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Item 2. Management’s Discussion and Analysis

2021-04-22 compared with 2020-10-22 · 148 added, 256 removed, 287 unchanged (58% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition as of September 30, 2020 and December 31, 2019 and results of operations for the three and nine month periods ended September 30, 2020 and September 30, 2019 should be read in conjunction with our consolidated financial statements and notes to the financial statements for the year ended December 31, 2019, and the other information included in our Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019 Form 10-K").

Certain risks, uncertainties and other factors, including those set forth under "Risk Factors" in Part I, Item 1A of the 2019 Form 10-K, and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, may cause actual results to differ materially from the results discussed in the forward-looking statements appearing in this discussion and analysis.

The following discussion and analysis of our financial condition as of March 31, 2021 and December 31, 2020 and results of operations for the three month periods ended March 31, 2021 and March 31, 2020 should be read in conjunction with our consolidated financial statements and notes to the financial statements for the year ended December 31, 2020, and the other information included in our Annual Report on Form 10-K for the year ended December 31, 2020 (the "2020 Form 10-K").

Certain risks, uncertainties and other factors, including those set forth under "Risk Factors" in Part I, Item 1A of the 2020 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.

Forward-Looking Statements

Certain statements and financial analysis contained in this report that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of federal securities laws.

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.

Forward-looking statements may also be contained in our future filings with SEC, in press releases and in oral and written statements made by us or with our approval that are not statements of historical fact and constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based on our beliefs, assumptions and expectations of our future performance taking into account all information available to us at the time such statements are made.

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Forward-looking statements may include, among other things, statements about the credit quality of our loan portfolio, general economic conditions in the United States and in our markets, including the continued impact on our customers from volatility in oil and gas prices, the material risks and uncertainties for the U.S.

and world economies, and for our business, resulting from the novel Coronavirus Disease 2019 ("COVID-19") pandemic, expectations regarding rates of default and loan losses, volatility in the mortgage industry, our business strategies and our expectations about future financial performance, future growth and earnings, the appropriateness of our allowance for credit losses and provision for credit losses, the impact of changing regulatory requirements and legislative changes on our business, increased competition, interest rate risk, new lines of business, new product or service offerings and new technologies.

and world economies, and for our business, resulting from the COVID-19 pandemic, expectations regarding rates of default and loan losses, volatility in the mortgage industry, our business strategies and our expectations about future financial performance, future growth and earnings, the appropriateness of our allowance for credit losses and provision for credit losses, the impact of changing regulatory requirements and legislative changes on our business, increased competition, interest rate risk, new lines of business, new product or service offerings and new technologies.

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.

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• The failure to effectively balance our funding sources with cash demands by depositors and borrowers.

The failure to manage information systems risk or to prevent cyber-attacks against us, our customers or our third party vendors, or to manage risks from disruptions or security breaches affecting us, our customers or our third party vendors, which risks have been materially enhanced by our increased reliance on technology to support associates working outside our offices.

• The failure to manage information systems risk or to prevent cyber-incidents against us, our customers or our third party vendors, or to manage risks from failures, disruptions or security breaches affecting us, our customers or our third party vendors, which risks have been materially enhanced by our increased reliance on technology to support associates working outside our offices.

• The costs and effects of cyber-incidents or other failures, disruptions or security breaches of our systems or those our third-party providers.

• The failure to effectively manage our interest rate risk resulting from unexpectedly large or sudden changes in interest rates, maturity imbalances in our assets and liabilities, potential adverse effects to our borrowers including their inability to repay loans with increased interest rates and the impact to our net interest income from the increasing cost of interest-bearing deposits.

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Department of Treasury and the Federal Reserve.

• The effect of changes in laws, regulations, policies and guidelines (including, among others, laws, regulations, policies and guidelines concerning taxes, banking, securities and monetary and fiscal policies) with which we and our subsidiaries must comply under the new Biden Administration and the effects of any such changes on our business and results of operations;

• The failure to successfully execute our business strategy, which may include expanding into new markets, developing and launching new lines of business or new products and services within the expected timeframes and budgets or to successfully manage the risks related to the development and implementation of these new businesses, products or services.

The failure to attract and retain key personnel or the loss of key individuals or groups of employees, including our ability to identify, employ and retain a successor chief executive officer.

• The failure to identify, attract and retain key personnel or the loss of key individuals or groups of employees.

• Increased or more effective competition from banks and other financial service providers in our markets.

• Structural changes in the markets for origination, sale and servicing of residential mortgages.

Uncertainty in the pricing of mortgage loans that we purchase, and later sell or securitize, as well as competition for the MSRs related to these loans and related interest rate risk or price risk resulting from retaining MSRs, and the potential effects of higher interest rates on our Mortgage Correspondent Aggregation ("MCA") loan volumes.

• Uncertainty in the pricing of mortgage loans that we purchase, and later sell or securitize, as well as competition for the MSRs related to these loans and related interest rate risk or price risk resulting from retaining MSRs, and the potential effects of higher interest rates on our MCA loan volumes.

• Changes in accounting principles, policies, practices or guidelines.

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Accordingly, we have created an operations infrastructure sufficient to support our lending and banking operations that we continue to build out as needed to serve a larger customer base and specialized industries.

On December 9, 2019, we and Independent Bank Group, Inc.

("IBTX") entered into a merger agreement to combine the companies in an all-stock merger of equals.

On May 22, 2020, we and IBTX mutually agreed to terminate the merger agreement.

The termination was approved by each company's board of directors after careful consideration of the significant impact of the COVID-19 pandemic on global markets and on the companies' ability to fully realize the benefits expected to be achieved through the merger.

Neither party paid a termination fee in connection with the termination of the merger agreement.

In response to the pressures of the current economic environment and a refinement of our strategy, we took actions during the second and third quarters of 2020 which are expected to decrease our non-interest expenses, including a workforce reduction and write-offs of certain software assets.

Significant transactions affecting our income statement during the nine months ended September 30, 2020 included:

$226.0 million provision for credit losses;

driven by an increase in charge-offs and reserve build related to higher criticized loan levels and continued economic uncertainty from the COVID-19 pandemic,

$42.1 million in non-recurring software expenses;

including $36.2 million in write-offs of certain software assets and $5.9 million in technology expense related to the roll-out of our Paycheck Protection Program ("PPP") capabilities,

$18.0 million in severance accruals related to the workforce reduction referenced above,

$17.8 million in merger-related expenses, and

$20.9 million MSR impairment.

While these expenses had a significant impact on our year-to-date operating results, we believe that we are better positioned to improve our core profitability going forward as the non-interest expense items are not expected to recur in future periods.

We continue to focus on balance sheet strength and while we intend to operate with above-average liquidity in response to the uncertain economic environment, we believe opportunities exist to improve core earnings by reducing or replacing higher cost funding sources and improving the earning asset mix.

Our organic growth model and the depth of talent on our team have built a resilient business with lasting client relationships and a record of value creation through dynamic markets and business cycles.

Impact of COVID-19

In March 2020, the outbreak of COVID-19 was recognized as a pandemic by the World Health Organization.

The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve.

Governmental responses to the pandemic included orders to close businesses not deemed essential and directing individuals to restrict their movements, observe social distancing and shelter in place.

These actions, together with responses to the pandemic by businesses and individuals, resulted in rapid decreases in commercial and consumer activity, temporary, and some permanent, closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, material decreases in oil and gas prices and in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future.

Many of the more restrictive orders have been eased, allowing businesses to open and operate at higher capacities, which has boosted commercial and consumer activity during the third quarter of 2020.

The risk of future reimplementation of restrictions on businesses in response to increasing infection rates remains significant.

Legislative Developments

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law.

It contained substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic.

The CARES Act included the PPP, a nearly $350 billion program designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks.

These loans were intended to guarantee eight weeks of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills.

The initial $350 billion program was supplemented in late April 2020 with $310 billion in additional funding.

On June 5, 2020, the Paycheck Protection Program Flexibility Act (the “new Act”) was signed into law, and made significant changes to the PPP to provide additional relief for small businesses, increasing flexibility for small businesses that have been unable to rehire employees due to lack of employee availability, or have been unable to operate as normal due to COVID-19 related restrictions, extending the period that businesses have to use PPP funds to qualify for loan forgiveness to 24 weeks, up from 8 weeks under the original rules, and relaxing the requirements that loan recipients must adhere to in order to qualify for loan forgiveness.

In addition, the new Act extended the payment deferral period for PPP loans until the date when the amount of loan forgiveness is determined and remitted to the lender.

For PPP recipients who do not apply for forgiveness, the loan deferral period is 10 months after the applicable forgiveness period ends.

On July 4, 2020, Congress enacted a new law to extend the deadline for applying for a PPP loan to August 8, 2020.

We have partnered with a web-based commercial and SBA lending software provider to manage the origination, processing, closing and monitoring of SBA loans and have set up the Texas Capital Bank SBA PPP Loan Portal to provide borrowers the ability to apply and qualify for PPP loans.

As of September 30, 2020, we had funded $717.5 million in PPP loans.

Those loans have an outstanding balance of $715.0 million as of September 30, 2020.

We also implemented a short-term loan modification program in late March 2020 to provide temporary payment relief to borrowers who meet the program's qualifications.

This program allows for a deferral of payments for 90 days, which we may extend for an additional 90 days, for a maximum of 180 days on a cumulative basis.

The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan.

Through September 30, 2020, we granted temporary modifications on 483 loans with a total outstanding loan balance of $1.3 billion, resulting in the deferral of $10.7 million in interest payments.

As of September 30, 2020 , 73 loans with a total outstanding balance of $166.2 million remain on deferral, of which $61.2 million have been granted a second deferral.

Impact on Our Financial Statements and Results of Operations

Financial institutions are dependent upon the ability of their loan customers to meet their loan obligations and the availability of their workforce and vendors.

As a result of the shelter-at-home mandate that was in force early in the second quarter of 2020, commercial activity throughout the state of Texas, as well as nationally, decreased significantly.

As of September 30, 2020, most regions in Texas have allowed businesses to re-open at limited capacities and with caution as to social-distancing and other restrictions.

Commercial activity has improved, but has not returned to the levels existing prior to the outbreak of the pandemic.

This continued depression in commercial activity may result in our customers' inability to meet their loan obligations to us.

Significant transactions affecting our financial statements during the three months ended March 31, 2021 included:

• Issuance of 5.75% fixed rate non-cumulative perpetual preferred stock, Series B (the "Series B Preferred Stock") and issuance and sale of 12,000,000 depositary shares, each representing a 1/40th interest in a share of the Series B Preferred Stock.

Net proceeds from the sale totaled $289.7 million.

The additional equity is being used for general corporate purchases, including funding regulatory capital infusions into the Bank, and may be used to redeem, in whole or in part and subject to receipt of all applicable regulatory approvals, our 6.5% non-cumulative perpetual preferred stock Series A, par value $0.01 per share, in accordance with its terms.

• Issuance of $275.0 million in senior unsecured credit-linked notes that mature on September 30, 2024.

The net proceeds of the offering will be used to expand the Bank's warehouse lending program and better serve our clients in all market environments.

Impact of COVID-19 Pandemic

The COVID-19 pandemic and related restrictive measures taken by governments, businesses and individuals caused unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve.

As the restrictive measures have been eased during 2020 and into 2021, the U.S.

economy has begun to recover and with the availability and distribution of a COVID-19 vaccine, we anticipate continued improvements in commercial and consumer activity and the U.S.

As of March 31, 2021, governor of Texas removed all restrictions initially set in place which has allowed businesses to reopen at full capacities.

While positive headwinds exist, we recognize that our business and consumer customers are experiencing varying degrees of financial distress, which is expected to continue into the second quarter of 2021, especially if new COVID-19 variant infections

increase and new economic restrictions are mandated.

Commercial activity has improved, but has not returned to the levels existing prior to the outbreak of the pandemic, which may result in our customers’ inability to meet their loan obligations to us.

In addition, the economic pressures and uncertainties related to the COVID-19 pandemic have resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer.

Our business and consumer customers are experiencing varying degrees of financial distress, which is expected to continue for the remainder of 2020, especially if COVID-19 infections increase and new economic restrictions are mandated.

Our borrowing base includes customers in industries such as energy, hotel/lodging, restaurants, entertainment, retail and commercial real estate, all of which have been and are likely to continue to be significantly impacted by the COVID-19 pandemic.

Our borrowing base includes customers in industries such as energy, hotel/lodging, restaurants, entertainment, retail and commercial real estate, all of which have been significantly impacted by the COVID-19 pandemic.

We recognize that these industries may take longer to recover as consumers may be hesitant to return to full social interaction or may change their spending habits on a more permanent basis as a result of the pandemic.

We continue to monitor these customers closely.

Future economic conditions are subject to significant uncertainty.

We have taken deliberate actions to ensure that we have the balance sheet strength to serve our clients and communities, including increases in liquidity and managing our assets and liabilities in order to maintain a strong capital position.

Current economic pressures and their effects on our customers, coupled with the implementation of the CECL expected loss methodology for determining our allowance for credit losses, have contributed to a substantially increased provision for credit losses for the first nine months of 2020.

We continue to monitor closely the impact of the COVID-19 pandemic on our customers, as well as the effects of the CARES Act and the new Act.

Uncertainties associated with the pandemic include the duration of the outbreak, the impact to our customers, employees and vendors and the impact to the economy as a whole.

COVID-19 has had, and is expected to continue to have, a significant adverse impact on our business, financial position and operating results.

The extent to which the COVID-19 pandemic will impact our operations and financial results during the remainder of 2020 and in 2021 cannot be reasonably or reliably estimated at this time.

Impact on our Business Operations

In order to protect the health of our customers and employees, and to comply with applicable government directives, we have modified our business practices, including restricting employee travel, directing employees to work from home insofar as is possible and implementing our business continuity plans and protocols to the extent necessary.

Since early March 2020, approximately 90% of our workforce has been working virtually with limited impact on the execution of our business and client experience.

We expect to be able to continue with this strategy for the foreseeable future.

When the decision is made to transition employees back into the office locations, our Business Continuity team has a plan in place to phase employees back into the office locations over an extended period of time.

Uncertainties associated with the pandemic include the duration of the COVID-19 outbreak and any related variant infections, the availability and effectiveness of COVID-19 vaccines, the impact to our customers, employees and vendors and the impact to the economy as a whole.

COVID-19 had a significant adverse impact on our business, financial position and operating results for the year ended December 31, 2020 and while uncertainty still exists, we believe we are well-positioned to operate effectively through the present economic environment and do expect to experience improvements in our financial results during 2021.

While we are still operating under our business continuity plan, we have begun to bring certain employees back into the office.

Our branch locations are currently open and operating during normal business hours, although customers are admitted into the branches only between the hours of 10:00 a.m.

and 2:00 p.m.

We are taking additional precautions within our branch locations, including enhanced cleaning procedures, to ensure the safety of our customers and our employees.

Energy Portfolio

Outstanding energy loans totaled $969.0 million, or 4% of total loans, at September 30, 2020, compared to $1.4 billion, or 6% of total loans, at December 31, 2019 and $1.5 billion, or 6% of total loans, at September 30, 2019.

Our energy loan portfolio is primarily comprised of loans to exploration and production (“E&P”) 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.

At September 30, 2020, loans to E&P companies represented approximately 70% of total energy loans outstanding.

The majority of this portfolio consists of first lien, senior secured, reserve-based loans, which we believe is the lowest-risk form of energy lending.

At September 30, 2020 approximately 40% of our exposure was located in lower cost production areas such as the Permian Basin and Eagle Ford.

We recorded $739,000 in net recoveries during the three months ended September 30, 2020, compared to $62.4 million in net charge-offs during the three months ended June 30, 2020.

Energy non-accruals also improved during the third quarter of 2020, decreasing to $73.8 million at September 30, 2020 compared to $103.9 million at June 30, 2020 and $63.2 million at September 30, 2019.

We continue to proactively manage our energy portfolio and overall credit quality.

Energy loans are reviewed quarterly and a formal borrowing base re-determination for reserve-based loans is completed semi-annually to ensure that borrowing capacity is commensurate with asset values.

Cash flows are assessed in the context of specific risk factors including commodity prices with corollary sensitivities, commodity hedges and select credit criteria.

Reserves allocated to energy loans totaled $112.9 million , or 12% of outstanding energy loans, at September 30, 2020 , compared to $102.7 million, or 9% of outstanding energy loans, at June 30, 2020 and $45.4 million , or 3% of outstanding energy loans, at September 30, 2019.

At September 30, 2020 approximately 70% of our E&P clients are hedged 50% or more for 2020 and approximately 50% of our E&P clients are hedged 50% or more for 2021.

We believe that this hedge coverage compares favorably to the energy downturn experienced in 2015 and 2016.

We continue to take additional precautions within our branch locations, including enhanced cleaning procedures, to ensure the safety of our customers and our employees.

Results of Operations

Summary of Performance

We reported net income of $57.1 million and net income available to common stockholders of $54.7 million for the third quarter of 2020 compared to net income of $88.1 million and net income available to common stockholders of $85.6 million for the third quarter of 2019 .

On a fully diluted basis, earnings per common share were $1.08 for the third quarter of 2020 , compared to $1.70 for the third quarter of 2019 .

Return on average common equity (“ROE”) was 8.24% and return on average assets ("ROA") was 0.59% for the third quarter of 2020 , compared to 13.21% and 1.06% , respectively, for the third quarter of 2019 .

The decline in net income, ROE and ROA for the third quarter of 2020 resulted primarily from a $44.6 million decline net interest income and a $19.0 million increase in the provision for credit losses, offset by a $40.0 million increase in non-interest income.

Net income and net loss available to common stockholders for the nine months ended September 30, 2020 totaled $6.1 million and $1.2 million , respectively, compared to net income and net income available to common stockholders of $247.6 million and $240.3 million , respectively, for the same period in 2019 .

On a fully diluted basis, earnings/(loss) per common share were

$(0.02) for the nine months ended September 30, 2020 , compared to $4.77 for the same period in 2019 .

ROE was (0.06)% and ROA was 0.02% for the nine months ended September 30, 2020 compared to 12.92% and 1.11%, respectively, for the same period in 2019 .

We reported net income of $71.9 million and net income available to common stockholders of $68.2 million for the first quarter of 2021 compared to a net loss of $16.7 million and net loss available to common stockholders of $19.1 million for the first quarter of 2020.

On a fully diluted basis, earnings per common share were $1.33 for the first quarter of 2021, compared to a loss per common share of $0.38 for the first quarter of 2020.

Return on average common equity (“ROE”) was 10.08% and return on average assets ("ROA") was 0.73% for the first quarter of 2021, compared to a negative 2.85% and negative 0.20%, respectively, for the first quarter of 2020.

The increase in net income, ROE and ROA for the first quarter of 2021 resulted primarily from a $102.0 million decrease in provision for credit losses.

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

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Consolidated Daily Average Balances, Average Yields and Rates

Three months ended September 30, 2020

Three months ended September 30, 2019

(in thousands except percentages)

Three months ended March 31, 2021 Three months ended March 31, 2020

(in thousands except percentages) Average

Balance Revenue/

Expense Yield/

Balance Revenue/

Expense Yield/

Investment securities – taxable $ 3,225,786 $ 8,112 1.02 % $ 42,799 $ 274 2.57 %

Investment securities – non-taxable(2)

196,785 2,247 4.63 % 195,578 2,417 4.97 %

Federal funds sold and securities purchased under resale agreements

4,605 1 0.07 % 199,727 614 1.24 %

Interest-bearing deposits in other banks

11,840,942 2,932 0.10 % 6,225,948 19,586 1.27 %

Loans held for sale 243,326 1,595 2.66 % 3,136,381 27,480 3.52 %

Loans held for investment, mortgage finance

8,177,759 64,942 3.22 % 7,054,682 55,324 3.15 %

Loans held for investment(1)(2) 15,457,888 149,196 3.91 % 16,598,775 201,781 4.89 %

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Cash and other assets 1,064,679 976,520

Liabilities and Stockholders’ Equity

Transaction deposits

Savings deposits

Time deposits

Total interest-bearing deposits

Other borrowings

Subordinated notes

Trust preferred subordinated debentures

Total interest-bearing liabilities

Demand deposits

Other liabilities

Stockholders’ equity

Total liabilities and stockholders’ equity

Net interest income(2)

Net interest margin

Net interest spread

Loan spread(3)

The loan averages include non-accrual loans and are stated net of unearned income.

Taxable equivalent rates used where applicable.

Yield on loans, net of reserves, less funding cost including all deposits and borrowed funds.

Nine months ended September 30, 2020

Nine months ended September 30, 2019

(in thousands except percentages)

Investment securities – taxable

Investment securities – non-taxable(2)

Federal funds sold and securities purchased under resale agreements

Interest-bearing deposits in other banks

Loans held for sale

Loans held for investment, mortgage finance

Loans held for investment(1)(2)

Less reserve for loan losses

Loans held for investment, net

Total earning assets

Cash and other assets

Total assets $ 39,957,073 $ 34,228,573

Liabilities and Stockholders’ Equity

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Other borrowings 2,686,398 2,592 0.39 % 3,020,255 10,251 1.37 %

Subordinated notes

Trust preferred subordinated debentures

Long-term debt 464,731 5,743 5.01 % 395,571 5,264 5.35 %

Total interest-bearing liabilities 22,237,311 28,339 0.52 % 21,100,857 77,689 1.48 %

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Total liabilities and stockholders’ equity

$ 39,957,073 $ 34,228,573

Net interest income(2) $ 200,686 $ 229,787

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The following table presents the changes in taxable-equivalent net interest income and identifies the changes due to differences in the average volume of earning assets and interest-bearing liabilities and the changes due to differences in the average interest rate on those assets and liabilities.

Three months ended September 30, 2020/2019

Nine months ended September 30, 2020/2019

Change due to(1)

Change Due To(1)

(in thousands)

Yield/Rate(2)

Three months ended March 31, 2021/2020

Change Change due to(1)

(in thousands) Volume Yield/Rate(2)

Interest income:

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Interest-bearing deposits in other banks (16,654) 17,730 (34,384)

Total (78,451) 22,676 (101,127)

Interest expense:

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Long-term debt 479 920 (441)

Total (49,350) 3,661 (53,011)

Net interest income $ (29,101) $ 19,015 $ (48,116)

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Net Interest Income

Net interest income was $207.6 million for the three months ended September 30, 2020 , compared to $252.2 million for the same period in 2019 .

Net interest income was $200.1 million for the three months ended March 31, 2021, compared to $228.3 million for the same period in 2020.

The decrease was primarily due to decreases in yields on earning assets and a shift in earning asset composition, offset by a decrease in funding costs.

Average earning assets for the three months ended September 30, 2020 increased by $5.5 billion compared to the same period in 2019 , including a $476.1 million increase in average total investment securities, reflecting our strategy of utilizing excess liquidity to build our investment portfolio, a $276.7 million increase in average total loans held for investment, primarily attributable to increases in average mortgage finance loans related to lower long-term interest rates, and a $6.8 billion increase in average liquidity assets, offset by a $2.0 billion decrease in average loans held for sale.

The increase in average liquidity assets was the result of actions taken by management in the first nine months of 2020 to ensure that we have the balance sheet strength to serve our clients during the COVID-19 pandemic.

While we intend to operate with above-average liquidity in response to the uncertain economic environment, we believe opportunities exist to improve core earnings by reducing or replacing higher-cost funding sources and improving the earning asset mix.

The decrease in average loans held for sale compared to the third quarter of 2019 resulted from holding purchased loans for shorter durations than in prior periods in order to limit exposure to forbearance risk caused by current economic uncertainties.

Average earning assets for the three months ended March 31, 2021 increased by $5.6 billion compared to the same period in 2020, and included a $3.2 billion increase in average total investment securities, reflecting the deployment of excess liquidity into higher-yielding investment securities and a $5.4 billion increase in average liquidity assets, partially offset by a $2.9 billion decrease in average loans held for sale.

Throughout 2020, management took deliberate actions to increase liquidity balances to ensure we had the balance sheet strength to serve our clients during the COVID-19 pandemic and through the first three months of 2021 these balances have remained high.

The decrease in average loans held for sale compared to the first quarter of 2020 resulted from holding purchased loans for shorter durations than in prior periods in order to limit exposure to forbearance risk caused by economic uncertainties.

The decline in net interest income on loans held for sale resulting from shorter hold times was offset by an increase in non-interest income.

Average interest-bearing liabilities increased for the three months ended September 30, 2020 compared to the same period in 2019 and included a $3.3 billion increase in average interest-bearing deposits, offset by an $85.0 million decrease in average other borrowings.

Net interest margin for the three months ended September 30, 2020 was 2.22% compared to 3.16% for the same period in 2019 .

The decrease was primarily due to the effect of decreases in interest rates on earning asset yields, coupled with the shift in earning asset composition, primarily the increases in investment securities and liquidity assets and decreases in loans held for sale and loans held for investment, excluding mortgage finance, offset by lower funding costs compared to the third quarter of 2019.

The yield on total loans held for investment decreased to 3.71% for the three months ended September 30, 2020 compared to 4.87% for the same period in 2019 , and the yield on earning assets decreased to 2.60% for the three months ended September 30, 2020 compared to 4.44% for the same period in 2019 .

The average cost of total deposits and borrowed funds decreased to 0.36% for the third quarter of 2020 from 1.31% for the third quarter of 2019 .

The spread on total earning assets, net of the cost of deposits and borrowed funds, was 2.24% for the third quarter of 2020 compared to 3.13% for the third quarter of 2019 .

The decrease was primarily a result of declining loan yields offset by a decrease in the cost of interest-bearing liabilities.

Total funding costs, including all deposits, long-term debt and stockholders' equity, decreased to 0.38% for the third quarter of 2020 compared to 1.25% for the third quarter of 2019 .

Net interest income was $645.8 million for the nine months ended September 30, 2020 compared to $731.3 million for the same period in 2019 .

The decrease was primarily due to decreases in yields on earning assets and a shift in earning asset composition, offset by a decrease in funding costs.

Average earning assets increased for the nine months ended September 30, 2020 , compared to the same period in 2019 and included a $191.9 million increase in average total investment securities, a $1.3 billion increase in average total loans held for investment and a $6.5 billion increase in average liquidity assets, offset by a $1.0 billion decrease in average loans held for sale.

The increases in average total investment securities and liquidity assets were the result of deliberate actions taken by management to enhance the strength of our balance sheet as described above.

The decrease in average loans held for sale was due to holding purchased loans for shorter durations as mentioned above.

Average interest-bearing liabilities increased for the nine months ended September 30, 2020 , compared to the same period in 2019 , and included a $4.1 billion increase in average interest-bearing deposits and a $36.0 million increase in average other borrowings.

Net interest margin for the nine months ended September 30, 2020 was 2.42% compared to 3.41% for the same period of 2019 .

The decrease was primarily due to the effect of decreases in interest rates on earning asset yields, coupled with the shift in earning asset composition, primarily the increases in investment securities and liquidity assets and decrease in loans held for sale, offset by lower funding costs compared to the same period in 2019.

The yield on total loans held for investment decreased to 3.99% for the nine months ended September 30, 2020 , compared to 5.13% for the prior year period, and the yield on earning assets decreased to 3.00% for the nine months ended September 30, 2020 , compared to 4.78% for the same period in 2019 .

The average cost of total deposits and borrowed funds decreased to 0.56% for the nine months ended September 30, 2020 from 1.41% for the same period in 2019 .

The spread on total earning assets, net of the cost of deposits and borrowed funds, was 2.44% for 2020 compared to 3.37% for 2019 .

The decrease was primarily a result of a declining loan yields offset by a decrease in the cost of interest-bearing liabilities.

Total funding costs, including all deposits, long-term debt and stockholders' equity decreased to 0.57% for the nine months ended September 30, 2020 , compared to 1.34% for the same period in 2019 .

Average interest-bearing liabilities increased for the three months ended March 31, 2021 compared to the same period in 2020, primarily due to a $1.4 billion increase in average interest-bearing deposits and a $69.2 million increase in long-term debt, partially offset by a $333.9 million decrease in average other borrowings.

Average demand deposits for the three months ended March 31, 2021 increased to $14.4 billion from $10.0 billion for the three months ended March 31, 2020.

Net interest margin for the three months ended March 31, 2021 was 2.09% compared to 2.78% for the same period in 2020.

The decrease was primarily due to the effect of declining interest rates on earning asset yields and a shift in earning asset composition, primarily increases in lower-yielding investment securities and liquidity assets, as well as declines in loans held for sale and loans held for investment, excluding mortgage finance, partially offset by lower funding costs compared to the first quarter of 2020.

The yield on total loans held for investment decreased to 3.71% for the three months ended March 31, 2021 compared to 4.41% for the same period in 2020, and the yield on earning assets decreased to 2.39% for the three months ended March 31, 2021 compared to 3.72% for the same period in 2020.

The average cost of total deposits decreased to 0.24% for the first quarter of 2021 from 0.90% for the first quarter of 2020 and total funding costs, including all deposits, long-term debt and stockholders' equity decreased to 0.29% for the first quarter of 2021 compared to 0.92% for the first quarter of 2020.

Non-interest Income

Three months ended September 30,

Nine months ended September 30,

Three months ended March 31,

(in thousands) 2021 2020

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Servicing income 9,009 4,746

Swap fees 526 2,757

Net gain/(loss) on sale of loans held for sale 5,572 (13,000)

Other(1) 7,103 3,502

Total non-interest income $ 39,092 $ 11,780

(1) Other non-interest income includes such items as letter of credit fees, bank owned life insurance ("BOLI") income, dividends on FHLB and FRB stock, income from legal settlements and other general operating income.

Non-interest income increased by $40.0 million during the three months ended September 30, 2020 to $60.3 million , compared to $20.3 million for the same period in 2019 .

This increase was primarily due to a $31.3 million increase in net gain/(loss) on sale of loans held for sale and a $6.3 million increase in brokered loan fees.

The increase in net gain/(loss) on sale of loans held for sale was due to favorable economics and lower hedge costs in the third quarter of 2020 as a result of holding purchased loans for shorter durations than in prior periods, which was offset by the decline in net interest income on loans held for sale noted above.

The increase in brokered loan fees was due to an increase in total mortgage finance volumes during the three months ended September 30, 2020 compared to the same period in 2019 .

Non-interest income increased by $68.0 million during the nine months ended September 30, 2020 to $142.6 million , compared to $74.7 million for the same period in 2019 .

This increase was primarily due to a $63.8 million increase in net gain/(loss) on sale of loans held for sale, a $12.7 million increase in brokered loans fees and an $8.8 million increase in servicing income, partially offset by a $20.1 million decrease in other non-interest income.

The increase in net gain/(loss) on sale of loans held for

sale was due to favorable economics and lower hedge costs in 2020 as a result of holding purchased loans for shorter durations than in prior periods.

The increase in brokered loan fees was due to an increase in total mortgage finance volumes during the nine months ended September 30, 2020 , compared to the same period in 2019 , and the increase in servicing income was due to an overall increase in MSR balances held.

The decrease in other non-interest income resulted primarily from $15.0 million in settlements of legal claims during the nine months ended September 30, 2019 not present in 2020.

While management expects continued growth in certain components of non-interest income, the future rate of growth could be affected by increased competition from national and regional financial institutions and general economic conditions.

In order to achieve continued growth in non-interest income, management from time to time evaluates new products, new lines of business or the expansion of existing lines of business.

Any new product introduction or new market entry could place additional demands on capital and managerial resources and introduce new risks to our business.

Non-interest income increased by $27.3 million during the three months ended March 31, 2021 to $39.1 million, compared to $11.8 million for the same period in 2020.

This increase was primarily due to a $18.6 million increase in net gain/(loss) on sale of loans held for sale, a $4.3 million increase in servicing income and a $3.6 million increase in other non-interest income.

The increase in net gain/(loss) on sale of loans held for sale was due to lower hedge costs in the first quarter of 2021 as a result of holding purchased loans for shorter durations than in prior periods, which was offset by the decline in net interest income on loans held for sale noted above.

The increase in servicing income was due to an increase in the outstanding balance of our servicing portfolio.

Non-interest Expense

Three months ended September 30,

Nine months ended September 30,

Three months ended March 31,

(in thousands) 2021 2020

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Net occupancy expense 8,274 8,712

Marketing 1,697 8,522

Legal and professional 8,277 17,466

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Merger-related expenses — 7,270

Other(1) 8,975 10,260

Total non-interest expense $ 150,316 $ 165,417

(1) Other expense includes such items as courier expenses, regulatory assessments other than FDIC insurance, insurance expenses and other general operating expenses.

Non-interest expense for the three months ended September 30, 2020 increased $16.3 million compared to the same period in 2019 .

The increase was primarily due to an increase in communications and technology expenses, primarily due to the write-off of $15.4 million in software assets in the three months ended September 30, 2020 , partially offset by a decrease in marketing expense.

Non-interest expense for the nine months ended September 30, 2020 increased $120.8 million compared to 2019 .

The increase was primarily due to increases in salaries and employee benefits, communication and technology, servicing-related expenses and merger-related expenses, partially offset by a decrease in marketing expenses.

The increases in salaries and employee benefits and communications and technology expense were primarily due to the severance accruals and non-recurring software expenses, respectively, mentioned above.

The full impact on salaries and employee benefits expense from the reduction in workforce and on software amortization expense from the software write-offs recorded in the nine months ended September 30, 2020 is expected to be realized in non-interest expense in the first half of 2021, with meaningful reductions in run-rate occurring in the fourth quarter of 2020.

Further software write-offs are not expected in the fourth quarter of 2020.

The increase in servicing-related expenses was primarily due to higher MSR amortization expense resulting from an increase in the cost basis of our MSR asset as well as from higher mortgage prepayment rates, and an increase in impairment expense.

Non-interest expense for the three months ended March 31, 2021 decreased $15.1 million compared to the same period in 2020.

The decrease was primarily due to decreases in marketing expense, legal and professional expense, servicing-related expenses and merger-related expenses, partially offset by increases in salaries and employee benefits and communication and technology expense.

Analysis of Financial Condition

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The following table summarizes our loans held for investment on a gross basis by portfolio segment:

September 30, 2020

December 31, 2019

March 31, 2021 December 31, 2020

(in thousands)

Commercial $ 8,969,224 $ 8,861,580

Energy 691,806 766,217

Mortgage finance 9,009,081 9,079,409

Real estate 5,810,590 5,794,624

Gross loans held for investment $ 24,480,701 $ 24,501,830

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Total loans held for investment, net $ 24,165,771 $ 24,176,245

Mortgage finance loans relate to our mortgage warehouse lending operations in which we purchase mortgage loan ownership interests that are typically sold within 10 to 20 days and represent 38% of total loans held for investment at September 30, 2020 , an increase compared to 33% at December 31, 2019.

Total gross loans held for investment were $24.5 billion at March 31, 2021, a decline of $21.1 million from December 31, 2020 primarily due to declines in our energy and mortgage finance portfolios, partially offset by an increase in commercial loans, primarily due to the continued funding of loans under the Paycheck Protection Plan during the first quarter of 2021.

The decline in the energy portfolio is consistent with our strategy of planned reductions in this portfolio as it has experienced higher historic losses.

Mortgage finance loans relate to our mortgage warehouse lending operations in which we purchase mortgage loan ownership interests that are typically sold within 10 to 20 days.

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.

Traditional loans held for investment decreased 4% during the first nine months of 2020.

The majority of the decrease was in our commercial and energy portfolios, and was partially offset by the addition of $715.0 million in PPP loan balances at September 30, 2020.

We continue the strategy of planned reductions in portfolios that have experienced higher historic losses, primarily energy and leveraged lending.

Despite the decline in the first quarter of 2021, balances in this portfolio remain elevated related to increases in volumes driven by continued lower long-term interest rates.

We originate a substantial majority of all loans held for investment.

We also participate in syndicated loan relationships, both as a participant and as an agent.

As of September 30, 2020 , we had $1.8 billion in syndicated loans, $449.7 million of which we administer as agent.

As of March 31, 2021, we had $1.8 billion in syndicated loans, $475.9 million of which we administer as agent.

All syndicated loans, whether we act as agent or participant, are underwritten to the same standards as all other loans we originate.

As of September 30, 2020 , $473,000 of our syndicated loans were on non-accrual.

As of March 31, 2021, none of our syndicated loans were on non-accrual.

Portfolio Geographic and Industry Concentrations

Although more than 50% of our total loan exposure is outside of Texas and more than 50% of our deposits are sourced outside of Texas, our Texas concentration remains significant.

As of September 30, 2020 , a majority of our loans held for investment, excluding mortgage finance loans and other national lines of business, were to businesses with headquarters or operations in Texas.

As of March 31, 2021, a majority of our loans held for investment, excluding mortgage finance loans and other national lines of business, were to businesses with headquarters or operations in Texas.

This geographic concentration subjects the loan portfolio to the general economic conditions within this state.

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The table below summarizes our non-performing assets by type and by type of property securing the credit:

(in thousands)

September 30, 2020

December 31, 2019

September 30, 2019

(in thousands) March 31, 2021 December 31, 2020 March 31, 2020

Non-accrual loans(1)

Assets of the borrowers $ 20,264 $ 18,776 $ 37,040

Inventory 6,633 3,547 17,561

Other 11,297 9,773 7,352

Total commercial 38,194 32,096 61,953

Oil and gas properties 29,368 51,724 151,858

Total energy 29,368 51,724 151,858

Assets of the borrowers 14,289 14,496 —

Commercial property 9,543 13,569 1,099

Hotel/motel 4,619 4,619 —

Single family residences 1,717 218 1,421

Other — 5,267 2,834

Total real estate 30,168 38,169 5,354

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Loans held for investment past due 90 days and accruing(2) 6,187 12,541 21,274

Loans held for sale non-accrual (3) — 6,966 —

Loans held for sale past due 90 days and accruing(4) 16,359 16,667 9,014

As of September 30, 2020 , December 31, 2019 and September 30, 2019 , non-accrual loans included $47.7 million , $35.1 million and $15.5 million , respectively, in loans that met the criteria for restructured.

At September 30, 2020 , December 31, 2019 and September 30, 2019 , loans past due 90 days and still accruing includes premium finance loans of $11.9 million , $8.5 million and $9.2 million, respectively.

(1) As of March 31, 2021, December 31, 2020 and March 31, 2020, non-accrual loans included $33.7 million, $45.4 million and $22.3 million, respectively, in loans that met the criteria for restructured.

(2) At March 31, 2021, December 31, 2020 and March 31, 2020, loans past due 90 days and still accruing includes premium finance loans of $3.1 million, $6.4 million and $8.6 million, respectively.

(3) Includes one non-accrual loan previously reported in loans HFI that was transferred to loans HFS as of December 31, 2020 and subsequently sold at carrying value.

(4) Includes loans guaranteed by U.S.

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Also includes loans that, pursuant to Ginnie Mae servicing guidelines, we have the unilateral right, but not the obligation, to repurchase if defined delinquent loan criteria are met and therefore must record as loans held for sale on our balance sheet regardless of whether the repurchase option has been exercised.

Total non-performing assets at September 30, 2020 decreased $63.4 million from December 31, 2019 and increased $41.3 million compared to September 30, 2019 .

The decrease from December 31, 2019 was primarily related to charge-offs of energy and leveraged lending loans during the first nine months of 2020.

The year-over-year increase is primarily related to our energy and real estate portfolios.

Non-accrual energy loans totaled $73.8 million ( 46% of total NPAs) at September 30, 2020 , compared to $63.2 million (52% of total NPAs) at September 30, 2019 .

Non-accrual leveraged lending loans totaled $31.3 million ( 19% of total NPAs) at September 30, 2020 compared to $28.3 million (23% of total NPAs) at September 30, 2019 .

The COVID-19 pandemic has had an adverse effect on our non-performing assets and, based on the current trajectory, we anticipate that continued adverse impacts will occur in subsequent quarters.

Total non-performing assets at March 31, 2021 decreased $24.3 million from December 31, 2020 and decreased $121.4 million compared to March 31, 2020.

The decrease from both December 31, 2020 and March 31, 2020 was primarily due to a decline in non-accrual energy loans.

Potential problem loans consist of loans that are performing in accordance with contractual terms, but for which we have concerns about the borrower’s ability to comply with repayment terms because of the borrower’s potential financial difficulties.

We monitor these loans closely and review their performance on a regular basis.

At September 30, 2020 , we had $129.5 million in loans of this type, compared to $46.6 million at December 31, 2019 and $58.2 million at September 30, 2019 .

At March 31, 2021, we had $145.1 million in loans of this type, compared to $193.2 million at December 31, 2020 and $98.2 million at March 31, 2020.

Summary of Credit Loss Experience

The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the allowance for credit losses at a level consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date.

We adopted ASU 2016-13 on January 1, 2020, which replaced the incurred loss methodology for determining our provision for credit losses and allowance for credit losses with the Current Expected Credit Loss ("CECL") model.

Upon adoption, the allowance for credit losses was increased by $9.1 million, with no impact on the consolidated statement of income.

We recorded a $30.0 million provision for credit losses for the third quarter of 2020 , compared to $100.0 million in the second quarter of 2020 and $11.0 million in the third quarter of 2019.

The decrease from the second quarter of 2020 resulted primarily from a decrease in charge-offs.

We recorded $1.6 million in net charge-offs during the third quarter of 2020, compared to $74.1 million during the second quarter of 2020 and $36.9 million during the third

quarter of 2019.

Criticized loans totaled $1.1 billion at September 30, 2020 , compared to $1.0 billion at June 30, 2020 and $536.4 million at September 30, 2019 .

Criticized loan levels remain elevated due to the downgrade of loans to borrowers that have been impacted by the COVID-19 pandemic or that are in categories that are expected to be more significantly impacted by COVID-19.

We recorded a $6.0 million negative provision for credit losses for the first quarter of 2021, compared to provisions of $32.0 million in the fourth quarter of 2020 and $96.0 million in the first quarter of 2020.

The decrease from the fourth quarter of 2020 resulted primarily from a decrease in charge-offs and improvement in the economic outlook as the economy begins to recover from the impacts of the COVID-19 pandemic.

We recorded $6.4 million in net charge-offs during the first quarter of 2021, compared to $65.4 million during the fourth quarter of 2020 and $57.7 million during the first quarter of 2020.

Criticized loans totaled $945.1 million at March 31, 2021, compared to $918.4 million at December 31, 2020 and $675.9 million at March 31, 2020.

Criticized loan levels remain elevated when compared to pre-pandemic levels due to the downgrade of loans to borrowers that have been impacted by the COVID-19 pandemic.

The table below presents a summary of our loan loss experience:

Nine months ended September 30, 2020

Year ended December 31, 2019

Nine months ended September 30, 2019

Three months ended March 31, 2021 Year ended December 31, 2020 Three months ended March 31, 2020

(in thousands except percentage and multiple data)

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Loans charged-off:

Commercial 2,451 73,360 20,653

Energy 5,732 133,522 37,730

Real estate — 180 —

Total charge-offs 8,183 207,062 58,383

Commercial 1,050 1,277 257

Energy 715 6,999 423

Total recoveries 1,765 8,276 680

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Allowance for off-balance sheet credit losses to off-balance sheet credit commitments

Combined allowance for credit losses to LHI

Allowance as a multiple of non-performing loans

The allowance for credit losses, including the allowance for losses on unfunded commitments reported on the consolidated balance sheets in other liabilities, totaled $305.4 million at September 30, 2020 , $203.7 million at December 31, 2019 and $199.5 million at September 30, 2019 .

The combined allowance as a percentage of loans held for investment increased to 1.21% at September 30, 2020 , from 0.83% at December 31, 2019 and 0.81% at September 30, 2019 .

The combined allowance as a percentage of loans held for investment, excluding mortgage finance, increased to 1.93% at September 30, 2020 from 1.24% at December 31, 2019 and 1.19% at September 30, 2019 .

The increase in the combined allowance as a percentage of loans held for investment at September 30, 2020 , compared to September 30, 2019 , is due primarily to an increase in the allowance for credit losses, resulting from reserve build related to higher criticized loan levels and continued economic uncertainty related to the COVID-19 pandemic.

0.20 % 0.20 % 0.13 %

Total allowance for credit losses to LHI 1.06 % 1.11 % 1.03 %

Allowance as a multiple of non-performing loans 2.5 x 2.1 x 1.1 x

The allowance for credit losses, including the allowance for losses on unfunded commitments reported on the consolidated balance sheets in other liabilities, totaled $259.6 million at March 31, 2021, $272.0 million at December 31, 2020 and $251.1 million at March 31, 2020.

The total allowance for credit losses as a percentage of loans held for investment was 1.06% at March 31, 2021, compared to 1.11% at December 31, 2020 and 1.03% at March 31, 2020.

The total allowance for credit losses as a percentage of loans held for investment, excluding mortgage finance, was 1.69% at March 31, 2021, compared to 1.77% at December 31, 2020 and 1.49% at March 31, 2020.

The increase in the total allowance as a percentage of loans held for investment at March 31, 2021, compared to March 31, 2020, is due primarily to an increase in the allowance for credit losses, resulting from reserve build related to higher criticized loan levels and continued economic uncertainty related to the COVID-19 pandemic.

Loans Held for Sale

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In general terms, liquidity is a measurement of our ability to meet our cash needs.

Our objectives in managing our liquidity are to maintain our ability to meet loan commitments, repurchase investment securities or repay deposits and other liabilities in accordance with their terms, without an adverse impact on our current or future earnings.

Our objectives in managing our liquidity are to maintain our ability to meet loan commitments, repurchase investment securities and repay deposits and other liabilities in accordance with their terms, without an adverse impact on our current or future earnings.

Our liquidity strategy is guided by policies, formulated and monitored by our senior management and our Asset and Liability Management Committee (“ALCO”), which take into account the demonstrated marketability of our assets, the sources and stability of our funding and the level of unfunded commitments.

We regularly evaluate all of our various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness.

For the year ended December 31, 2019 and the nine months ended September 30, 2020 , our principal source of funding has been our customer deposits, supplemented by our short-term and long-term borrowings, primarily from federal funds purchased and FHLB borrowings, which are generally used to fund mortgage finance assets.

For the year ended December 31, 2020 and the three months ended March 31, 2021, our principal source of funding has been our customer deposits, supplemented by our short-term and long-term borrowings, primarily from federal funds purchased and FHLB borrowings, which are generally used to fund mortgage finance assets.

We also rely on the availability of the mortgage secondary market provided by Ginnie Mae and the GSEs to support the liquidity of our mortgage finance assets.

In accordance with our liquidity strategy, deposit growth and increases in borrowing capacity related to our mortgage finance loans have resulted in accumulating liquidity assets in recent periods.

Additionally, throughout 2020 we have significantly increased our liquidity assets to ensure that we have the balance sheet strength to serve our clients during the COVID-19 pandemic.

Throughout 2020 we significantly increased our liquidity assets to ensure that we had the balance sheet strength to serve our clients during the COVID-19 pandemic, and through the first quarter of 2021 these balances have remained high.

The following table summarizes the composition of liquidity assets:

(in thousands except percentage data)

September 30, 2020

December 31, 2019

September 30, 2019

(in thousands except percentage data) March 31, 2021 December 31, 2020 March 31, 2020

Federal funds sold and securities purchased under resale agreements $ — $ — $ 30,000

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Total deposits 33.6 % 29.1 % 35.0 %

Our liquidity requirements to support growth in loans held for investment have been fulfilled primarily through growth in our core customer deposits.

Our liquidity needs to support growth in loans held for investment have been fulfilled primarily through growth in our core customer deposits.

Our goal is to obtain as much of our funding for loans held for investment and other earning assets as possible from deposits of these core customers.

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The following table summarizes our period-end and average core customer deposits, relationship brokered deposits and traditional brokered deposits:

(in thousands)

September 30, 2020

December 31, 2019

September 30, 2019

(in thousands) March 31, 2021 December 31, 2020 March 31, 2020

Deposits from core customers $ 30,102,156 $ 27,581,532 $ 22,368,584

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Based on our internal guidelines, we have chosen to limit our use of these sources to a lesser amount.

We have increased our use of traditional brokered deposits in 2019 and 2020 in response to favorable rates available in that market relative to other available funding sources.

We have short-term borrowing sources available to supplement deposits and meet our funding needs.

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The following table summarizes our short-term and other borrowings:

(in thousands)

September 30, 2020

(in thousands) March 31, 2021

Federal funds purchased $ 110,100

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The following table summarizes our other borrowing capacities net of balances outstanding.

As of September 30, 2020 , all are scheduled to mature within one year.

(in thousands)

September 30, 2020

As of March 31, 2021, all are scheduled to mature within one year.

(in thousands) March 31, 2021

FHLB borrowing capacity relating to loans $ 7,369,068

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The loan agreement contains customary financial covenants and restrictions.

No borrowings were made against this line of credit during the nine months ended September 30, 2020 .

Our equity capital averaged $2.8 billion for the three months ended September 30, 2020 as compared to $2.7 billion for the same period in 2019 .

No borrowings were made against this line of credit during the three months ended March 31, 2021.

Our equity capital averaged $3.0 billion for the three months ended March 31, 2021 as compared to $2.9 billion for the same period in 2020.

We have not paid any cash dividends on our common stock since we commenced operations and have no plans to do so in the foreseeable future.

Periodically, based on market conditions and other factors, and subject to compliance with applicable laws and regulations and the terms of our existing indebtedness, we or the Bank may repay, repurchase, exchange or redeem outstanding indebtedness, or otherwise enter into transactions regarding our debt or capital structure.

For example, we and the Bank periodically evaluate 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, as we seek to actively manage our debt maturity profile and interest cost.

For additional information regarding our capital and stockholders' equity, see Note 7 - Regulatory Restrictions in the accompanying notes to the consolidated financial statements included elsewhere in this report.

Commitments and Contractual Obligations

The following table presents, as of September 30, 2020 , significant fixed and determinable contractual obligations to third parties by payment date.

The following table presents, as of March 31, 2021, significant fixed and determinable contractual obligations to third parties by payment date.

Amounts in the table do not include accrued or accruing interest.

(in thousands)

After One But

(in thousands) Within One

Year After One But

Years After Three

Five Years After

Deposits without a stated maturity $ 31,429,041 $ — $ — $ — $ 31,429,041

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FHLB borrowings 2,400,000 — — — 2,400,000

Subordinated notes

Trust preferred subordinated debentures

Operating lease obligations 17,221 33,169 14,546 21,497 86,433

Long-term debt — — 442,722 222,246 664,968

Total contractual obligations $ 35,310,663 $ 642,779 $ 461,768 $ 243,748 $ 36,658,958

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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 loan losses expected to be recognized over the life of the loans in our portfolio.

The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans.

The 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 our 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.

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See “Summary of Credit Loss Experience” above and Note 4 – Loans Held for Investment 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.

Impact of Inflation and Changing Prices

The preparation of financial statements in conformity with GAAP requires management to measure the company’s financial position and operating results primarily in terms of historic dollars.

Changes in the relative value of money due to inflation or recession are generally not considered.

The primary effect of inflation on our operations is reflected in increased operating expenses.

Management considers changes in interest rates to impact our financial condition and results of operations to a far greater degree than changes in prices due to inflation.

Although interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate.

We manage our interest rate risk in several ways.

Refer to “Interest Rate Risk Management” in Item 7A for further discussion.

There can be no assurance that we will not be materially adversely affected by future changes in interest rates, as interest rates are highly sensitive to many factors that are beyond our control.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis