What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-07-22 compared with 2021-04-22 · 184 added, 134 removed, 301 unchanged (51% 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 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").

The following discussion and analysis of our financial condition as of June 30, 2021 and December 31, 2020 and results of operations for the three and six month periods ended June 30, 2021 and June 30, 2020 should be read in conjunction with our consolidated financial statements and the related notes to the consolidated 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.

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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.

Words such as “believes,” “expects,” “estimates,” “anticipates,” “plans,” “goals,” “objectives,” “expects,” “intends,” “seeks,” “likely,” “targeted,” “continue,” “remain,” “will,” “should,” “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

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.

Forward-looking statements may often be identified by the use of words such as “expects,” “estimates,” “anticipates,” “plans,” “goals,” “objectives,” “intends,” “seeks,” “likely,” “should,” “may” “could” and other similar expressions.

Forward-looking statements may include, among other things and without limitation, 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 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.

Important factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to, the following:

• Deterioration of the credit quality of our loan portfolio or declines in the value of collateral related to external factors such as commodity prices, real estate values or interest rates, increased default rates and loan losses or adverse changes in the industry concentrations of our loan portfolio.

• The COVID-19 pandemic is adversely affecting us and our customers, employees and third-party service providers;

the adverse impacts of the pandemic on our business, financial position, operations and prospects have been material.

It is not possible to accurately predicts the extent, severity or duration of the pandemic or when normal economic and operational conditions will return.

Important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, the following:

economy in general or the Texas economy specifically.

• The adverse effect of the COVID-19 pandemic on us and our customers, employees and third-party service providers;

the material adverse impacts of the COVID-19 pandemic on our business, financial position, operations and prospects.

It is not possible to accurately predict the extent, severity or duration of the COVID-19 pandemic or to what level and when normal economic and operational conditions will return.

This also includes the incurrence of material costs and liabilities associated with legal and regulatory proceedings, investigations, inquiries and related matters with respect to the financial services industry, including those directly involving us or our Bank and arising from our participation in government stimulus programs responding to the economic impact of the COVID-19 pandemic.

• Operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent.

This also includes 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.

• Changes in interest rates, which may affect our net income and other future cash flows, or the market value of our assets, including the market value of investment securities.

• Changes in our ability to access the capital markets, including changes in our credit ratings.

• Changes in the value of commercial and residential real estate securing our loans or in the demand for credit to support the purchase and ownership of such assets.

• Changing economic conditions or other developments adversely affecting our commercial, entrepreneurial and professional customers.

• Adverse economic conditions and other factors affecting our middle market customers and their ability to continue to meet their loan obligations.

• Adverse economic or market conditions and other factors in Texas, the United States or internationally that could affect the credit quality of our loan portfolio or our operating performance, including any conditions or factors affecting our middle market customers and their ability to continue to meet their loan obligations.

• The failure to correctly assess and model the assumptions supporting our allowance for credit losses, causing it to become inadequate in the event of deteriorations in loan quality and increases in charge-offs, or increases or decreases to our allowance for credit losses as a result of the implementation of CECL.

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• Adverse changes in economic or market conditions, in Texas, the United States or internationally, that could affect the credit quality of our loan portfolio or our operating performance.

• Unanticipated effects from the Tax Cuts and Jobs Act of 2017 may limit its benefits or adversely impact our business, which could include decreased demand for borrowing by our middle market customers or increased price competition that offsets the benefits of decreased federal income tax expense.

• Unexpected market conditions or regulatory changes that could cause access to capital market transactions and other sources of funding to become more difficult to obtain on terms and conditions that are acceptable to us.

• Unexpected market conditions, regulatory changes or changes in our credit ratings that could, among other things, cause access to capital market transactions and other sources of funding to become more difficult to obtain on terms and conditions that are acceptable to us.

• The inadequacy of our available funds to meet our deposit, debt and other obligations as they become due, or our failure to maintain our capital ratios as a result of adverse changes in our operating performance or financial condition, or changes in applicable regulations or regulator interpretation of regulations impacting our business or the characterization or risk weight of our assets.

• 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-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.

• Material failures of our accounting estimates and risk management processes based on management judgment, or the supporting analytical and forecasting models.

• Failure of our risk management strategies and procedures, including failure or circumvention of our controls.

• 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.

• The failure of our enterprise risk management framework, our compliance program, or our corporate governance and supervisory oversight functions to timely identify and address emerging risks adequately, which may result in unexpected losses.

• Uncertainty regarding the future of the London Interbank Offered Rate LIBOR, and the expected transition away from LIBOR toward new interest rate benchmarks.

• Legislative and regulatory changes imposing further restrictions and costs on our business, a failure to maintain well capitalized or well managed status or regulatory enforcement actions against us, and uncertainty related to future implementation and enforcement of regulatory requirements resulting from the current political environment.

• Changes in the monetary and fiscal policies of the U.S.

Government, including policies of the U.S.

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.

• Uncertainty regarding the upcoming transition away from the London Interbank Offered Rate, or LIBOR, toward new interest rate benchmarks and our ability to successfully implement any new interest rate benchmarks.

• Legislative and regulatory changes imposing further restrictions and costs on our business, a failure to maintain well capitalized or well managed status or any regulatory enforcement actions brought against us and uncertainty related to future implementation and enforcement of regulatory requirements resulting from the current political environment.

• The effect of changes in laws, regulations, policies and guidelines (including, among others, laws, regulations, policies and guidelines concerning taxes, banking, accounting, securities and monetary and fiscal policies) with which we and our subsidiaries must generally comply, including those promulgated by the U.S.

government, U.S.

Department of Treasury and the Federal Reserve and any changes made by 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, completing planned merger, acquisition or sale transactions or to successfully manage the risks related to the development and implementation of these new businesses, products or services.

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

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• 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 MCA loan volumes.

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

• Volatility in the market price of our common stock.

• Material failures of our accounting estimates and risk management processes based on management judgment, or the supporting analytical and forecasting models.

• Failure of our risk management strategies and procedures, including failure or circumvention of our controls.

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

• Credit risk resulting from our exposure to counterparties.

• An increase in the incidence or severity of fraud, illegal payments, security breaches and other illegal acts impacting our Bank and our customers.

• The failure to maintain adequate regulatory capital to support our business.

• Unavailability of funds obtained from borrowing or capital transactions or from our Bank to fund our obligations.

• Incurrence of material costs and liabilities associated with legal and regulatory proceedings, investigations, inquiries and related matters with respect to the financial services industry, including those directly involving us or our Bank and arising from our participation in government stimulus programs responding to the economic impact of the COVID-19 pandemic.

• An increase in the incidence or severity of fraud, illegal payments, security breaches and other illegal acts impacting our subsidiary, Texas Capital Bank, National Association (the “Bank”) and our customers.

• The failure to maintain adequate regulatory capital to support our business, including the unavailability of funds obtained from borrowing or capital transactions or from our Bank to fund our obligations.

• Environmental liability associated with properties related to our lending activities.

• Severe weather, natural disasters, acts of war or terrorism and other external events.

Actual outcomes and results may differ materially from what is expressed in our forward-looking statements and from our historical financial results due to the factors discussed elsewhere in this report or disclosed in our other SEC filings.

Actual outcomes and results may differ materially from what is expressed in our forward-looking statements and from our historical financial results due to the factors discussed above or elsewhere in this report or disclosed in our other U.S.

Securities and Exchange Commission (“SEC”) filings.

Forward-looking statements included herein speak only as of the date hereof and should not be relied upon as representing our expectations or beliefs as of any date subsequent to the date of this report.

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An important aspect of our growth strategy has been our ability to effectively service and manage a large number of loans and deposit accounts in multiple markets in Texas, as well as several lines of business serving a regional or national clientele of commercial borrowers.

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.

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.

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

Significant transactions affecting our financial statements during the three months ended June 30, 2021 included:

• Sale of our portfolio of mortgage servicing rights (“MSRs”) and transition of the Mortgage Correspondent Aggregation (“MCA”) program to a third-party.

For additional information, see Note 5 - Certain Transfers of Financial Assets in the accompanying notes to the consolidated financial statements included elsewhere in this report;

• Issuance and sale of $375.0 million of 4.00% fixed-to-fixed rate subordinated notes due 2031.

For additional information, see Note 6 - Long-Term Debt in the accompanying notes to the consolidated financial statements included elsewhere in this report;

• Redemption of our 6.50% non-cumulative perpetual preferred stock, Series A (the “Series A Preferred Stock”).

For additional information, see Note 12 - Material Transactions Affecting Stockholders' Equity in the accompanying notes to the consolidated financial statements included elsewhere in this report;

• Redemption of our 6.50% subordinated notes due 2042.

For additional information, see Note 6 - Long-Term Debt in the accompanying notes to the consolidated financial statements included elsewhere in this report;

• In May 2021 the Bank, applied to the Texas Department of Banking to convert from a national association to a Texas state-chartered bank.

If approved and the conversion is completed, the Texas Department of Banking will be the Bank's primary regulator, the Federal Deposit Insurance Corporation will be the Bank's primary federal regulator and the Federal Reserve will continue to be the Company's primary federal regulator.

The application is currently being reviewed.

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 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.

The COVID-19 pandemic and related restrictive measures taken by governments, businesses and individuals have caused and continue to cause 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 began to be eased during the latter part of 2020 and continue to be eased during 2021, the U.S.

economy has begun to improve from 2020, and with the availability and distribution of COVID-19 vaccines, we anticipate continued improvements in commercial and consumer activity and the U.S.

During the first quarter of 2021, the governor of Texas removed all restrictions initially set in place which has allowed businesses, including ours as well as our clients' businesses, to reopen at full capacities.

While positive headwinds exist, we recognize that our business and consumer customers are continuing to experience varying degrees of financial distress, which we expect to continue, though to a lesser degree, throughout 2021.

Commercial activity has improved, but has not returned to the levels existing prior to the outbreak of the COVID-19 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 seemingly resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer.

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

We continue to monitor these customers closely.

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, however, future economic conditions are subject to significant uncertainty.

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 have taken deliberate actions to meet our goal of ensuring that we have the balance sheet strength to serve our clients and communities, including by seeking to increase our liquidity and manage our assets and liabilities in order to maintain a strong capital position;

however, future economic conditions are subject to significant uncertainty.

Uncertainties associated with the COVID-19 pandemic include the duration of any COVID-19 outbreaks and any related variants, 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.

Effective June 1, 2021, we returned to pre-pandemic business operations and brought 100% of our workforce back into the office.

Our branch locations are currently open and operating during normal business hours.

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

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Summary of Performance

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.

We reported net income of $73.5 million and net income available to common stockholders of $67.2 million for the second quarter of 2021 compared to a net loss of $34.3 million and net loss available to common stockholders of $36.8 million for the second quarter of 2020.

On a fully diluted basis, earnings per common share were $1.31 for the second quarter of 2021, compared to a loss per common share of $0.73 for the second quarter of 2020.

Return on average common equity (“ROE”) was 9.74% and return on average assets (“ROA”) was 0.76% for the second quarter of 2021, compared to a negative 5.48% and negative 0.36%, respectively, for the second quarter of 2020.

The increase in net income, ROE and ROA for the second quarter of 2021 resulted primarily from a $119.0 million decrease in provision for credit losses.

Net income and net income available to common stockholders for the six months ended June 30, 2021 totaled $145.4 million and $135.3 million, respectively, compared to net loss and net loss available to common stockholders of $51.0 million and $55.9 million, respectively, for the same period in 2020.

On a fully diluted basis, earnings per common share were $2.65 for the six months ended June 30, 2021, compared to a loss per common share of $1.11 for the same period in 2020.

ROE was 9.91% and ROA was 0.75% for the six months ended June 30, 2021, compared to a negative 4.16% and $0.28%, respectively, for the same period in 2020.

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 March 31, 2021 Three months ended March 31, 2020

Three months ended June 30, 2021 Three months ended June 30, 2020

(in thousands except percentages) Average

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

Six months ended June 30, 2021 Six months ended June 30, 2020

(in thousands except percentages) Average

Balance Revenue/

Expense Yield/

Balance Revenue/

Expense Yield/

Investment securities – taxable $ 3,294,117 $ 17,334 1.06 % $ 40,814 $ 459 2.26 %

Investment securities – non-taxable(2) 189,137 4,394 4.69 % 195,692 4,744 4.88 %

Federal funds sold and securities purchased under resale agreements 2,649 1 0.08 % 222,580 691 0.62 %

Interest-bearing deposits in other banks 11,711,282 5,893 0.10 % 8,373,594 21,900 0.53 %

Loans held for sale 167,830 2,376 2.85 % 1,758,502 30,027 3.43 %

Loans held for investment, mortgage finance 7,818,014 122,343 3.16 % 7,865,602 129,842 3.32 %

Loans held for investment(1)(2) 15,349,838 301,711 3.96 % 16,806,908 372,751 4.46 %

Less reserve for loan losses 248,151 — — 219,330 — —

Loans held for investment, net 22,919,701 424,054 3.73 % 24,453,180 502,593 4.13 %

Total earning assets 38,284,716 454,052 2.39 % 35,044,362 560,414 3.22 %

Cash and other assets 1,030,625 1,026,193

Total assets $ 39,315,341 $ 36,070,555

Liabilities and Stockholders’ Equity

Transaction deposits $ 3,893,015 $ 11,256 0.58 % $ 3,848,517 $ 19,580 1.02 %

Savings deposits 12,088,776 19,778 0.33 % 11,803,448 49,471 0.84 %

Time deposits 1,978,879 5,241 0.53 % 3,138,461 25,417 1.63 %

Total interest-bearing deposits 17,960,670 36,275 0.41 % 18,790,426 94,468 1.01 %

Other borrowings 2,517,128 3,094 0.25 % 3,316,259 14,996 0.91 %

Long-term debt 674,171 16,466 4.93 % 395,614 10,307 5.24 %

Total interest-bearing liabilities 21,151,969 55,835 0.53 % 22,502,299 119,771 1.07 %

Demand deposits 14,782,509 10,434,696

Other liabilities 291,925 282,283

Stockholders’ equity 3,088,938 2,851,277

Total liabilities and stockholders’ equity $ 39,315,341 $ 36,070,555

Net interest income(2) $ 398,217 $ 440,643

Net interest margin 2.10 % 2.53 %

Net interest spread 1.86 % 2.15 %

Loan spread(3) 3.49 % 3.41 %

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

(2) Taxable equivalent rates used where applicable.

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

Volume/Rate Analysis

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

Three months ended March 31, 2021/2020

Three months ended June 30, 2021/2020 Six months ended June 30, 2021/2020

Change Change due to(1) Net

Change Change Due To(1)

(in thousands) Volume Yield/Rate(2)

(in thousands) Volume Yield/Rate(2) Volume Yield/Rate(2)

Interest income:

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Net Interest Income

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 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 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.

Net interest income was $197.0 million for the three months ended June 30, 2021, compared to $209.9 million for the same period in 2020.

The decrease was primarily due to declines in total average loans and earning asset yields, partially offset by an increase in loan fees and declining cost of funds.

Average earning assets for the three months ended June 30, 2021 increased $847.0 million compared to the same period in 2020, and included a $3.3 billion increase in average total investment securities, reflecting the deployment of excess liquidity into higher-yielding investment securities, and an $817.1 million increase in average liquidity assets, partially offset by a $3.3 billion decrease in average total loans.

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.

Through the first six months of 2021 these balances have remained elevated, although they are beginning to run off as we have purchased investment securities and proactively exited certain high-cost indexed deposit products.

The decrease in average loans held for sale compared to the second quarter of 2020 resulted from the transition of the MCA program to a third-party.

Average interest-bearing liabilities for the three months ended June 30, 2021 decreased $3.8 billion compared to the same period in 2020, primarily due to a $3.0 billion decrease in average interest-bearing deposits and a $1.3 billion decrease in average other borrowings, partially offset by a $485.7 million increase in average long-term debt.

Average demand deposits for the three months ended June 30, 2021 increased to $15.1 billion from $10.9 billion for the three months ended June 30, 2020.

Net interest margin for the three months ended June 30, 2021 was 2.10% compared to 2.30% 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, partially offset by increases in loan fees and lower funding costs compared to the second quarter of 2020.

The yield on total loans held for investment decreased to 3.75% for the three months ended June 30, 2021 compared to 3.88% for the same period in 2020, and the yield on earning assets decreased to 2.40% for the three months ended June 30, 2021 compared to 2.76% for the same period in 2020.

The average cost of total deposits decreased to 0.20% for the second quarter of 2021 from 0.42% for the second quarter of 2020 and total funding costs, including all deposits, long-term debt and stockholders' equity, decreased to 0.29% for the second quarter of 2021 compared to 0.45% for the second quarter of 2020.

Net interest income was $397.1 million for the six months ended June 30, 2021 compared to $438.2 million for the same period in 2020.

The decrease was primarily due to a decrease in earning asset yields, partially offset by declining cost of funds.

Average earning assets increased $3.2 billion for the six months ended June 30, 2021, 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 $3.1 billion increase in average liquidity assets, partially offset by a $3.1 billion decrease in average total loans.

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.

Average interest-bearing liabilities decreased $1.4 billion for the six months ended June 30, 2021, compared to the same period in 2020, primarily due to a $829.8 million decrease in average interest-bearing deposits and a $799.1 million decrease in average other borrowings, partially offset by a $278.6 million increase in average long-term debt.

Average demand deposits for the six months ended June 30, 2021 increased to $14.8 billion from $10.4 billion for the same period in 2020.

Net interest margin for the six months ended June 30, 2021 was 2.10% compared to 2.53% for the same period of 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 the increases in lower-yielding investment securities and liquidity assets, partially offset by lower funding costs compared to the same period in 2020.

The yield on total loans held for investment decreased to 3.73% for the six months ended June 30, 2021, compared to 4.13% for the same period in 2020, and the yield on earning assets decreased to 2.39% for the six months ended June 30, 2021, compared to 3.22% for the same period in 2020.

The average cost of total deposits decreased to 0.22% for the six months ended June 30, 2021 from 0.65% for the same period in 2020 and total funding costs, including all deposits, long-term debt and stockholders' equity, decreased to 0.29% for the six months ended June 30, 2021, compared to 0.67% for the same period in 2020.

Non-interest Income

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

(in thousands) 2021 2020 2021 2020

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Total non-interest income $ 30,102 $ 70,485 $ 69,194 $ 82,265

(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 $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 income decreased by $40.4 million during the three months ended June 30, 2021 compared to the same period in 2020.

This decrease was primarily due to decreases in net gain/(loss) on sale of loans held for sale and brokered loan fees, partially offset by increases in service charges and other non-interest income.

The decrease in net gain/(loss) on sale of loans held for sale and brokered loan fees was primarily due to the second quarter 2021 sale of our portfolio of MSRs and transition of the MCA program to a third-party.

Non-interest income decreased by $13.1 million during the six months ended June 30, 2021 compared to the same period in 2020.

This decrease was primarily due to a decrease in net gain/(loss) on sale of loans held for sale, partially offset by an increase in other non-interest income.

The decrease in net gain/(loss) on sale of loans held for sale was primarily due to the second quarter 2021 sale of our portfolio of MSRs and transition of the MCA program to a third-party.

Non-interest Expense

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

(in thousands) 2021 2020 2021 2020

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Total non-interest expense $ 149,060 $ 222,335 $ 299,376 $ 387,752

(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 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.

Non-interest expense for the three months ended June 30, 2021 decreased $73.3 million compared to the same period in 2020.

The decrease was primarily due to decreases in salaries and employee benefits, communications and technology expense, servicing-related expenses and merger-related expenses.

Non-interest expense for the six months ended June 30, 2021 decreased $88.4 million compared to the same period in 2020.

The decrease was primarily due to decreases in marketing expense, legal and professional expense, communications and technology expense, servicing-related expenses and merger-related expenses.

Analysis of Financial Condition

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

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

(in thousands)

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Total loans held for investment, net $ 23,719,853 $ 24,176,245

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.

Total gross loans held for investment were $24.0 billion at June 30, 2021, a decline of $491.3 million from December 31, 2020 primarily due to declines in energy, mortgage finance and real estate loans, partially offset by an increase in commercial loans.

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

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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.

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.

Despite the decline in the first half 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 March 31, 2021, we had $1.8 billion in syndicated loans, $475.9 million of which we administer as agent.

As of June 30, 2021, we had $2.0 billion in syndicated loans, $550.4 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 March 31, 2021, none of our syndicated loans were on non-accrual.

As of June 30, 2021, $12.8 million 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 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.

As of June 30, 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.

We also make loans to customers that are secured by assets located outside of Texas.

The risks created by this concentration have been considered by management in the determination of the appropriateness of the allowance for credit losses.

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

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

(in thousands) June 30, 2021 December 31, 2020 June 30, 2020

Non-accrual loans(1)

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Loans held for sale past due 90 days and accruing(4) 2,695 16,667 10,152

(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.

(1) As of June 30, 2021, December 31, 2020 and June 30, 2020, non-accrual loans included $24.4 million, $45.4 million and $23.7 million, respectively, in loans that met the criteria for restructured.

(2) At June 30, 2021, December 31, 2020 and June 30, 2020, loans past due 90 days and still accruing includes premium finance loans of $3.0 million, $6.4 million and $14.8 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.

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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 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.

Total non-performing assets at June 30, 2021 decreased $35.4 million from December 31, 2020 and decreased $87.4 million compared to June 30, 2020.

The decrease from December 31, 2020 was primarily due to declines in energy and real estate non-accrual loans, and the decrease from June 30, 2020 was primarily due to declines in commercial and energy non-accrual 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 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.

At June 30, 2021, we had $22.0 million in loans of this type, compared to $193.2 million at December 31, 2020 and $132.0 million at June 30, 2020.

The decline in potential problem loans is consistent with the continued economic recovery from the impacts of the COVID-19 pandemic.

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 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.

We recorded a $25.0 million negative provision for credit losses for the six months ended June 30, 2021, compared to a provision of $196.0 million in the same period of 2020.

The year-over-year decrease resulted primarily from decreases in charge-offs and non-accrual loans, as well as improvement in the economic outlook as the economy continues to recover from the impacts of the COVID-19 pandemic.

We recorded $8.8 million in net charge-offs during the six months ended June 30, 2021, compared to $131.8 million during the same period of 2020.

Criticized loans totaled $891.6 million at June 30, 2021, compared to $918.4 million at December 31, 2020 and $1.0 billion at June 30, 2020.

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

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

Six months ended June 30, 2021 Year ended December 31, 2020 Six months ended June 30, 2020

(in thousands except percentage and multiple data)

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Total allowance for credit losses to LHI 1.00 % 1.11 % 1.09 %

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.

Allowance for credit losses on loans as a multiple of non-performing loans 2.6 x 2.1 x 1.5 x

The allowance for credit losses, including the allowance for losses on unfunded commitments reported on the consolidated balance sheets in other liabilities, totaled $238.3 million at June 30, 2021, $272.0 million at December 31, 2020 and $277.0 million at June 30, 2020.

The total allowance for credit losses as a percentage of loans held for investment was 1.00% at June 30, 2021, compared to 1.11% at December 31, 2020 and 1.09% at June 30, 2020.

The total allowance for credit losses as a percentage of loans held for investment, excluding mortgage finance, was 1.57% at June 30, 2021, compared to 1.77% at December 31, 2020 and 1.67% at June 30, 2020.

The decrease in the total allowance as a percentage of loans held for investment at June 30, 2021, compared to June 30, 2020, is due primarily to a decrease in the allowance for credit losses, resulting from reserve releases during the first half of 2021 driven by a decrease in charge-offs and improvement in the economic outlook as the economy continues to recover from the impacts of the COVID-19 pandemic.

Loans Held for Sale

Through our MCA program we commit to purchase residential mortgage loans from independent correspondent lenders and deliver those loans into the secondary market via whole loan sales to independent third parties or in securitization transactions to Ginnie Mae and GSEs such as Fannie Mae and Freddie Mac.

For additional information on our loans held for sale portfolio, see Note 5 - Certain Transfers of Financial Assets in the accompanying notes to the consolidated financial statements included elsewhere in this report.

Through the MCA program we commit to purchase residential mortgage loans from independent correspondent lenders and deliver those loans into the secondary market via whole loan sales to independent third parties or in securitization transactions to Ginnie Mae and Government Sponsored Enterprises (“GSEs”) such as Fannie Mae and Freddie Mac.

For additional information on our loans held for sale, see Note 5 - Certain Transfers of Financial Assets in the accompanying notes to the consolidated financial statements included elsewhere in this report.

Liquidity and Capital Resources

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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, 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.

Our principal source of funding is customer deposits, supplemented by short-term and long-term borrowings, primarily from federal funds purchased and Federal Home Loan Bank (“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.

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.

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.

The following table summarizes the composition of liquidity assets:

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

(in thousands except percentage data) June 30, 2021 December 31, 2020 June 30, 2020

Federal funds sold and securities purchased under resale agreements $ — $ — $ 50,000

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In addition to deposits from our core customers, we also have access to deposits through brokered customer relationships.

For regulatory purposes, these relationship brokered deposits are categorized as brokered deposits;

however, since these deposits arise from a customer relationship, which involves extensive treasury services, we consider these deposits to be core deposits for our reporting purposes.

We also have access to incremental deposits through brokered retail certificates of deposit, or CDs.

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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) March 31, 2021 December 31, 2020 March 31, 2020

(in thousands) June 30, 2021 December 31, 2020 June 30, 2020

Deposits from core customers $ 26,309,504 $ 27,581,532 $ 25,636,902

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We have access to sources of traditional brokered deposits that we estimate to be $7.5 billion.

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

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

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

Such borrowings are generally used to fund our mortgage finance loans, due to their liquidity, short duration and interest spreads available.

These borrowing sources include federal funds purchased from our downstream correspondent bank relationships (which consist of banks that are smaller than our Bank) and from our upstream correspondent bank relationships (which consist of banks that are larger than our Bank), customer repurchase agreements and advances from the FHLB and the Federal Reserve.

borrowing sources include federal funds purchased from our downstream correspondent bank relationships (which consist of banks that are smaller than our Bank) and from our upstream correspondent bank relationships (which consist of banks that are larger than our Bank), customer repurchase agreements and advances from the FHLB and the Federal Reserve.

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

(in thousands) March 31, 2021

(in thousands) June 30, 2021

Federal funds purchased $ 10,000

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

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

(in thousands) March 31, 2021

As of June 30, 2021, all are scheduled to mature within one year.

(in thousands) June 30, 2021

FHLB borrowing capacity relating to loans $ 6,680,417

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The loan agreement contains customary financial covenants and restrictions.

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

No borrowings were made against this line of credit during the six months ended June 30, 2021.

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.

For additional information regarding our borrowings and our capital and stockholders' equity, see Note 6 – Long-Term Debt and Note 8 – Regulatory Restrictions, respectively, in the accompanying notes to the consolidated financial statements included elsewhere in this report.

Commitments and Contractual Obligations

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

The following table presents, as of June 30, 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) Within One

Year After One But

Years After Three

Five Years After

(in thousands) Less than 1

Years 3-5 Years More than 5

Deposits without a stated maturity $ 27,123,020 $ — $ — $ — $ 27,123,020

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Total contractual obligations $ 30,268,036 $ 631,560 $ 460,217 $ 504,257 $ 31,864,070

Off-Balance Sheet Arrangements

We enter into commitments to extend credit and standby letters of credit in the ordinary course of business, details of which are described in Note 1 – Operations and Summary of Significant Accounting Policies in our 2020 Form 10-K.

For additional information, see Note 7 – Financial Instruments with Off-Balance Sheet Risk in the accompanying notes to the consolidated financial statements included elsewhere in this report.

Critical Accounting Policies

SEC guidance requires disclosure of “critical accounting policies.” The SEC defines “critical accounting policies” as those that are most important to the presentation of a company’s financial condition and results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

We follow financial accounting and reporting policies that are in accordance with accounting principles generally accepted in the United States.

The more significant of these policies are summarized in Note 1 - Operations and Summary of Significant Accounting Policies in the notes to the consolidated financial statements included elsewhere in this report and in our 2020 Form 10-K.

We follow financial accounting and reporting policies that are in accordance with accounting principles generally accepted in the United States (“GAAP”).

Certain significant policies are summarized in Note 1 - Operations and Summary of Significant Accounting Policies in the notes to the consolidated financial statements included elsewhere in this report and in our 2020 Form 10-K.

Not all significant accounting policies require management to make difficult, subjective or complex judgments.

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We manage our interest rate risk in several ways.

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

Refer to “Interest Rate Risk Management” in Item 3 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