest income | $46,872 | $25,332 | $130,286 | $71,855 | | Investment banking and trading income | $29,191 | $7,812 | $75,457 | $23,117 | - Non-interest income increased by $21.5 million YoY for Q3 2023 and by $58.4 million YoY for the nine months ended September 30, 2023, primarily driven by a significant increase in investment banking and trading income[125] Non-interest Expense This chapter analyzes the Company's non-interest expenses, including salaries, benefits, and technology costs Non-interest Expense (in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total non-interest expense | $179,891 | $197,047 | $555,562 | $514,442 | | Salaries and benefits | $110,010 | $128,764 | $351,730 | $331,981 | | Marketing | $4,757 | $8,282 | $20,168 | $21,765 | | Communications and technology | $19,607 | $18,470 | $57,655 | $48,819 | | FDIC insurance assessment | $5,769 | $3,953 | $11,632 | $11,252 | - Non-interest expense decreased by $17.2 million YoY for Q3 2023, mainly due to lower salaries and benefits (partially from a $13.7 million expense in Q3 2022 related to a subsidiary sale) and marketing expenses[126] - Non-interest expense increased by $41.1 million YoY for the nine months ended September 30, 2023, primarily due to higher salaries and benefits, legal and professional, and communications and technology expenses[127] Analysis of Financial Condition This chapter provides an in-depth analysis of the Company's financial condition, focusing on loans, non-performing assets, and credit loss experience Loans Held for Investment This section details the Company's loan portfolio by segment, highlighting growth and composition Gross Loans Held for Investment (in thousands) | Portfolio Segment | Sep 30, 2023 | Dec 31, 2022 | | :------------------------ | :----------- | :----------- | | Commercial | $10,365,650 | $9,832,676 | | Mortgage finance | $4,429,489 | $4,090,033 | | Commercial real estate | $5,358,770 | $4,875,363 | | Consumer | $537,229 | $552,848 | | Total gross loans held for investment | $20,691,138 | $19,350,920 | - Total loans held for investment increased by $1.3 billion (6.9%) from December 31, 2022, to September 30, 2023, reflecting broad-based growth across commercial, mortgage finance, and commercial real estate categories[130] - Mortgage finance loans, typically sold within 10-20 days, constituted 21% of total loans held for investment at both periods[130] Portfolio Concentrations This section discusses the geographic and business concentrations within the Company's loan portfolio - A majority of the Company's loans held for investment (excluding mortgage finance and other national lines of business) are to businesses headquartered or operating in Texas, indicating significant geographic concentration risk[132] - Over 50% of the Company's total loan exposure and deposits are outside of Texas, diversifying some of the geographic risk[132] Non-performing Assets This section reports on the Company's non-performing assets, including non-accrual loans and their ratios Non-performing Assets (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Total non-accrual loans held for investment | $63,129 | $48,338 | | Non-accrual loans held for investment to total loans held for investment | 0.31 % | 0.25 % | | Total non-performing assets to total assets | 0.21 % | 0.17 % | - Total non-performing assets increased to $63.1 million at September 30, 2023, from $48.3 million at December 31, 2022, primarily due to an increase in non-accrual commercial loans[135] - The ratio of allowance for credit losses on loans to non-accrual loans held for investment decreased to 3.9x at September 30, 2023, from 5.2x at December 31, 2022[135] Summary of Credit Loss Experience This section summarizes the Company's credit loss experience, including allowance for credit losses and net charge-offs Credit Loss Experience Metrics | Metric | Sep 30, 2023 | Sep 30, 2022 | | :----------------------------------- | :----------- | :----------- | | Allowance for credit losses on loans to total loans held for investment | 1.19 % | 1.19 % | | Total allowance for credit losses to total loans held for investment | 1.41 % | 1.30 % | | Total provision for credit losses to average total loans held for investment | 0.35 % | 0.19 % | - The total provision for credit losses (loans and off-balance sheet) increased to $53.0 million for the nine months ended September 30, 2023, from $32.0 million in the prior year[9] Net Charge-offs to Average Loans by Segment (9 Months Ended Sep 30) | Portfolio Segment | 2023 Net Charge-offs | 2023 Net Charge-offs to Average Loans | 2022 Net Charge-offs | 2022 Net Charge-offs to Average Loans | | :------------------------ | :------------------- | :------------------------------------ | :------------------- | :------------------------------------ | | Commercial | $37,054 | 0.48 % | $4,541 | 0.05 % | | Total | $37,090 | 0.25 % | $4,870 | 0.03 % | Liquidity and Capital Resources This chapter discusses the Company's liquidity position, funding sources, borrowing capacity, and capital levels - The Company's primary funding source is customer deposits, supplemented by short-term borrowings (federal funds, FHLB advances) and long-term debt[141] Liquidity Metrics (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Interest bearing cash and cash equivalents | $3,975,860 | $4,778,623 | | Interest bearing cash and cash equivalents as a percent of total deposits | 16.7 % | 20.9 % | | Customer deposits | $22,485,141 | $21,247,999 | | Brokered deposits | $1,393,837 | $1,608,881 | | Estimated uninsured deposits as a percent of total deposits | 40 % | N/A | Short-Term Borrowing Capacity (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Total FHLB borrowing capacity | $6,937,371 | $6,160,515 | | Unused federal funds lines available from commercial banks | $1,388,000 | $1,479,000 | | Unused Federal Reserve borrowings capacity | $3,052,148 | $3,574,762 | | Unused revolving line of credit | $100,000 | $75,000 | - The Company's equity capital averaged $3.1 billion for the nine months ended September 30, 2023, consistent with the prior year[149] Critical Accounting Estimates This chapter highlights the Company's critical accounting estimates, particularly the allowance for credit losses (ACL) - Management considers the allowance for credit losses (ACL) as the most critical accounting estimate, involving significant judgment and uncertainty[154] - The ACL is determined using a CECL model, segregating the loan portfolio into pools by segment and credit grade, and incorporating historical loss rates, probability of default, loss severities, and reasonable and supportable forecasts[154] - Under the most severe downside macroeconomic scenario considered, the quantitative estimate of the allowance for credit loss would increase by approximately $183.7 million[155] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section details the Company's market risk exposure, primarily interest rate risk, and its management through derivatives and LIBOR transition Interest Rate Risk Management This chapter describes how the Company identifies, measures, and manages its exposure to interest rate fluctuations - The Company is primarily exposed to market risk through changes in interest rates affecting its non-trading assets and interest rate derivative instruments[158] - Management uses a sensitivity analysis and a dynamic simulation model to quantify interest rate risk exposure on net interest income over the next twelve months under various 'shock test' scenarios (e.g., immediate 100 and 200 basis point increases/decreases)[163][165] Anticipated Impact on Net Interest Income (in thousands) - Next 12 Months | Scenario | Sep 30, 2023 Impact | Sep 30, 2022 Impact | | :----------------------------------- | :------------------ | :------------------ | | 100 bps Increase | $58,451 | $76,688 | | 200 bps Increase | $29,296 | $134,859 | | 100 bps Decrease | $(41,562) | $(103,564) | | 200 bps Decrease | $(83,055) | N/A | Use of Derivatives to Manage Interest Rate and Other Risks This chapter explains the Company's use of derivative instruments for hedging and managing various financial risks - The Company uses derivative transactions to manage interest rate, prepayment, credit, price, and foreign currency risks (asset and liability management positions) and to support customer business requirements (customer-related positions)[167][169] - Derivative contracts are designated as fair value hedges, cash flow hedges, net investment hedges, or non-hedging derivatives depending on their purpose[168] LIBOR Transition This chapter describes the Company's progress in transitioning financial instruments from LIBOR to alternative benchmark rates - The Company has transitioned substantially all financial instruments from LIBOR to an alternative benchmark rate, primarily SOFR, by September 30, 2023, following regulatory guidance and the Adjustable Interest Rate (LIBOR) Act[171][172] ITEM 4. CONTROLS AND PROCEDURES This section confirms the effectiveness of disclosure controls and procedures and reports no material changes in internal control - The Company's management, with CEO and CFO supervision, concluded that disclosure controls and procedures were effective as of September 30, 2023[174] - There were no material changes in the Company's internal control over financial reporting during the period covered by the report[175] PART II - OTHER INFORMATION This section provides additional information, including legal proceedings, risk factors, and equity security sales ITEM 1. LEGAL PROCEEDINGS This section details the Company's involvement in legal proceedings and management's assessment of their financial impact - Management does not expect current legal proceedings to have a material adverse impact on the Company's financial statements or results of operations[177] ITEM 1A. RISK FACTORS This section confirms no material changes to the risk factors previously disclosed in the Company's prior filings - No material changes to risk factors were reported since the previous filings[178] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section details the Company's common stock repurchase activities, including program completion and new authorizations Common Stock Repurchases (9 Months Ended Sep 30, 2023) | Month | Total Number of Shares Purchased | Average Price Paid per Share | | :------------------------ | :------------------------------- | :--------------------------- | | January 2023 | 564,206 | $61.50 | | March 2023 | 447,703 | $55.80 | | Total | 1,011,909 | $58.98 | - The Company completed its $150.0 million share repurchase program authorized in April 2022 during January 2023[179] - A new $150.0 million share repurchase program was authorized on January 18, 2023, under which 1,011,909 shares were repurchased for $59.7 million during the nine months ended September 30, 2023[179][150] ITEM 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q, including certifications and XBRL taxonomy documents - The report includes certifications from the Chief Executive Officer and Chief Financial Officer as required by the Exchange Act[182] - XBRL (eXtensible Business Reporting Language) documents are filed, providing structured data for financial reporting[182]