What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-10-21 compared with 2021-07-22 · 105 added, 87 removed, 398 unchanged (33% 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 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”).

The following discussion and analysis of our financial condition as of September 30, 2021 and December 31, 2020 and results of operations for the three and nine month periods ended September 30, 2021 and September 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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• 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 subsidiary, Texas Capital Bank, National Association (the “Bank”) and our customers.

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

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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 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:

Early in 2021, we embarked on an enterprise-wide transformation which included detailed reviews of all of our business lines, our operating model, our investment spend and our overall strategy, which resulted in the September 1, 2021 announcement by management of our new long-term strategy.

This new long-term strategy will ensure that we are best positioned to serve clients and capitalize on business opportunities going forward.

This new plan includes focusing on building a technology-enabled operating model organized around client delivery and investing in technology.

To achieve these goals we are pursuing an aggressive hiring plan to significantly increase the number of client-facing professionals by 2025, and we are also investing in new technologies and lines of business to become a full-service financial services firm for our clients, with the goal of improving client relationships and fee income.

We are investing in treasury solutions product and service offerings, building on our existing private wealth business and expanding the scope of our investment banking product and service offerings, which will include the establishment of a broker-dealer service.

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

The application was approved during the third quarter and the conversion was effective at open of business on September 15, 2021.

Effective as of the date of conversion, the Texas Department of Banking is the Bank’s primary regulator, the Federal Deposit Insurance Corporation is the Bank’s primary federal regulator and the Federal Reserve will continue to be the Company’s primary federal regulator.

Significant transactions affecting our financial statements during the nine months ended September 30, 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 purposes, 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;

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

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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.

• $12.0 million write-off of certain software assets to reposition our capitalized technology investment to align with the long-term strategy as announced by management in the third quarter of 2021.

Impact of COVID-19 Pandemic

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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.

While positive tailwinds 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.

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Summary of Performance

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.

We reported net income of $43.4 million and net income available to common stockholders of $39.1 million for the third quarter of 2021 compared to net income of $57.1 million and net income available to common stockholders of $54.7 million for the third quarter of 2020.

On a fully diluted basis, earnings per common share were $0.76 for the third quarter of 2021, compared to $1.08 for the third quarter of 2020.

Return on average common equity (“ROE”) was 5.41% and return on average assets (“ROA”) was 0.47% for the third quarter of 2021, compared to 8.24% and 0.59%, respectively, for the third quarter of 2020.

The decrease in net income for the third quarter of 2021 resulted primarily from decreases in net interest income and non-interest income, partially offset by decreases in provision for credit losses and non-interest expense.

The decrease in net income was the primary driver in the decreases in ROE and ROA.

Net income and net income available to common stockholders for the nine months ended September 30, 2021 totaled $188.8 million and $174.4 million, respectively, compared to net income and net loss available to common stockholders of $6.1 million and $1.2 million, respectively, for the same period in 2020.

On a fully diluted basis, earnings per common share were $3.41 for the nine months ended September 30, 2021, compared to a loss per common share of $0.02 for the same period in 2020.

ROE was 8.35% and ROA was 0.66% for the nine months ended September 30, 2021, compared to a negative 0.06% and 0.02%, respectively, for the same period in 2020.

The increase in net income, ROE and ROA for the nine months ended September 30, 2021 resulted primarily from a $246.0 million decrease in provision for credit losses as compared to 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 June 30, 2021 Three months ended June 30, 2020

Three months ended September 30, 2021 Three months ended September 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

Nine months ended September 30, 2021 Nine months ended September 30, 2020

(in thousands except percentages) Average

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

Three months ended September 30, 2021/2020 Nine months ended September 30, 2021/2020

Change Change due to(1) Net

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Net Interest Income

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.

Net interest income was $194.1 million for the three months ended September 30, 2021, compared to $207.6 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 increases in average investment securities and loan fees, as well as declining cost of funds.

Average earning assets for the three months ended September 30, 2021 decreased $1.5 billion compared to the same period in 2020, and included a $3.1 billion increase in average total investment securities, reflecting the deployment of excess liquidity into higher-yielding investment securities, partially offset by a $2.0 billion decrease in average liquidity assets and a $2.6 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.

Through the first nine 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 third quarter of 2020 resulted from the transition of the MCA program to a third-party.

Average interest-bearing liabilities for the three months ended September 30, 2021 decreased $5.2 billion compared to the same period in 2020, primarily due to a $5.2 billion decrease in average interest-bearing deposits and a $511.7 million decrease in average other borrowings, partially offset by a $531.9 million increase in average long-term debt.

Average demand deposits for the three months ended September 30, 2021 increased to $15.4 billion from $12.2 billion for the three months ended September 30, 2020.

Net interest margin for the three months ended September 30, 2021 was 2.15% compared to 2.22% 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, partially offset by increases in loan fees and lower funding costs compared to the third quarter of 2020.

The yield on total loans held for investment decreased to 3.55% for the three months ended September 30, 2021 compared to 3.71% for the same period in 2020, and the yield on earning assets decreased to 2.44% for the three months ended September 30, 2021 compared to 2.60% for the same period in 2020.

The average cost of total deposits decreased to 0.19% for the third quarter of 2021 from 0.34% for the third quarter of 2020 and total funding costs, including all deposits, long-term debt and stockholders' equity, decreased to 0.28% for the third quarter of 2021 compared to 0.38% for the third quarter of 2020.

Net interest income was $591.2 million for the nine months ended September 30, 2021 compared to $645.8 million for the same period in 2020.

Average earning assets increased $1.6 billion for the nine months ended September 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 $1.4 billion increase in average liquidity assets, partially offset by a $2.9 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.

Average interest-bearing liabilities decreased $2.6 billion for the nine months ended September 30, 2021, compared to the same period in 2020, primarily due to a $2.3 billion decrease in average interest-bearing deposits and a $702.9 million decrease in average other borrowings, partially offset by a $363.9 million increase in average long-term debt.

Average demand deposits for the nine months ended September 30, 2021 increased to $15.0 billion from $11.0 billion for the same period in 2020.

Net interest margin for the nine months ended September 30, 2021 was 2.12% compared to 2.42% 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.

The yield on total loans held for investment decreased to 3.67% for the nine months ended September 30, 2021, compared to 3.99% for the same period in 2020, and the yield on earning assets decreased to 2.41% for the nine months ended September 30, 2021, compared to 3.00% for the same period in 2020.

The average cost of total deposits decreased to 0.21% for the nine months ended September 30, 2021 from 0.54% 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 nine months ended September 30, 2021, compared to 0.57% for the same period in 2020.

Non-interest Income

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

Three months ended September 30, Nine months ended September 30,

(in thousands) 2021 2020 2021 2020

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Total non-interest income $ 21,220 $ 60,348 $ 90,414 $ 142,613

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 income decreased by $39.1 million during the three months ended September 30, 2021 compared to the same period in 2020.

The decrease was primarily due to decreases in net gain/(loss) on sale of loans held for sale, brokered loan fees and servicing income, all resulting from the 2021 sale of our MSR portfolio and transition of the MCA program to a third-party.

Non-interest income decreased by $52.2 million during the nine months ended September 30, 2021 compared to the same period in 2020.

Non-interest Expense

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

Three months ended September 30, Nine months ended September 30,

(in thousands) 2021 2020 2021 2020

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Total non-interest expense $ 152,987 $ 165,741 $ 452,363 $ 553,493

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.

Non-interest expense for the three months ended September 30, 2021 decreased $12.8 million compared to the same period in 2020.

The decrease was primarily due to decreases in communications and technology expense and servicing-related expenses, partially offset by an increase in salaries and employee benefits.

The decrease in servicing-related expenses resulted from the 2021 sale of our MSR portfolio and transition of the MCA program to a third-party.

Communication and technology expenses for the three months ended September 30, 2021 included a $12.0 million write-off of certain software assets, as is discussed above, compared to $15.4 million included in the same period of 2020.

Non-interest expense for the nine months ended September 30, 2021 decreased $101.1 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.

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

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

(in thousands)

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Total loans held for investment, net $ 23,527,760 $ 24,176,245

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.

Total gross loans held for investment were $23.8 billion at September 30, 2021, a decline of $686.0 million from December 31, 2020 due to declines in energy, mortgage finance and real estate loans, 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 half 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 nine months 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 June 30, 2021, we had $2.0 billion in syndicated loans, $550.4 million of which we administer as agent.

As of September 30, 2021, we had $2.3 billion in syndicated loans, $628.3 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 June 30, 2021, $12.8 million of our syndicated loans were on non-accrual.

As of September 30, 2021, $11.5 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 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.

As of September 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

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) June 30, 2021 December 31, 2020 June 30, 2020

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

Non-accrual loans(1)

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Total non-performing assets $ 87,532 $ 121,989 $ 161,946

Restructured loans - accruing $ — $ — $ —

Loans held for investment past due 90 days and accruing(2) 3,405 12,541 15,896

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Loans held for sale past due 90 days and accruing(4) 3,808 16,667 15,631

(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.

(1) As of September 30, 2021, December 31, 2020 and September 30, 2020, non-accrual loans included $23.7 million, $45.4 million and $47.7 million, respectively, in loans that met the criteria for restructured.

(2) At September 30, 2021, December 31, 2020 and September 30, 2020, loans past due 90 days and still accruing includes premium finance loans of $2.3 million, $6.4 million and $11.9 million, respectively.

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

(4) Includes loans guaranteed by U.S.

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Interest on these past due loans accrues at the debenture rate guaranteed by the U.S.

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 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.

Balances as of December 31, 2020 and September 30, 2020 also include 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, 2021 decreased $34.5 million from December 31, 2020 and decreased $74.4 million compared to September 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 September 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 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.

At September 30, 2021, we had $68.0 million in loans of this type, compared to $193.2 million at December 31, 2020 and $129.5 million at September 30, 2020.

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

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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 $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.

We recorded a $20.0 million negative provision for credit losses for the nine months ended September 30, 2021, compared to a provision of $226.0 million in the same period of 2020.

The year-over-year decrease resulted primarily from decreases in net 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 $11.9 million in net charge-offs

during the nine months ended September 30, 2021, compared to $133.4 million during the same period of 2020.

Criticized loans totaled $728.9 million at September 30, 2021, compared to $918.4 million at December 31, 2020 and $1.1 billion at September 30, 2020.

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

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

Nine months ended September 30, 2021 Year ended December 31, 2020 Nine months ended September 30, 2020

(in thousands except percentage and multiple data)

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Energy 1,366 6,999 1,303

Real estate 112 — —

Total recoveries 3,940 8,276 2,186

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Allowance for credit losses on loans as a multiple of non-performing loans 2.5 x 2.1 x 1.8 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.

The allowance for credit losses, including the allowance for losses on unfunded commitments reported on the consolidated balance sheets in other liabilities, totaled $240.2 million at September 30, 2021, $272.0 million at December 31, 2020 and $305.4 million at September 30, 2020.

The total allowance for credit losses as a percentage of loans held for investment was 1.01% at September 30, 2021, compared to 1.11% at December 31, 2020 and 1.21% at September 30, 2020.

The total allowance for credit losses as a percentage of loans held for investment, excluding mortgage finance, was 1.58% at September 30, 2021, compared to 1.77% at December 31, 2020 and 1.93% at September 30, 2020.

The decrease in the total allowance as a percentage of loans held for investment at September 30, 2021, compared to September 30, 2020, is due primarily to a decrease in the allowance for credit losses, resulting from reserve releases during the first nine months of 2021 driven by a decrease in net 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 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.

On April 20, 2021, we entered into an agreement to sell our portfolio of MSRs and to transition the MCA program to a third-party.

The sale was completed on June 1, 2021 and the transfer of servicing on the underlying mortgage loans was completed on August 1, 2021.

Transition activities began immediately following the execution of the agreement and are significantly complete as of September 30, 2021.

On October 1, 2021, we completed the sale of the remaining MSRs to the same third-party.

For additional information on these sales and the winding down of this line of business, 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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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) June 30, 2021 December 31, 2020 June 30, 2020

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

Federal funds sold and securities purchased under resale agreements $ — $ — $ —

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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) June 30, 2021 December 31, 2020 June 30, 2020

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

Deposits from core customers $ 27,339,071 $ 27,581,532 $ 27,339,283

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

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.

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.

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

(in thousands) June 30, 2021

(in thousands) September 30, 2021

Federal funds purchased $ —

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

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

(in thousands) June 30, 2021

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

(in thousands) September 30, 2021

FHLB borrowing capacity relating to loans $ 6,168,920

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The loan agreement contains customary financial covenants and restrictions.

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

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

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 borrowings and our capital and stockholders' equity, see Note 6 - Long-Term Debt, Note 8 - Regulatory Restrictions and Note 12 - Material Transactions Affecting Stockholders’ Equity, 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 June 30, 2021, significant fixed and determinable contractual obligations to third parties by payment date.

The following table presents, as of September 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.

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A reserve is recorded upon origination or purchase of a loan.

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.

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

8 unchanged sentences

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