What changed in this filing

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Item 1. Business

2022-02-09 compared with 2021-02-09 · 149 added, 173 removed, 257 unchanged (56% of the section changed)

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Texas Capital Bancshares, Inc.

(“we,” “us,” “TCBI” or the “Company”), a Delaware corporation organized in 1996, is the parent of Texas Capital Bank, National Association (the “Bank”).

(“we,” “us,” “TCBI” or the “Company”), a Delaware corporation, was incorporated in November 1996 and commenced banking operations in December 1998.

The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiary, Texas Capital Bank (the “Bank”).

The Company is a registered bank holding company and has elected to be a financial holding company.

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We have focused on organic growth, maintenance of credit quality and recruiting and retaining experienced bankers with strong personal and professional relationships in their communities.

We serve the needs of commercial businesses and successful professionals and entrepreneurs located in Texas as well as operate several lines of business that serve a regional or national clientele of commercial borrowers.

We serve the needs of commercial businesses and professionals and entrepreneurs located in Texas as well as operate several lines of business serving a regional or national clientele of commercial borrowers.

We are primarily a secured lender, with the majority of our loans held for investment, excluding mortgage finance loans and other national lines of business, being made to businesses headquartered or with operations in Texas.

Our national lines of business provide specialized lending products to businesses throughout the United States.

We have benefitted from the success of our business model since inception, producing strong loan and deposit growth and favorable loss experience amidst a challenging environment for banking nationally.

On December 9, 2019, the Company and Independent Bank Group, Inc.

("IBTX") entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which, on the terms and subject to the conditions therein, the Company would be merged with and into IBTX.

On May 22, 2020, the Company and IBTX entered into an agreement pursuant to which the parties mutually agreed to terminate the Merger Agreement.

Neither party paid a termination fee in connection with the termination of the Merger Agreement.

On January 25, 2021, Robert C.

Holmes began his tenure as President and Chief Executive Officer ("CEO") of the Company.

Larry Helm, who served as Executive Chairman of the board of directors and President and CEO of the Company from May 25, 2020, through January 24, 2021, will continue as Executive Chair of the board of directors for up to 90 days after the start of Mr.

Holmes' tenure to facilitate a smooth transition of responsibilities, after which he will return to his previous role as Non-Executive Chair of the board of directors.

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 (“FDIC”) is the Bank’s primary federal regulator, and the Board of Governors of the Federal Reserve System (“Federal Reserve”) will continue to be the Company’s primary federal regulator.

In December 2021, the Company received approval from the U.S.

Securities and Exchange Commission (“SEC”) and Financial Industry Regulatory Authority (“FINRA”) for registration and FINRA membership of a broker-dealer to conduct securities transactions and business with the investing public in the United States.

In connection with this approval, TCBI Securities, Inc., (“TCBI Securities”) a wholly owned non-bank subsidiary of the Bank, was formed to provide investment banking products and services to our customers.

TCBI Securities is subject to regulation by the SEC, FINRA and state securities regulators.

Growth History

We have grown substantially in both size and profitability since our formation.

In 2020, we continued to experience growth in most of our key areas of business, however we did experience a decline in certain loan portfolios as we strategically reduced certain portfolios.

In 2020, we continued to experience growth in most of our key areas of business, however we did experience a decline in certain loan portfolios as we strategically reduced certain concentrations.

In 2021, we continued this strategic reduction of certain portfolios, transitioned our Mortgage Correspondent Aggregation (“MCA”) program to a third party, and embarked on an enterprise-wide transformation to support our new long-term strategic plan, as was unveiled on September 1, 2021, all of which resulted in the continued contraction of certain areas of our balance sheet.

The table below sets forth data regarding our key areas of business for the past five years.

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Loans held for investment, net 15,331,457 15,351,451 16,476,413 16,690,550 15,366,252

Assets 37,726,096 32,548,069 28,257,767 25,075,645 21,697,134

Demand deposits 12,740,947 9,438,459 7,317,161 7,812,660 7,994,201

Total assets 34,731,738 37,726,096 32,548,069 28,257,767 25,075,645

Non-interest bearing deposits 13,390,370 12,740,947 9,438,459 7,317,161 7,812,660

Total deposits 28,109,365 30,996,589 26,478,593 20,606,113 19,123,180

Stockholders’ equity 2,871,224 2,801,321 2,480,308 2,190,072 1,997,890

The following table provides information about our loans held for investment ("LHI") portfolio by type of loan for the past five years:

Total stockholders’ equity 3,209,616 2,871,224 2,801,321 2,480,308 2,190,072

The following table provides information about our portfolio of loans held for investment by type of loan for the past five years:

(in thousands) 2021 2020 2019 2018 2017

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Real estate 4,777,530 5,794,624 6,008,040 6,050,083 5,960,785

Gross loans held for investment 22,871,961 24,501,830 24,736,642 22,676,524 20,772,343

Unearned income (net of direct origination costs) (65,007) (70,970) (90,380) (108,450) (97,931)

Total loans held for investment, net $ 22,806,954 $ 24,430,860 $ 24,646,262 $ 22,568,074 $ 20,674,412

The Texas Market

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We also compete with other providers of financial services, such as non-bank lenders, commercial finance and leasing companies, consumer finance companies, financial technology, or fintech, companies, securities firms, insurance companies, full-service brokerage firms and discount brokerage firms, credit unions and savings and loan associations.

We believe that many middle market companies and successful professionals and entrepreneurs are interested in banking with a company headquartered in, and with decision-making authority based in, Texas and with established Texas bankers who have the expertise to act as trusted advisors to customers with regard to their banking needs.

We believe that many commercial businesses and successful professionals and entrepreneurs are interested in banking with a company headquartered in, and with decision-making authority based in, Texas and with established Texas bankers who have the expertise to act as trusted advisors to customers with regard to their banking needs.

Our banking centers in our target markets are served by experienced bankers with lending expertise in the specific industries found in their market areas and established community ties.

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National Lines of Business

While the Texas market continues to be central to the growth and success of our company, we have developed several lines of business that offer specialized loan and deposit products to businesses regionally and throughout the nation, including mortgage finance, mortgage correspondent aggregation, homebuilder finance, insurance premium finance, lender finance, asset-based lending and escrow services.

While the Texas market continues to be central to the growth and success of our company, we have developed several lines of business that offer specialized loan and deposit products to businesses and individuals regionally and throughout the nation, including mortgage finance, homebuilder finance, insurance premium finance, lender finance, asset-based lending, and Bask Bank, an online banking division that offers depositors American Airlines AAdvantage® miles instead of interest.

We believe these business lines help us mitigate our geographic concentration risk in Texas.

We continue to seek opportunities to develop additional lines of business that leverage our capabilities and are consistent with our business strategy.

Most recently, we launched Bask Bank, an all-digital branch of our Bank that offers depositors American Airlines AAdvantage® miles instead of interest.

Business Strategy

Drawing on the business and community ties of our management and their banking experience, our strategy has been to grow an independent bank that has focused primarily on middle market business customers and successful professionals and entrepreneurs in each of the five major metropolitan markets of Texas as well as our national lines of business.

Drawing on the business and community ties of our management and their banking experience, our strategy has been to grow an independent bank that has focused primarily on commercial businesses and successful professionals and entrepreneurs in each of the five major metropolitan markets of Texas as well as our national lines of business.

To achieve this, we employ the following strategies:

• offering a premier and differentiated banking experience to middle market businesses and successful professionals and entrepreneurs who value a broad relationship with our Bank;

• offering a differentiated banking experience to commercial businesses and successful professionals and entrepreneurs who value a broad relationship with our Bank;

• growing our loan and deposit base in our existing markets by hiring additional experienced bankers in our different lines of business;

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• extending our reach within our target markets and lines of business through service innovation and service excellence.

On September 1, 2021, we announced key updates to our long-term strategy.

This new long-term strategy includes the following key steps that we are taking to build a technology-enabled operating model:

• organizing around client delivery and investing in technology;

• expanding products and services;

• enhancing accountability and maintaining financial resilience.

Products and Services

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We offer a full range of products and services oriented to the needs of our business customers, including:

• commercial loans for general corporate purposes, including financing for working capital, internal growth, acquisitions and financing for business insurance premiums;

• commercial loans for general corporate purposes, including financing for working capital, organic growth, acquisitions and financing for business insurance premiums;

• real estate term and construction loans;

• mortgage warehouse lending;

• mortgage correspondent aggregation;

• equipment finance and leasing;

• treasury management services, including online banking and debit and credit card services;

• escrow services;

• investment banking services;

• letters of credit.

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• online and mobile banking;

• Bask Bank, an all-digital branch offering depositors American Airlines AAdvantage® miles instead of interest.

• investment banking services;

• Bask Bank, an online banking division offering depositors American Airlines AAdvantage® miles instead of interest.

Lending Activities

We target our lending to middle market businesses and successful professionals and entrepreneurs that meet our credit standards.

We target our lending to commercial businesses and successful professionals and entrepreneurs that meet our credit standards.

The credit standards are set by our standing Credit Policy Committee with the assistance of our Bank’s Chief Credit Officer, who is charged with ensuring that credit standards are met by loans in our portfolio.

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We believe that our Bank is differentiated from its competitors by its focus on and targeted marketing to our core customers and by its ability to tailor its products to the individual needs of our customers.

We generally extend variable rate loans in which the interest rate fluctuates with a specified reference rate such as the United States prime rate or the London Interbank Offered Rate ("LIBOR") and frequently provide for a minimum floor rate.

We generally extend variable rate loans in which the interest rate fluctuates with a specified reference rate and frequently provide for a minimum floor rate.

Our use of variable rate loans is designed to protect us from risks associated with interest rate fluctuations since the rates of interest earned will automatically reflect such fluctuations.

In 2017, the U.K.

Financial Conduct Authority announced that it would no longer compel banks to submit rates for the calculation of LIBOR after 2021.

Financial Conduct Authority announced that it would no longer compel banks to submit rates for the calculation of the London Interbank Offered Rate (“LIBOR”) after 2021.

The administrator of LIBOR has proposed to extend publication of the most commonly used U.S.

dollar LIBOR settings to June 30, 2023 and to cease publishing other LIBOR settings on December 31, 2021.

federal banking agencies have issued guidance strongly encouraging banking organizations to cease using U.S.

federal banking agencies issued guidance strongly encouraging banking organizations to cease using U.S.

dollar LIBOR as a reference rate in new contracts as soon as practicable and in any event by December 31, 2021.

It is not possible to know whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR or what the effect of any such changes in views or alternatives may have on the financial markets for LIBOR-linked financial instruments.

The full impact of alternatives to LIBOR on the valuations, pricing and operation of our financial instruments is not yet known;

however, the primary instruments that may be impacted include loans, securities, borrowings and derivatives indexed to LIBOR that mature after December 31, 2021.

We have established a working group, consisting of key stakeholders from throughout the Bank, to monitor developments relating to LIBOR uncertainty and changes and to guide our Bank's response.

This team is currently working to ensure that our technology systems are prepared for the transition, our loan documents that reference LIBOR-based rates have been

appropriately amended to reference other methods of interest rate determination and internal and external stakeholders are apprised of the transition.

We have significant exposure to financial instruments with attributes that are either directly or indirectly dependent on LIBOR to establish their interest rate and/or value, some of which mature after December 31, 2021.

We have established a working group, consisting of key stakeholders from

throughout the Company, to monitor developments relating to LIBOR changes and to guide the Bank’s response.

This team is continuing to work to ensure that our technology systems are prepared for the transition, our loan documents that reference LIBOR-based rates have been appropriately amended to reference other methods of interest rate determinations and internal and external stakeholders are apprised of the transition.

Based on our transition progress to date, we have ceased originating LIBOR-based products and began originating Bloomberg Short Term Yield Index based loans in December 2021.

We are prepared with other alternative benchmarks, as necessary, to support the transition from LIBOR.

Over the next 18 months, we will continue to transition all of our remaining LIBOR-based products to an alternative benchmark.

We will also continue to evaluate the transition process and align our trajectory with regulatory guidelines regarding the cessation of LIBOR as well as monitor new developments for transitioning to alternative reference rates.

Our mortgage finance business encounters seasonal demands for credit, surges in consumer demand driven by changes in interest rates and month-end “spikes” of residential mortgage closings.

Deposit Products

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Our wealth management and trust services are primarily focused on serving the needs of our banking clients and depend on close cooperation and support between our banking relationship managers and our investment management professionals.

Impact of the COVID-19 Pandemic

In March 2020, the outbreak of the novel Coronavirus Disease 2019 (“COVID-19”) was recognized as a pandemic by the World Health Organization.

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

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

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

Although financial markets have rebounded from significant declines that occurred earlier in the pandemic and global economic conditions showed signs of improvement beginning during the second quarter of 2020, many of the effects that arose or became more pronounced after the onset of the COVID-19 pandemic have persisted through the end of the year.

These changes have had and are likely to continue to have a significant adverse effect on the markets in which we conduct our business and the demand for our products and services.

See “Risk Factors—Other Risks Affecting our Business—The COVID-19 pandemic is adversely affecting us and our customers, employees and third-party service providers, and the adverse impacts on our business, financial position, operations and prospects have been and are expected to continue to be significant.”

Legislative Developments .

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

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

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

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

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

On June 5, 2020, the Paycheck Protection Program Flexibility Act (the “new Act”) was signed into law, and made significant changes to the PPP to provide additional relief for small businesses.

The new Act increased flexibility for small businesses that have been unable to rehire employees due to lack of employee availability, or have been unable to operate as normal due to COVID-19 related restrictions, extended the period that businesses have to use PPP funds to qualify for loan forgiveness to 24 weeks, up from 8 weeks under the original rules, and relaxed the requirements that loan recipients must adhere to in order to qualify for loan forgiveness.

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

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

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

The program was re-opened on January 11, 2021 with updated guidance outlining program changes to enhance its effectiveness and accessibility.

This round of the PPP will serve

new borrowers, as well as allow certain existing PPP borrowers to apply for a second draw PPP Loan and make a request to modify their first draw PPP loan.

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

As of December 31, 2020, we had funded $717.5 million in PPP loans.

Those loans have an outstanding balance of $617.5 million as of December 31, 2020.

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

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

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

Through December 31, 2020, we granted temporary modifications on 483 loans with a total outstanding loan balance of $1.3 billion, resulting in the deferral of $7.7 million in interest payments.

As of December 31, 2020, 48 loans with a total outstanding balance of $90.2 million remain on deferral, of which $50.7 million have been granted a second deferral.

See Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information on the impact of the COVID-19 pandemic to our financial statements and results of operations, as well as our business operations.

Human Capital

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We are continually investing in our workforce to further emphasize diversity and inclusion and to foster our employees' growth and career development.

As part of our commitment to address diversity, equity and inclusion ("DEI") we have launched a DEI Council, chaired by our CEO.

As part of our commitment to address diversity, equity and inclusion (“DEI”) we have a DEI Council, co-chaired by our Chief Executive Officer and Chief Human Resources Officer and made up of colleagues from departments across our organization, that aims to steer our DEI strategies.

The DEI Council is working to develop DEI goals and metrics that will be integrated into our business strategy.

Through routine strategy sessions and planning, the DEI Council continues to explore the evolution of DEI at the Company.

Among our highest priorities in 2021 was the safety, well-being and stability of our employees during the continuation of the COVID-19 pandemic.

We focused on providing employee support to address work, life, financial and health-related matters.

This included programs and benefits to ease work-from-home challenges and address the medical and other support needs of those directly impacted by COVID-19.

We took significant measures to provide employees with a sense of safety, security, and certainty in response to the COVID-19 pandemic, by establishing social distancing and hygiene and environmental safety protocols for on-site workers at our banking centers and offices.

We also provided free COVID-19 testing for employees enrolled in our medical coverage and developed tracking and reporting solutions to monitor employee circumstances related to the COVID-19 pandemic.

We offer a comprehensive benefits program to our employees and design our compensation programs to attract, retain and motivate employees, as well as to align with Company performance.

During 2021, we enhanced our performance management process, and implemented a more defined process for succession planning deeper into the organization.

We also enhanced parental bonding leave benefits.

We also made enhancements to our training and development program during 2021 which included the creation and launch of training targeted for people managers, packaging of current online training courses to align with career paths, the launch of an analyst program that included several months of training in preparation to transition to frontline banking positions and the creation of technical training focused on bank employees.

At December 31, 2021, we had 1,751 employees, nearly all of whom are full time and of which approximately 50% were female and 40% were minorities.

Due to our significant Texas-based operations and branch-lite network, the majority of our employees are based in Texas.

We offer a comprehensive benefits program to our employees and design our compensation programs to attract, retain and motivate employees, as well as to align with Company performance.

None of our employees is represented by a collective bargaining agreement, and we consider our relations with our employees to be good.

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We and our Bank are subject to extensive federal and state laws and regulations that impose specific requirements on us and provide regulatory oversight of virtually all aspects of our operations.

These laws and regulations generally are intended for the protection of the Bank's depositors, the Deposit Insurance Fund ("DIF") of the Federal Deposit Insurance Corporation (the "FDIC") and the stability of the U.S.

These laws and regulations generally are intended for the protection of the Bank's depositors, the Deposit Insurance Fund (“DIF”) of the FDIC and the stability of the U.S.

banking system as a whole, rather than for the protection of our stockholders and creditors.

Complying with the regulations discussed below did not have and is not expected to have a material effect on our capital expenditures, earnings and competitive position.

We do not have any environmental control facilities, and we did not spend any capital expenditures on such facilities during 2021.

The following discussion summarizes certain laws, regulations and policies to which we and our Bank are subject.

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The Company’s activities are governed by the Bank Holding Company Act of 1956, as amended (the “BHCA”).

We are subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System (the "Federal Reserve") pursuant to the BHCA.

The Company is subject to primary regulation, supervision and examination by the Board of Governors of the Federal Reserve pursuant to the BHCA.

We file quarterly reports and other information with the Federal Reserve.

As a public company, we also file reports with the U.S.

Securities and Exchange Commission (the "SEC") and are subject to its regulatory authority, as well as the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, with respect to our securities, financial reporting and certain governance matters.

Because our securities are listed on the Nasdaq Global Select Market ("Nasdaq"), and we are subject to Nasdaq's rules for listed companies, including rules relating to corporate governance.

Our Bank is organized as a national banking association under the National Bank Act, and is subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (the “OCC”), the FDIC and the Consumer Financial Protection Bureau (the “CFPB”) as well as being subject to regulation by certain other federal and state agencies.

The OCC has primary supervisory responsibility for our Bank and performs a continuous program of examinations concerning safety and soundness, the quality of management and oversight by our board of directors, information technology and compliance with applicable laws and regulations.

Our Bank also files quarterly reports of condition and income with the FDIC, which provides insurance for certain of our Bank’s deposits.

As a public company, we also file reports with the SEC and are subject to its regulatory authority, as well as the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, with respect to our securities, financial reporting and certain governance matters.

Because our securities are listed on the Nasdaq Global Select Market (“Nasdaq”), we are subject to Nasdaq's rules for listed companies, including rules relating to corporate governance.

Our Bank is organized as a Texas state-chartered bank, and is subject to primary regulation, supervision and examination by the Texas Department of Banking and the FDIC.

Our Bank’s activities are also subject to regulation by the Consumer Financial Protection Bureau (the “CFPB”) and by certain other federal and state agencies.

Our Bank files quarterly reports of condition and income with the FDIC, which provides insurance for certain of our Bank’s deposits.

Our Bank has a wholly owned non-bank subsidiary, TCBI Securities, that is a registered broker-dealer with the SEC and a member of FINRA.

TCBI Securities is subject to a number of regulatory bodies, including the SEC, FINRA, and state securities regulators.

Bank Holding Company Regulation .

The BHCA limits our business to banking, managing or controlling banks and other activities that the Federal Reserve has determined to be closely related to banking.

The Gramm-Leach-Bliley Act of 1999, as amended (the "GLB Act"), allows bank holding companies meeting certain management, capital and Community Reinvestment Act standards to elect to be treated as financial holding company that may offer customers a more comprehensive array of financial products and services.

The Gramm-Leach-Bliley Act of 1999, as amended (the “GLB Act”), allows bank holding companies meeting certain management, capital and Community Reinvestment Act standards to elect to be treated as a financial holding company that may offer customers a more comprehensive array of financial products and services.

We have elected to register with the Federal Reserve as a financial holding company.

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Examples of non-banking activities that are financial in nature include securities underwriting and dealing, insurance underwriting, providing investment and financial advice, leasing personal property and making merchant banking investments.

We are not at this time exercising the powers authorized for a financial holding company at the parent company level.

We, through our Bank, engage in traditional banking activities that are deemed financial in nature.

In order for us to undertake new activities permitted by the BHCA, we and our Bank must be considered "well capitalized" (as defined below) and well managed, our Bank must have received a rating of at least "satisfactory" in its most recent examination under the Community Reinvestment Act and we must notify the Federal Reserve within thirty days of engaging in the new activity.

We do not currently expect to engage in any non-banking activities at the holding company level.

Under Federal Reserve policy, now codified by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), we are expected to act as a source of financial and managerial strength to our Bank and commit resources to its support.

Such support may be required even at times when, absent this Federal Reserve policy, a holding company may not be in a financial position, or otherwise inclined, to provide such resources.

We could in certain circumstances be required to guarantee the capital plan of our Bank if it became undercapitalized.

It is the policy of the Federal Reserve that financial holding companies may pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition.

The policy provides that financial holding companies may not pay cash dividends in an amount that would undermine the holding company’s ability to serve as a source of strength to its banking subsidiary.

With certain limited exceptions, the BHCA and the Change in Bank Control Act of 1978, as amended (the "CIBC Act"), together with regulations promulgated thereunder, prohibit a person or company or a group of persons deemed to be “acting in concert” from, directly or indirectly, acquiring more than 10% (5% if the acquirer is a bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or otherwise direct the management or policies of our company without prior notice or application to and the approval of the Federal Reserve.

In order for us to undertake certain new activities permitted by the BHCA, we and our Bank must be considered “well capitalized” (as defined below) and well managed, our Bank must have received a rating of at least “satisfactory” in its most recent examination under the Community Reinvestment Act and we must notify the Federal Reserve within 30 days of engaging in the new activity.

Under Federal Reserve regulations, now largely authorized by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), we are expected to act as a source of financial and managerial strength to our Bank and commit resources to its support.

Such support may be required even at times when a holding company may not be in a financial position, or otherwise inclined, to provide such resources.

We also could in certain circumstances be required to guarantee the capital restoration plan of our Bank if it became undercapitalized.

It is the policy of the Federal Reserve that bank holding companies may maintain their existing rate of cash dividends on common stock only out of net income available over the past year and only if the prospective rate of earnings retention is consistent with the organization’s expected future capital needs, asset quality and financial condition.

As a general matter, the Federal Reserve expects a bank holding company’s board of directors to inform it and to eliminate, defer or significantly reduce the bank holding company’s dividends if (i) the bank holding company’s net income available to stockholders for the past four

quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends, (ii) the bank holding company’s prospective rate of earnings retention is not consistent with the company’s capital needs and overall current and prospective financial condition or (iii) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.

The policy provides that bank holding companies may not pay cash dividends in an amount that would undermine the holding company’s ability to serve as a source of strength to its banking subsidiary.

With certain limited exceptions, the BHCA and the Change in Bank Control Act of 1978, as amended (the “CIBC Act”), together with regulations promulgated thereunder, prohibit a person or company or a group of persons deemed to be an association or “acting in concert” from, directly or indirectly, acquiring more than 10% (5% if the acquirer is a bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or otherwise direct the management or policies of our company without prior notice or application to and the approval of the Federal Reserve.

If, in the opinion of the applicable federal bank regulatory authorities, a depository institution or holding company is engaged in or is about to engage in an unsafe or unsound practice (which could include the payment of dividends or repurchase or redemptions of securities), such authority may require, generally after notice and hearing, that such institution or holding company cease and desist such practice.

The federal banking agencies have indicated that paying dividends that deplete a depository institution’s or holding company’s capital base to an inadequate level would be such an unsafe or unsound banking practice.

Moreover, the Federal Reserve and the FDIC have issued policy statements providing that financial holding companies and insured depository institutions generally should only pay dividends out of current operating earnings and only if the prospective rate of earnings retention appears consistent with the entity's current and expected future capital needs, asset quality and overall financial condition.

Federal Reserve regulations require that the Company provide prior notice to or obtain the prior approval of the Federal Reserve for declaring or paying dividends that exceed its earnings for the relevant period and redemptions or repurchases of its equity securities, and prohibit such actions if they would deplete the Company's capital or impair its ability to serve as a source of strength for our Bank.

Regulation of Our Bank by the OCC.

National banks the size of our Bank are subject to continuous regulation, supervision and examination by the OCC.

The OCC regulates or monitors all areas of a national bank’s operations, including security devices and procedures, adequacy of capitalization and loss reserves, accounting treatment and impact on capital determinations, loans, investments, borrowings, deposits, liquidity, mergers, issuances of securities, payment of dividends, interest rate risk management, establishment of branches, corporate reorganizations, maintenance of books and records, and adequacy of staff training to carry on safe and sound lending and deposit gathering practices.

The OCC requires national banks to maintain specified capital ratios and imposes limitations on their aggregate investment in real estate, bank premises and furniture and fixtures.

National banks are required by the OCC to file quarterly reports of their financial condition and results of operations and to obtain an annual audit of their financial statements in compliance with minimum standards and procedures prescribed by the OCC.

Declaring or paying dividends that exceed its earnings for the relevant period could result in supervisory findings by the Federal Reserve.

Federal Reserve regulations require that the Company, under certain circumstances, provide prior notice to or obtain prior approval for redemptions or repurchases of its equity securities.

Under such regulations, the Federal Reserve may disapprove such actions if the Federal Reserve finds that they would constitute an unsafe or unsound practice or violate any law or Federal Reserve order.

Regulation of Our Bank by the Texas Department of Banking and the FDIC.

Pursuant to applicable Texas and federal law, Texas state-chartered banks are permitted to engage in any activity permissible for national banks, including non-banking activities that are permissible for national banks.

In addition, Texas state-chartered banks may engage in financial activities or activities incidental or complementary to a financial activity with the prior approval of the Commission.

Our Bank is subject to continuous regulation, supervision and examination by the Texas Department of Banking and the FDIC.

Our regulators monitor all areas of our Bank’s operations, including security devices and procedures, adequacy of capitalization and loss reserves, accounting treatment and impact on capital determinations, loans, investments, borrowings, deposits, liquidity, mergers, issuances of securities, payment of dividends, interest rate risk management, establishment of branches, corporate reorganizations, maintenance of books and records, and adequacy of staff training to carry on safe and sound lending and deposit gathering practices.

Among other things, our Bank is required by its regulators to maintain specified capital ratios, file quarterly reports of its financial condition and results of operations and to obtain an annual audit of its financial statements.

Regulation of Our Bank by the CFPB .

Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Truth in Savings Act, the Right to Financial Privacy Act and the Electronic Funds Transfer Act and their respective related regulations.

The CFPB has regulation, supervision and examination authority over our Bank with respect to substantially all federal statutes and regulations protecting the interests of consumers of financial services, including but not limited to the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Truth in Savings Act, the Right to Financial Privacy Act and the Electronic Funds Transfer Act and their respective related regulations.

Penalties for violating these laws and regulations could subject our Bank to lawsuits and administrative penalties, including civil monetary penalties, payments to affected consumers and orders to halt or materially change our consumer banking activities.

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Capital Adequacy Requirements.

Federal banking regulators have adopted a system using certain risk-based capital guidelines to evaluate the capital adequacy of banks and bank holding companies that is based upon the 1988 capital accord of the Bank for International Settlements’ Basel Committee on Banking Supervision (the “Basel Committee”), a committee of central banks and bank regulators from the major industrialized countries that coordinates international standards for bank regulation.

Federal banking regulators adopted a system using certain risk-based capital guidelines to evaluate the capital adequacy of banks and bank holding companies that is based upon the 1988 capital accord of the Bank for International Settlements’ Basel Committee on Banking Supervision (the “Basel Committee”), a committee of central banks and bank regulators from the major industrialized countries that coordinates international standards for bank regulation.

Under the guidelines, specific categories of assets and off-balance-sheet activities such as letters of credit are assigned risk weights, based generally on the perceived credit or other risks associated with the asset.

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These risk weights are multiplied by corresponding asset balances to determine a “risk weighted” asset base, which is then measured against various forms of capital to produce capital ratios.

An organization’s capital is classified in one of two tiers, Core Capital, or Tier 1, and Supplementary Capital, or Tier 2.

Tier 1 capital includes common stock, retained earnings, qualifying non-cumulative perpetual preferred stock, minority interests in the equity of consolidated subsidiaries, a limited amount of qualifying trust preferred securities and qualifying cumulative perpetual preferred stock at the holding company level, less goodwill and most intangible assets.

Tier 2 capital includes perpetual preferred stock and trust preferred securities not meeting the Tier 1 definition, mandatory convertible debt securities, subordinated debt, and allowances for loan and lease losses.

Each category is subject to a number of regulatory definitional and qualifying requirements.

The Basel Committee in 2010 released a set of international recommendations for strengthening the regulation, supervision and risk management of banking organizations, known as Basel III.

In 2010, the Basel Committee released a set of international recommendations for strengthening the regulation, supervision and risk management of banking organizations, known as Basel III.

In July 2013, the Federal Reserve published final rules for the adoption of the Basel III regulatory capital framework (the “Basel III Capital Rules”).

The Basel III Capital Rules became effective for us on January 1, 2015, with certain transition provisions phasing in over a period that ended on January 1, 2019.

The Basel III Capital Rules, among other things, (i) specify a capital measure called “Common Equity Tier 1” (“CET1”), (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) require that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) define the scope of the deductions/adjustments to the capital measures.

Our Series A 6.5% Non-Cumulative Perpetual Preferred Stock constitutes Additional Tier 1 capital and our subordinated notes constitute Tier 2 capital.

The Basel III Capital Rules set the risk-based capital requirement and the total risk-based capital requirement to a minimum of 6.0% and 8.0%, respectively, each plus a 2.5% capital conservation buffer composed entirely of CET1, producing targeted ratios of 8.5% and 10.5%, respectively, which were fully phased-in as of January 1, 2019 and for subsequent years.

The leverage ratio requirement under the Basel III Capital Rules, calculated as the ratio of Tier 1 capital to average assets, is 4.0%.

In order to be well capitalized under the rules now in effect, our Bank must maintain CET1, Tier 1 and total capital ratios that are equal to or greater than 7.0%, 8.5% and 10.5%, respectively, and a leverage ratio equal to or greater than 5.0%.

See “ Selected Consolidated Financial Data - Capital and Liquidity Ratios.

Additionally, the Basel III Capital Rules specify a capital conservation buffer with respect to each of the CET1, Tier 1 and total capital to risk-weighted assets ratios, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements.

The 2.5% capital conservation buffer was implemented over a three year phase-in period that began on January 1, 2016 and concluded on January 1, 2019.

The Basel III Capital Rules, among other things, (i) establishes the capital measure called “Common Equity Tier 1” (“CET1”), (ii) specifies that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting stated requirements, (iii) requires that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) defines the scope of the deductions/adjustments to the capital measures.

The Basel III Capital Rules also specify a capital measure for Tier 2 capital, which includes subordinated debt and a portion of the allowance for loan and lease losses, in each case, subject to certain regulatory requirements.

Our preferred stock constitutes Additional Tier 1 capital and our subordinated notes constitute Tier 2 capital.

The Basel III Capital Rules set the Tier 1 risk-based capital requirement and the total risk-based capital requirement to a minimum of 6.0% and 8.0%, respectively, each plus a 2.5% capital conservation buffer composed entirely of CET1, producing targeted ratios of 8.5% and 10.5%, respectively, which were fully phased-in as of January 1, 2019 and for subsequent years.

A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers.

We have met the capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis since we commenced filing of the applicable reports with the FDIC and OCC.

As of December 31, 2020 our Bank's CET1 ratio was 9.48% and its total risk-based capital ratio was 11.67% and, as a result, it is currently classified as "well capitalized" for purposes of the OCC's prompt corrective action regulations.

The leverage ratio requirement under the Basel III Capital Rules, calculated as the ratio of Tier 1 capital to total assets, is 4.0%.

Under the rules now in effect, the Company and the Bank must maintain CET1, Tier 1 and total capital ratios that are equal to or greater than 7.0%, 8.5% and 10.5%, respectively, and a leverage ratio equal to or greater than 5.0%.

We have met the capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis since we commenced filing of the applicable reports with our federal banking regulators.

As of December 31, 2021 our Bank's CET1 ratio was 11.30% and its total risk-based capital ratio was 13.42% and, as a result, it is currently classified as “well capitalized” for purposes of the FDIC’s prompt corrective action regulations, which is discussed in more detail below.

Because we had less than $15 billion in total consolidated assets as of December 31, 2009, we are allowed to continue to classify our trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1 capital.

As a non-advanced approaches banking organization, we have elected to exclude the effects of certain accumulated other comprehensive income ("AOCI") items included in stockholders’ equity for the determination of regulatory capital and capital ratios under the Basel III Capital Rules.

In November 2017, the federal banking regulators issued a final rule to extend certain transition periods related to the regulatory capital treatment under the capital rules for certain items (including certain deferred tax assets, mortgage servicing rights, investments in non-consolidated financial entities and minority interest limitations) until January 1, 2020 when final rules to simplify the regulatory treatment of those items took effect.

The relief provided under the final rule applies to banking organizations that are not subject to the advanced approaches framework, such as the Company and the Bank.

In December 2017, the Basel Committee published the last version of the Basel III regulatory reforms, which are commonly referred to as “Basel IV.” The Basel IV standards, which will be generally effective on January 1, 2022, revise, among other things the Basel Committee’s standardized approach for credit risk and provide a new standardized approach for operational risk capital.

As a non-advanced approaches banking organization, we have elected to exclude the effects of certain AOCI items included in stockholders’ equity for the determination of regulatory capital and capital ratios under the Basel III Capital Rules.

In December 2017, the Basel Committee published the last version of the Basel III regulatory reforms, which are commonly referred to as “Basel IV.” The Basel IV standards revised, among other things the Basel Committee’s standardized approach for credit risk and provide a new standardized approach for operational risk capital.

Under the current U.S.

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Regulators could also require us to make retroactive adjustments to financial statements to reflect such changes.

A regulatory capital ratio or category may not constitute an accurate representation of the Bank’s overall financial condition or prospects.

A regulatory capital ratio or category may not constitute an accurate representation of a financial institution’s overall financial condition or prospects.

Our regulatory capital status is addressed in more detail under the heading “ Liquidity and Capital Resources ” within Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 13 - Regulatory Restrictions in the accompanying notes to the consolidated financial statements included elsewhere in this report.

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The five capital categories for insured depository institutions under the prompt corrective action regulations consist of:

• Well capitalized - equals or exceeds a 10% total risk-based capital ratio, 8% Tier 1 risk-based capital ratio, and 5% leverage ratio and is not subject to any written agreement, order or directive requiring it to maintain a specific level for any capital measure;

• Adequately capitalized - equals or exceeds an 8% total risk-based capital ratio, 6% Tier 1 risk-based capital ratio, and 4% leverage ratio;

• Undercapitalized - total risk-based capital ratio of less than 8%, or a Tier 1 risk-based ratio of less than 6%, or a leverage ratio of less than 4%;

• Significantly undercapitalized - total risk-based capital ratio of less than 6%, or a Tier 1 risk-based capital ratio of less than 4%, or a leverage ratio of less than 3%;

• Well capitalized - equals or exceeds a 10% total risk-based capital ratio, 8% Tier 1 risk-based capital ratio, 6.5% CET1 capital ratio and 5% leverage ratio and is not subject to any written agreement, order or directive requiring it to maintain a specific level for any capital measure;

• Adequately capitalized - equals or exceeds an 8% total risk-based capital ratio, 6% Tier 1 risk-based capital ratio, 4.5% CET1 capital ratio and 4% leverage ratio;

• Undercapitalized - total risk-based capital ratio of less than 8%, or a Tier 1 risk-based ratio of less than 6%, a CET1 capital ratio of less than 4.5% or a leverage ratio of less than 4%;

• Significantly undercapitalized - total risk-based capital ratio of less than 6%, or a Tier 1 risk-based capital ratio of less than 4%, a CET1 capital ratio of less than 3% or a leverage ratio of less than 3%;

• Critically undercapitalized - a ratio of tangible equity to total assets equal to or less than 2%.

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FDICIA imposes an increasingly stringent array of restrictions, requirements and prohibitions as an organization’s capital levels deteriorate.

A bank rated "adequately capitalized" or below may not accept, renew or roll over brokered deposits unless it receives a waiver from the FCIC.

A bank rated “adequately capitalized” or below may not accept, renew or roll over brokered deposits unless it receives a waiver from the FDIC.

A “significantly undercapitalized” institution is subject to mandated capital raising activities, restrictions on interest rates paid and transactions with affiliates, removal of management and other restrictions.

The OCC has only very limited discretion in dealing with a

"critically undercapitalized" institution and generally must appoint a receiver or conservator (the FDIC) if the capital deficiency is not corrected promptly.

The FDIC has only very limited discretion in dealing with a “critically undercapitalized” institution and generally must appoint a receiver or conservator if the capital deficiency is not corrected promptly.

Under the Federal Deposit Insurance Act, as amended (the “FDIA”), “critically undercapitalized” banks may not, beginning 60 days after becoming critically undercapitalized, make any payment of principal or interest on their subordinated debt (subject to certain limited exceptions).

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Under the FDIA, a bank may not pay interest on its subordinated notes if such interest is required to be paid only out of net profits, or distribute any of its capital assets, while it remains in default on any assessment due to the FDIC.

In December 2020, the FDIC issued a final rule that is designed to bring the brokered deposits regulations in line with modern deposit taking methods and generally reduces the amount of deposits that would be classified as brokered, which most directly affects banks rated as “adequately capitalized” or “undercapitalized”.

The final rule will become effective on April 1, 2021, with an extended compliance date of January 1, 2022.

In December 2020, the FDIC issued a final rule that is designed to bring the brokered deposits regulations in line with modern deposit taking methods and generally reduces the scope of deposits that would be classified as brokered, which most directly affects banks rated as “adequately capitalized” or “undercapitalized”.

The final rule became effective on April 1, 2021, with an extended compliance date of January 1, 2022.

Compliance with the final rule did not have an impact to our classification of brokered deposits.

Federal bank regulators may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant.

Federal Reserve and OCC guidelines provide that banking organizations experiencing significant growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.

Federal banking guidelines provide that banking organizations experiencing significant growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.

Concentration of credit risks, interest rate risk (imbalances in rates, maturities or sensitivities) and risks arising from non-traditional activities, as well as an institution’s ability to manage these risks, are important factors taken into account by regulatory agencies in assessing an organization’s overall capital adequacy.

The OCC and the Federal Reserve also use a leverage ratio as an additional tool to evaluate the capital adequacy of banking organizations.

The FDIC and the Federal Reserve also use a leverage ratio as an additional tool to evaluate the capital adequacy of banking organizations.

The leverage ratio is a company’s Tier 1 capital divided by its average total consolidated assets.

A minimum leverage ratio of 3.0% is required for banks and bank holding companies that either have the highest supervisory rating or have implemented the appropriate federal regulatory authority’s risk-adjusted measure for market risk.

All other banks and bank holding companies are required to maintain a minimum leverage ratio of 4.0%, unless a different minimum is specified by an appropriate regulatory authority.

Banks and bank holding companies are required to maintain a minimum leverage ratio of 4.0%, unless a different minimum is specified by an appropriate regulatory authority.

In order to be considered well capitalized the leverage ratio must be at least 5.0%.

As of December 31, 2020, our Bank’s leverage ratio was 7.36% and, as a result, it is currently classified as “well capitalized” for purposes of the OCC’s prompt corrective action regulations.

As of December 31, 2021, our Bank’s leverage ratio was 8.51% and is currently classified as “well capitalized” for purposes of the FDIC’s prompt corrective action regulations.

The risk-based and leverage capital ratios established by federal banking regulators are minimum supervisory ratios generally applicable to banking organizations that meet specified criteria, assuming that they otherwise have received the highest regulatory ratings in their most recent examinations.

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Liquidity Requirements .

bank regulators in September 2014 issued a final rule implementing the Basel III liquidity framework for certain U.S.

banks - generally those having more than $50 billion of assets or whose primary federal banking regulator determines compliance with the liquidity framework is appropriate based on the organization's size, level of complexity, risk profile, scope of operations, U.S.

affiliations or risk to the financial system.

One of the liquidity tests included in the new rule, referred to as the liquidity coverage ratio (“LCR”), is designed to ensure that a banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario.

capital rules implementing the Basel III standards also include two quantitative liquidity tests for certain large banking organizations.

One of the liquidity tests, referred to as the liquidity coverage ratio (“LCR”), is designed to ensure that a banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario.

The other test, referred to as the net stable funding ratio (“NSFR”), is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon.

These requirements encourage the covered banking entities to increase their holdings of U.S.

Treasury securities and other sovereign debt as a component of assets, and also to increase the use of long-term debt as a funding source.

While the LCR and NSFR tests are not currently applicable to our Bank, and the proposed rules would increase substantially the $50 billion asset threshold, other relevant measures of liquidity are monitored by management and are reported to our board of directors.

Treasury securities and other sovereign debt as a component of assets and to increase the use of long-term debt as a funding source.

While the LCR and NSFR tests are not currently applicable to us or our Bank, other relevant measures of liquidity are monitored by management and are reported to our board of directors.

Regulators may change capital and liquidity requirements, including previous interpretations of practices related to risk weights, which could require an increase in liquid assets or in the necessary capital to support the assets held by our Bank.

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Stress Testing .

Pursuant to the Dodd-Frank Act and regulations published by the Federal Reserve and OCC, we were required to conduct an annual “stress test” of capital and consolidated earnings and losses under a base case and two severely adverse stress scenarios provided by bank regulatory agencies during the years 2016 to 2018.

In response to this requirement we

developed dedicated staffing, economic models, policies and procedures to implement stress testing on an annual basis, the results of which were furnished to regulators and published on our website, as well as conducting stress tests for internal use based upon economic scenarios we developed.

The Economic Growth, Regulatory Relief and Consumer Protection Act (the “Regulatory Relief Act”), which amended portions of the Dodd-Frank Act, was enacted in 2018 and subsequently adopted, terminating our stress testing requirements.

Pursuant to the Dodd-Frank Act and regulations published by the federal bank regulatory agencies, we were required to conduct an annual “stress test” of capital and consolidated earnings and losses under a base case and two severely adverse stress scenarios provided by federal bank regulatory agencies from the years 2016 to 2018.

In response to this requirement we developed dedicated staffing, economic models, policies and procedures to implement stress testing on an annual basis, the results of which were furnished to regulators and published on our website, as well as conducting stress tests for internal use based upon economic scenarios we developed.

The Regulatory Relief Act, terminated our stress testing requirements.

However, we have continued to perform certain stress tests internally and have incorporated the economic models and information developed through our stress testing program into our risk management and business, capital and liquidity planning activities, which are subject to continuing regulatory oversight.

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and (5) incident response, cyber resilience and situational awareness.

In May 2019,the Federal Reserve announced that it would revisit the Advance Notice of Proposed Rulemaking in the future.

In December 2020, the federal banking agencies issued a Notice of Proposed Rulemaking that would require banking organizations to notify their primary federal regulator within 36 hours of becoming aware of a "computer-security incident" or a "notification incident." The Notice of Proposed Rulemaking also would require specific and immediate notifications by bank service providers that become aware of similar incidents.

In November 2021, the federal banking agencies approved a final rule that, among other things, would require banking organizations to notify their primary federal regulator within 36 hours of becoming aware of a “computer-security incident” that rises to the level of a “notification incident.”

In February 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents.

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Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs that meet specified requirements.

In addition, other nations in which our customers do business, such as the European Union, have adopted similar requirements.

In addition, other jurisdictions in which our customers do business, such as the European Union, have adopted similar requirements.

This trend of activity is expected to continue to expand, requiring continual monitoring of developments in the states and nations in which our customers are located and ongoing investments in our information systems and compliance capabilities.

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Depository institutions are periodically examined for compliance with the CRA and are assigned one of four ratings.

Our Bank is subject to examination by the OCC.

In order for a financial holding company to commence new activity permitted by the BHCA, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the CRA.

Our Bank is subject to examination by the FDIC.

In order for a financial holding company to commence new activity permitted by the BHCA, each insured depository institution subsidiary of the financial holding company must have received a

rating of at least “satisfactory” in its most recent examination under the CRA.

Our Bank's strategic focus on serving commercial customers in regional and national markets from a limited number of branches makes it more challenging for us to satisfy CRA requirements as compared to banks of comparable size that focus on providing retail banking services in markets where they maintain a network of full-service branches.

In December 2019, the OCC and the FDIC issued a notice of proposed rulemaking intended to (i) clarify which activities qualify for CRA credit;

In December 2019, the FDIC and the Office of the Comptroller of the Currency (“OCC”) issued a notice of proposed rulemaking intended to (i) clarify which activities qualify for CRA credit;

(ii) update where activities count for CRA credit;

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and (iv) provide for more transparent, consistent, and timely CRA-related data collection, recordkeeping, and reporting.

In May 2020, the OCC issued its final CRA rule, effective October 1, 2020.

The FDIC has not finalized the revisions to its CRA rule.

The OCC finalized its CRA rule in 2020, but, effective January 1, 2022 rescinded it and replaced it with the OCC’s prior CRA rule.

The Federal Reserve has so far only issued an Advance Notice of Proposed Rulemaking on its CRA rules.

The USA Patriot Act, the International Money Laundering Abatement and Financial Anti-Terrorism Act and the Bank Secrecy Act.

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government policy regarding financial institutions in recent years has been combating money laundering, terrorist financing and other illegal payments.

The USA Patriot Act of 2001 and the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 substantially broadened the scope of United States anti-money laundering laws and penalties, specifically related to the Bank Secrecy Act of 1970, and expanded the extra-territorial jurisdiction of the U.S.

The USA Patriot Act of 2001 and the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 substantially broadened the scope of U.S.

anti-money laundering laws and penalties, specifically related to the Bank Secrecy Act of 1970, and expanded the extra-territorial jurisdiction of the U.S.

government in this area.

Regulations issued under these laws impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and other suspicious activity and to verify the identity of their customers and apply additional scrutiny to customers considered

to present greater than normal risk.

Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with relevant laws or regulations, could have serious legal, reputational and financial consequences for the institution.

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requires the development of standards for evaluating technology and internal processes for BSA compliance;

expands enforcement- and investigation-related authority, including increasing available sanctions for certain BSA violations and instituting BSA whistleblower incentives and protections.

and expands enforcement- and investigation-related authority, including increasing available sanctions for certain BSA violations and instituting BSA whistleblower incentives and protections.

Office of Foreign Assets Control .

Treasury Department’s Office of Foreign Assets Control (“OFAC”) is responsible for administering and enforcing economic and trade sanctions against specified foreign parties, including countries and regimes, foreign individuals and other foreign organizations and entities.

OFAC publishes lists of prohibited parties that are regularly consulted by our Bank in the conduct of its business in order to assure compliance.

OFAC publishes lists of prohibited parties that are regularly consulted by our Bank in the conduct of its business in order to ensure compliance.

We are responsible for, among other things, blocking accounts of, and transactions with, prohibited parties identified by OFAC, avoiding unlicensed trade and financial transactions with such parties and reporting blocked transactions after their occurrence.

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Failure to implement such a plan may result in an enforcement action against the bank.

Enforcement actions against us, our Bank and our officers and directors may include the issuance of a written directive, the issuance of a cease-and-desist order that can be judicially enforced, the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against officers or other institution-affiliated parties, the imposition of restrictions and sanctions under prompt corrective action regulations, the termination of deposit insurance (in the case of our Bank) and the appointment of a conservator or receiver for our Bank.

Civil money penalties can be as high as $1.0 million for each day a violation continues.

regulations, the termination of deposit insurance (in the case of our Bank) and the appointment of a conservator or receiver for our Bank.

Civil money penalties can be over $2 million for each day a violation continues.

Transactions with Affiliates and Insiders.

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Extensions of credit to affiliates must be adequately collateralized by specified amounts and types of collateral.

Section 23A also limits the amount of loans or advances made by our Bank to third party borrowers that are collateralized by our or our subsidiaries' respective securities or obligations.

Section 23A also limits the amount of loans or advances made by our Bank to third party borrowers that are collateralized by securities or obligations of the Bank’s affiliates.

Our Bank is also subject to Section 23B of the FRA, which, among other things, prohibits an institution from engaging in transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with non-affiliates.

We are subject to restrictions on extensions of credit to insiders (namely executive officers, directors, and 10% stockholders) and their related interests.

These restrictions are contained in the FRA and Federal Reserve Regulation O and apply to all insured institutions as well as their subsidiaries and holding companies.

These restrictions are contained in the FRA and Federal Reserve Regulation O and apply to all insured depository institutions as well as their subsidiaries and holding companies.

These restrictions include limits on loans to any individual insider and such insider's related interests and certain conditions that must be met before such loans can be made.

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We may in the future seek to rely upon receipt of dividends paid by our Bank to meet our financial obligations.

Our Bank is subject to statutory dividend restrictions.

Under such restrictions, national banks may not, without the prior approval of the OCC, declare dividends in excess of the sum of the current year’s net profits plus the retained net profits from the prior two years, less any required transfers to surplus.

The Basel III Capital Rules further limit the amount of dividends that may be paid by our Bank.

In addition, under the FDICIA, our Bank may not pay any dividend if it is undercapitalized or if payment would cause it to become undercapitalized.

Our Bank is subject to federal banking law requirements concerning the payment of dividends, including, under the FDICIA, our Bank may not pay any dividend if it is undercapitalized or if payment would cause it to become undercapitalized.

Limits on Compensation .

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This guidance was intended to ensure that the incentive compensation policies of banking organizations do not undermine their safety and soundness by encouraging excessive risk-taking.

The objective of the guidance is to assure that incentive compensation arrangements (i) provide incentives that do not encourage excessive risk-taking, (ii) are compatible with effective internal controls and risk management and (iii) are supported by strong corporate governance, including oversight by the board of directors.

The objective of the guidance is to ensure that incentive compensation arrangements (i) provide incentives that do not encourage excessive risk-taking, (ii) are compatible with effective internal controls and risk management and (iii) are supported by strong corporate governance, including oversight by the board of directors.

In 2016, as required by the Dodd-Frank Act, the Federal Reserve, the FDIC and the SEC proposed rules that would, depending upon the assets of the institution, directly regulate incentive compensation arrangements and would require enhanced oversight and recordkeeping.

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The Dodd-Frank Act.

The Dodd-Frank Act became law in 2010 and has had a broad impact on the financial services industry, imposing significant regulatory and compliance changes.

A significant volume of financial services regulations required by the Dodd-Frank Act have not yet been finalized by banking regulators, Congress continues to consider legislation that would make significant changes to the law and courts are addressing significant litigation arising under the Act, making it difficult to predict the ultimate effect of the Dodd-Frank Act on our business.

In 2010, the Dodd-Frank Act became law and has had a broad impact on the financial services industry, imposing significant regulatory and compliance changes.

The following discussion provides a brief summary of certain provisions of the Dodd-Frank Act that may have an effect on us.

The Dodd-Frank Act significantly reduces the ability of national banks to rely upon federal preemption of state consumer financial laws and permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.

Although the OCC, as the primary regulator of national banks, has the ability to make preemption determinations where certain conditions are met, the broad rollback of federal preemption has the potential to create a patchwork of federal and state compliance obligations and enforcement.

This may result in significant state regulatory requirements applicable to us and certain of our lending activities, with potentially significant changes in our operations and increases in our compliance costs.

The Dodd-Frank Act generally enhances the restrictions on transactions with affiliates under Sections 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered credit transactions must be satisfied.

Insider transaction limitations are expanded through the strengthening of restrictions on loans to insiders and the expansion of the types of transactions subject to the various limits, including derivatives transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions.

Restrictions are also placed on certain asset sales to and from an insider to an institution, including requirements that such sales be on market terms and, in certain circumstances, approved by the institution’s board of directors.

The Dodd-Frank Act increases the risk of “secondary actor liability” for lenders that provide financing or other services to customers offering financial products or services to consumers, as our Bank does in our mortgage finance, mortgage correspondent aggregation and lender finance lines of business.

The Dodd-Frank Act can impose liability on a service provider for knowingly or recklessly providing substantial assistance to a customer found to have engaged in unfair, deceptive or abusive

practices that injure a consumer.

The Dodd-Frank Act generally enhances the restrictions on transactions with affiliates under Sections 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which the statutorily prescribed collateral amounts must be maintained for covered credit transactions must be satisfied.

Insider transaction limitations are expanded through the expansion of the types of transactions subject to the various limits, including derivatives transactions, repurchase agreements and securities lending or borrowing transactions.

Restrictions on certain asset sales to and from certain insiders to an institution were also expanded to include a broader range of insiders, to

always require the transactions be on market terms and, in certain circumstances, to also require approval of the transaction by a majority of the disinterested members of the institution’s board.

The Dodd-Frank Act can impose liability on a service provider for knowingly or recklessly providing substantial assistance to a customer found to have engaged in unfair, deceptive or abusive practices that injure a consumer.

This exposure contributes to increased compliance and other costs in connection with the administration of credit extended to entities engaged in providing financial products and services to consumers.

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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-K

Item 1. Business