What changed in this filing

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Item 1A. Risk Factors

2022-02-09 compared with 2021-02-09 · 112 added, 93 removed, 425 unchanged (33% of the section changed)

10 unchanged sentences

• We are subject to risks arising from conditions in the real estate market, as a significant portion of our loans are secured by commercial and residential real estate.

• Our future profitability depends, to a significant extent, upon our middle market business customers.

• Our future profitability depends, to a significant extent, upon our commercial business customers.

• Our business is concentrated in Texas;

our energy industry exposure could adversely affect our performance.

• Our mortgage correspondent aggregation business subjects us to additional risks.

• We are subject to certain other risks related to our transition away from our mortgage correspondent aggregation business.

• We must effectively manage our counterparty risk.

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• We must effectively manage our interest rate risks.

• We may be adversely affected by changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate, for our variable rate loans, derivative contracts and other financial assets and liabilities.

• We may be adversely affected by the transition away from LIBOR for our variable rate loans, derivative contracts and other financial assets and liabilities.

Strategic Risks

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Operational Risks

• We, our vendors and customers must effectively manage our information systems risk which may experience disruption, failure or breach in security.

• We, our vendors and customers must effectively manage our information systems and cyber risk which may experience disruption, failure or breach in security.

• Our operations rely extensively on a broad range of external vendors.

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• 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.

• As a participating lender in the Small Business Administration’s PPP, we may be subject to additional risks regarding our Bank’s processing of PPP loans and are dependent on the federal government’s continuation and support of the program.

• The soundness of other financial institutions could adversely affect us.

• The impact of the Tax Cuts and Jobs Act (the “Tax Act”) on us and our customers contributes to uncertainty and risk related to our customers’ future demand for credit and our future results.

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• Severe weather, earthquakes, other natural disasters, pandemics, acts of war or terrorism and other external events could significantly impact our business.

• Climate change has the potential to disrupt our business and adversely impact the operations and creditworthiness of our clients.

• Climate change and related legislative and regulatory initiatives may result in operational changes and expenditures that could significantly impact our business.

• Negative public opinion could damage our reputation and adversely affect our earnings.

Risks Relating to Our Securities

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We generally invest a greater proportion of our assets in commercial loans to business customers than other banking institutions of our size, and our business plan calls for continued efforts to increase our assets invested in these loans.

At December 31, 2020, approximately 36% of our LHI portfolio was comprised of commercial loans.

At December 31, 2021, approximately 43% of our portfolio of loans held for investment was comprised of commercial loans.

Commercial loans may involve a higher degree of credit risk than other types of loans due, in part, to their larger average size, the effects of changing economic conditions on the businesses of our commercial loan customers, the dependence of borrowers on operating cash flow to service debt and our reliance upon collateral which may not be readily marketable.

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The market value of real estate can fluctuate significantly in a relatively short period of time as a result of market conditions in the geographic area in which the real estate is located, in response to factors such as economic downturns, changes in the economic health of industries heavily concentrated in a particular area and in response to changes in market interest rates, which influence capitalization rates used to value revenue-generating commercial real estate.

If the value of real estate serving as collateral for our loans declines materially, a significant part of our loan portfolio could become under-collateralized and losses incurred upon borrower defaults would increase.

If the value of real estate serving as collateral for

our loans declines materially, a significant part of our loan portfolio could become under-collateralized and losses incurred upon borrower defaults would increase.

Conditions in certain segments of the real estate industry, including homebuilding, lot development and mortgage lending, may have an effect on values of real estate pledged as collateral for our loans.

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Changes in the economic health of certain industries can have a significant impact on other sectors or industries which are directly or indirectly associated with those industries, and may impact the value of real estate in areas where such industries are concentrated.

Our future profitability depends, to a significant extent, upon our middle market business customers .

Our future profitability depends, to a significant extent, upon revenue we receive from middle market business customers, and their ability to continue to meet their loan obligations.

Adverse economic conditions or other factors affecting this market segment, and our failure to timely identify and react to unexpected economic downturns, may have a greater adverse effect on us than on other financial

institutions that have a more diversified customer base.

Additionally, our inability to grow our middle market business customer base in a highly competitive market could affect our future growth and profitability.

Our future profitability depends, to a significant extent, upon our commercial business customers .

Our future profitability depends, to a significant extent, upon revenue we receive from commercial business customers, and their ability to continue to meet their loan obligations.

Additionally, our inability to grow our commercial business customer base in a highly competitive market could affect our future growth and profitability.

Our business is concentrated in Texas;

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Our energy loans consist primarily of producing reserve-based loans to exploration and production companies, with a smaller portion of our loan balances attributable to royalty owners, midstream operators, saltwater disposal and other service companies whose businesses primarily relate to production, not exploration and development, of oil and gas.

These businesses have been significantly affected by volatility in oil and natural gas prices, reserve depletion curves, material declines in the level of drilling and production activity in Texas and in other areas of the United States and material fluctuations in investor interest in oil and gas exploration and production investments.

We experienced an increase in non-performing assets and higher charge-offs primarily related to energy loans during 2017, and they still remain elevated compared to the overall loan portfolio.

These businesses are significantly affected by volatility in oil and natural gas prices, reserve depletion curves, material declines in the level of drilling and production activity in Texas and in other areas of the United States and material fluctuations in investor interest in oil and gas exploration and production investments.

There is no assurance that we will not be materially adversely impacted by the direct and indirect effects of current and future conditions in the energy industry in Texas and nationally.

Our mortgage correspondent aggregation business subjects us to additional risks.

In 2015, we launched our mortgage correspondent aggregation (“MCA”) business, a correspondent lending program that complements our mortgage warehouse lending business, in 2015.

Volatility in the mortgage industry has caused uncertainty related to the pricing of the mortgage loans that we seek to purchase, as well as uncertainty in the pricing of those loans when they are sold or securitized.

Similar uncertainty exists with respect to volatility in the value of mortgage servicing rights ("MSRs") on our balance sheet.

This volatility may cause the actual returns on mortgage sales or securitization transactions to be less than anticipated, which could adversely affect our overall loans held for sale volumes and the profitability of this line of business.

Fluctuations in the value of MSRs that we hold on our balance sheet could require that we recognize impairments in the value of such assets and/or actual losses on the disposition of such assets.

Additionally, non-bank competitors may have a pricing advantage as they are not subject to the same capital maintenance requirements relative to mortgage loans and MSRs as our Bank.

Our MCA business subjects us to additional interest rate risk and price risk, which may have an adverse effect on our business.

The persistent low interest rate environment has in certain cases resulted in an increase in the value of MSRs, causing other market participants and competitors who are planning to hold MSRs for a longer term to be more aggressive in their pricing of the underlying loan purchases than a participant like our Bank that does not plan to hold MSRs on a long-term basis.

While we believe market and competitive conditions may improve in the future, a prolonged low interest rate environment could adversely affect the economics of our MCA business over a longer period of time.

Conversely, an environment of rising interest rates could have a significant effect on loan volumes in our MCA business if refinancing and home purchase activities are reduced.

We have entered into loan purchase commitments and forward sales commitments in connection with the MCA business, as well as interest rate swap futures and forward sale commitments of mortgage-backed securities in connection with holding MSRs.

While we believe that our hedging strategies will be successful in mitigating our exposure to interest rate risk associated with the purchase of mortgage loans held for sale and holding of MSRs, no hedging strategy can completely protect us.

Poorly designed strategies, improperly executed transactions, or inaccurate assumptions regarding future interest rates or market conditions could have a material adverse effect on our financial condition and results of operations.

We are subject to certain other risks related to our transition away from our mortgage correspondent aggregation business.

In 2015, we launched our MCA business, a correspondent lending program that complemented our mortgage warehouse lending business.

On April 20, 2021, we entered into an agreement to sell our portfolio of mortgage servicing rights (“MSRs”) and to transition the MCA program to a third-party.

At December 31, 2021, we have $8.1 million in loans held for sale remaining on our balance sheet.

Volatility in the mortgage industry has caused uncertainty related to the pricing of these mortgage loans when they are sold or securitized.

This volatility may cause the actual returns on mortgage sales or securitization transactions to be less than anticipated.

We are from time to time required to hold or repurchase mortgage loans or reimburse investors as a result of breaches in contractual representations and warranties under the agreements pursuant to which we purchase and sell mortgage loans.

While our agreements with the originators and sellers of mortgage loans provide us with legal recourse against them that may allow us to recover some or all of our losses, these companies are frequently not financially capable of paying large amounts of damages and as a result we can offer no assurance that we will not bear all of the risk of loss.

We may incur other costs and losses as a result of actual or alleged violations of regulations related to the origination and purchase of residential mortgage loans.

The origination of residential mortgage loans is governed by a variety of federal and state laws and regulations, which are frequently changing.

We sell residential mortgage loans that we have purchased or that we have originated to various parties, including Ginnie Mae and GSEs such as Fannie Mae or Freddie Mac and other financial institutions that purchase mortgage loans for investment or private label securitization.

We may also pool FHA-insured and VA-guaranteed mortgage loans which back securities issued by Ginnie Mae.

Our accrued mortgage repurchase liability represents management’s best estimate of the probable loss that we may expect to incur for the representations and warranties in

the contractual provisions of our sales of mortgage loans, but there is no assurance that our losses will not materially exceed such amounts.

We must effectively manage our counterparty risk .

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When specific loan losses are identified, the amount of the expected loss is removed, or charged off, from the allowance.

Our methodology for establishing the appropriateness of the allowance for credit losses on loans depends on our subjective application of risk grades as indicators of each borrower’s ability to repay specific loans, together with our assessment of how actual or projected changes in competitor underwriting practices, competition for borrowers and depositors and other conditions in our markets are likely to impact improvement or deterioration in the collectability of our loans as compared to our historical experience.

Our methodology for establishing the appropriateness of the allowance for credit losses on loans depends on our subjective application of risk grades as indicators

of each borrower’s ability to repay specific loans, together with our assessment of how actual or projected changes in competitor underwriting practices, competition for borrowers and depositors and other conditions in our markets are likely to impact improvement or deterioration in the collectability of our loans as compared to our historical experience.

Our business model makes our Bank more vulnerable to changes in underlying business credit quality than other banks with which we compete.

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We have substantially increased our liquidity in recent years, and these funds have primarily been invested in low-yielding deposits with federal agencies and other financial institutions.

And, we have had a substantially smaller portion of our assets consists of securities and other earning asset categories that can be less vulnerable to changes in local, regional or industry-specific economic trends, causing our potential for credit losses to be more severe than other banks.

However, during 2020, we began deploying some of our excess liquidity into securities to improve income, but the most significant portion of earning assets still remains in loans.

Our business model has focused on growth in various loan categories that can be more sensitive to changes in economic trends.

We believe our ability to maintain an above-peer rate of growth in commercial loans is dependent on maintaining above-peer credit quality metrics.

And, we have had a substantially smaller portion of our assets consist of securities and other earning asset categories that can be less vulnerable to changes in local, regional or industry-specific economic trends, causing our potential for credit losses to be more severe than other banks.

During 2021, these balances have remained elevated, although they have begun to run off as we have purchased investment securities and proactively exited certain high-cost indexed deposit products;

however, the most significant portion of earning assets still remains in loans.

The failure to maintain above-peer credit quality metrics would have a material adverse impact on our growth and profitability.

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We must effectively manage our liquidity risk .

Our Bank requires liquidity in the form of available funds to meet its deposit, debt and other obligations as they come due, borrower requests to draw on committed credit facilities as well as unexpected demands for cash payments.

Our Bank requires liquidity in the form of available funds to meet deposit, debt and other obligations as they come due, borrower requests to draw on committed credit facilities as well as unexpected demands for cash payments.

While we are not subject to Basel III liquidity regulations, the adequacy of our liquidity is a matter of regulatory interest given the significant portion of our balance sheet represented by loans as opposed to securities and other more marketable investments.

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We have historically held smaller balances of marketable securities than many of our competitors, limiting our ability to increase our liquidity by completing market sales of these assets.

During 2020, we deployed some of our excess liquidity into marketable securities.

During 2020 and continuing into 2021, we deployed some of our excess liquidity into marketable securities.

An inability to raise funds through deposits, borrowings, the sale of securities and loans and other sources, or an inability to access the capital markets, could have a substantial negative effect on our Bank’s liquidity.

We actively manage our available sources of funds to meet our expected needs under normal and financially stressed conditions, but there is no assurance that our Bank will be able to make new loans, meet ongoing funding commitments to borrowers and replace maturing deposits and advances as necessary under all possible circumstances.

borrowers and replace maturing deposits and advances as necessary under all possible circumstances.

Our Bank’s ability to obtain funding could be impaired by factors beyond its control, such as disruptions in financial markets, negative expectations regarding the financial services industry generally or in our markets or negative perceptions of our Bank, including our credit ratings.

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We receive deposits provided by certain of our customers in connection with our delivery of other financial services to them or their customers which are subject to regulatory classification as “brokered deposits” even though we consider these to be relationship deposits and they are not subject to the typical risks or market pricing associated with conventional brokered deposits.

If we do not maintain our regulatory capital above the level required to be well capitalized we would be required to obtain FDIC consent for us to continue to accept deposits classified as brokered deposits, and there can be no assurance that the FDIC would consent under any circumstances.

If we do not maintain our regulatory capital above the level required to be well capitalized we would be required to obtain FDIC consent for us to continue to accept, renew or roll over most deposits classified as brokered deposits, and there can be no assurance that the FDIC would consent under any circumstances.

We could also be required to suspend or eliminate deposit gathering from any source classified as “brokered” deposits.

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Our historical ability to raise capital through the sale of capital stock and debt securities may be affected by economic and market conditions or regulatory changes that are beyond our control.

Adverse changes in our operating performance or financial condition could make raising additional capital difficult or more expensive or limit our access to customary sources of funding, including inter-bank borrowings, repurchase agreements and borrowings from the Federal Reserve Bank ("FRB") or the Federal Home Loan Bank ("FHLB").

Adverse changes in our operating performance or financial condition could make raising additional capital difficult or more expensive or limit our access to customary sources of funding, including inter-bank borrowings, repurchase agreements and borrowings from a Federal Reserve Bank (“FRB”) or the Federal Home Loan Bank (“FHLB”).

Unexpected changes in requirements for capital resulting from regulatory actions could require us to raise capital at a time, and at a price, that might be unfavorable, or could require that we forego continuing growth or reduce our current loan portfolio.

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Factors that could adversely affect our ability to raise additional capital or necessary funding include conditions in the capital markets, our financial performance, our credit ratings, regulatory actions and general economic conditions.

Increases in our cost of capital, including dilution and

increased interest or dividend requirements, could have a direct adverse impact on our operating performance and our ability to achieve our growth objectives.

Increases in our cost of capital, including dilution and increased interest or dividend requirements, could have a direct adverse impact on our operating performance and our ability to achieve our growth objectives.

Trust preferred securities are no longer viable as a source of new long-term debt capital as a result of regulatory changes.

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Individual escrow account balances also experience significant variability monthly as principal and interest payments, as well as ad valorem taxes and insurance premiums , are paid periodically.

While the short average holding period of our mortgage interests of approximately 20 days will allow us, if necessitated by a funding shortfall, to rapidly decrease the size of the portfolio and its associated capital and funding requirements, any such action might significantly damage our business and important mortgage finance relationships.

While the short average holding period of our mortgage interests

of approximately 20 days will allow us, if necessitated by a funding shortfall, to rapidly decrease the size of the portfolio and its associated capital and funding requirements, any such action might significantly damage our business and important mortgage finance relationships.

We are dependent on funds obtained from borrowing or capital transactions or from our Bank to fund our obligations.

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Periods of unusually low or volatile interest rates have a material effect on our earnings.

During the first quarter of 2020, in response to the COVID-19 pandemic, the Federal Reserve reduced the target Federal Funds rate to between zero and 0.25%, and there is an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future.

During the first quarter of 2020, in response to the COVID-19 pandemic, the Federal Reserve reduced the target Federal Funds rate to between zero and 0.25%.

At the most recent meeting, the Federal Reserve voted to maintain this target range, but indicated that the economic recovery pace was such that a rate increase was likely in early 2022 with additional rate increases to potentially follow.

Increases in interest rates and economic conditions affecting consumer demand for housing can have a material impact on the volume of mortgage originations and refinancings, adversely affecting the profitability of our mortgage finance business.

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There can be no assurance that we will not be materially adversely affected by future changes in interest rates.

We may be adversely affected by changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate, for our variable rate loans, derivative contracts and other financial assets and liabilities .

We may be adversely affected by the transition away from LIBOR for our variable rate loans, derivative contracts and other financial assets and liabilities .

Our business relies upon a large volume of loans, derivative contracts and other financial instruments which are directly or indirectly dependent on LIBOR to establish their interest rate and/or value.

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.

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

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.

While we have established a working group consisting of key stakeholders from throughout the company to monitor developments relating to LIBOR uncertainty and changes and to guide the Bank’s response, the impact of these developments on our business and financial results is not yet known.

The transition from LIBOR may cause us to incur increased costs and face additional risks.

Uncertainty as to the nature of alternative reference rates and as to potential changes in or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans originated prior to 2021.

If LIBOR rates are no longer available, any successor or replacement interest rates may perform differently, which may affect our net interest income, change our market risk profile and require changes to our risk, pricing and hedging strategies.

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 continued transition from LIBOR.

Over the next 18 months, we will continue to transition all 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.

Any successor or replacement interest rates to LIBOR may perform differently, which may affect our net interest income, change our market risk profile and require changes to our risk, pricing and hedging strategies.

Any failure to adequately manage this transition could adversely impact our reputation .

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We must be effective in developing and executing new lines of business and new products and services while managing associated risks .

Our business strategy requires that we develop and grow new lines of business and offer new products and services within existing lines of business in order to compete successfully in offering a premier and differentiated client banking experience to ensure future client acquisition and retention of existing clients and realize our strategic priorities for both loans and deposits.

Our business strategy requires that we develop and grow new lines of business and offer new products and services within existing lines of business in order to ensure future client acquisition and retention of existing clients and realize our strategic priorities for both loans and deposits.

Substantial costs, risks and uncertainties are associated with these efforts, particularly in instances where the markets are not fully developed.

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We must effectively execute our business strategy in order to continue our asset and earnings growth .

Our core strategy is to develop our business principally through organic growth by offering a premier and differentiated banking experience to companies in high-value business segments.

Our core strategy is to develop our business principally through organic growth by offering a differentiated banking experience to companies in high-value business segments.

Our prospects for continued growth must be considered in light of the risks, expenses and difficulties frequently encountered by growing companies.

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Operational Risks

We, our vendors and customers must effectively manage our information systems risk which may experience disruption, failure or breach in security..

We, our vendors and customers must effectively manage our information systems and cyber risk which may experience disruption, failure or breach in security.

We, our vendors and customers all rely heavily on communications and information systems to conduct our respective businesses, store sensitive data and work effectively together.

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Our customers and employees have been, and will continue to be, targeted by parties using fraudulent e-mails and other communications in attempts to misappropriate passwords, bank account information or other personal information or to introduce viruses or other malware through “Trojan horse” programs to our information systems, the information systems of our merchants or third-party service providers and/or our customers' computers.

Although we, with the help of third-party service providers, will continue to implement information security technology solutions and establish operational procedures to protect sensitive data, there can be no assurance that these

measures will be effective.

We advise and provide training to our customers and evaluate and impose security requirements on our vendors regarding protection of their respective information systems, but there is no assurance that these actions will have the intended positive effects or will be effective to prevent losses.

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(ii) result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of confidential, sensitive or otherwise valuable information of ours or our customers;

(iii) result in a violation of applicable privacy, data breach and other laws, subjecting us to additional regulatory scrutiny and exposing us to civil litigation, governmental fines and possible financial liability;

(iii) result in a violation of applicable privacy, data breach and other laws, subjecting us to additional regulatory

scrutiny and exposing us to civil litigation, governmental fines and possible financial liability;

(iv) require significant management attention and resources to remedy the damages that result;

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Any system of controls, however well designed and operated, is based in part on certain assumptions and management judgment and can provide only reasonable, not absolute, assurances that the objectives of the system are met.

Any failure or circumvention of our controls and procedures or

failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.

Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.

Our business is susceptible to fraud.

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Our lending customers may also experience fraud in their businesses which could adversely affect their ability to repay their loans or make use of our services.

Our exposure and the exposure of our customers to fraud may increase our financial risk and reputation risk as it may result in unexpected loan losses that exceed those that have been provided for in our allowance for credit losses.

Our exposure and the exposure of our customers to fraud may increase our

financial risk and reputation risk as it may result in unexpected loan losses that exceed those that have been provided for in our allowance for credit losses.

Legal, Regulatory and Compliance Risks

We are subject to extensive government regulation and supervision .

We, as a bank holding company and financial holding company, and our Bank as a national bank, are subject to extensive federal and state regulation and supervision, and the potential for regulatory enforcement actions, that impact our business on a daily basis.

We, as a bank holding company and financial holding company, and our Bank as a Texas state-chartered bank, are subject to extensive federal and state regulation and supervision, and the potential for regulatory enforcement actions, that impact our business on a daily basis.

See the discussion above at Business - Regulation and Supervision .

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These regulations also impose obligations to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identities of our customers.

The level of regulatory scrutiny that we are subject to may fluctuate over time, based on numerous factors, including as a result of the upcoming change in the U.S.

presidential administration.

The level of regulatory scrutiny that we are subject to may fluctuate over time, based on numerous factors.

In addition, Congress, state legislatures, and federal and state regulatory agencies continually review banking laws, regulations and policies for possible changes.

Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways.

Material changes in regulation and requirements imposed on financial institutions, such as the Dodd-Frank Act, Basel III Capital Rules, European Union's General Data Protection Regulations and California Consumer Privacy Act CCPA result in additional costs, impose more stringent capital, liquidity and leverage requirements, limit the types of financial services and products we may offer and increase the ability of non-bank financial services providers to offer competing financial services and products, among other things.

Material changes in regulation and requirements imposed on financial institutions, such as the Dodd-Frank Act, Basel III Capital Rules, European Union's General Data Protection Regulations and California Consumer Privacy Act result in additional costs, impose more stringent capital, liquidity and leverage requirements, limit the types of financial services and products we may offer and increase the ability of non-bank financial services providers to offer competing financial services and products, among other things.

Such changes could result in new regulatory obligations which could prove difficult, expensive or competitively impractical to comply with if not equally imposed upon non-bank financial services providers with whom we compete.

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Our satisfaction of these requirements is subject to qualitative judgments by regulators that may differ materially from management’s and that are subject to being determined retroactively for prior periods.

Additionally, regulators can make subjective assessments about the adequacy of capital levels, even if our Bank's

reported capital exceeds the “well-capitalized” requirements.

Additionally, regulators can make subjective assessments about the adequacy of capital levels, even if our Bank's reported capital exceeds the “well capitalized” requirements.

Our ability to maintain our status as a financial holding company and to continue to operate our Bank as we have in recent periods is dependent upon a number of factors, including our Bank qualifying as “well capitalized” and “well managed” under applicable prompt corrective action regulations and upon our company qualifying on an ongoing basis as “well capitalized” and “well managed” under applicable Federal Reserve regulations.

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• brokered deposits;

• the Federal Reserve discount window;

• FRB discount window;

• advances from the FHLB;

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Failure to meet regulatory capital standards may also result in higher FDIC assessments.

If we fall below guidelines for being deemed “adequately capitalized” the OCC or Federal Reserve could impose restrictions on our activities and a broad range of regulatory requirements in order to effect “prompt corrective action.” The capital requirements applicable to us are in a process of continuous evaluation and revision in connection with actions of the Basel Committee, our regulators and the requirements of the Dodd-Frank Act.

If we fall below guidelines for being deemed “adequately capitalized” the FDIC or Federal Reserve could impose restrictions on our activities and a broad range of regulatory requirements in order to effect “prompt corrective action.” The capital requirements applicable to us are in a process of continuous evaluation and revision in connection with actions of the Basel Committee and our regulators.

We cannot predict the final form, or the effects, of these regulations on our business, but among the possible effects are requirements that we slow our rate of growth or obtain additional capital which could reduce our earnings or dilute our existing stockholders.

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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.

As a result of the unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity caused by the COVID-19 pandemic, business and consumer customers of the Bank are experiencing varying degrees of financial distress, which is expected to increase over coming months and will likely adversely affect their ability to timely pay interest and principal on their loans and the value of the collateral securing their obligations.

This in turn has influenced the recognition of credit losses in our loan portfolios and has increased our allowance for credit losses, particularly as businesses remain closed and as more customers are expected to draw on their lines of credit or seek additional loans to help finance their businesses.

During 2020, as a result of the uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity caused by the COVID-19 pandemic, business and consumer customers of the Bank experienced varying degrees of financial distress, which is expected to continue over coming months and may likely adversely affect their ability to timely pay interest and principal on their loans and the value of the collateral securing their obligations.

During 2021, restrictive measures taken by governments, businesses and individuals eased and the U.S.

economy began to improve.

With the recent outbreak of the Omicron variant, we may experience additional uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity, which may lead to the recognition of credit losses in our loan portfolios and increases in our allowance for credit losses.

Disruptions to our customers’ businesses could also result in declines in, among other things, wealth management revenue.

These developments as a consequence of the pandemic are materially impacting our business and the businesses of our customers and are expected to have a material adverse effect on our financial results, as evidenced by our results for the prior quarters in 2020.

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

These new developments as a consequence of the pandemic may materially impact our business and the businesses of our customers and may have a material adverse effect on our financial results as the pandemic continues.

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

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

In order to protect the health of our customers and employees, we continue to take additional precautions within our branch locations, including enhanced cleaning procedures.

We may take further such actions that we determine are in the best interest of our employees, customers and communities or as may be required by government order.

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Similarly, if any of our vendors or business partners become unable to continue to provide their products and services, which we rely upon to maintain our day-to-day operations, our ability to serve our customers could be impacted.

COVID-19 does not yet appear to be contained and could affect significantly more households and businesses.

COVID-19 does not yet appear to be contained and the continued outbreak of new variants of COVID-19 could affect significantly more households and businesses.

Given the ongoing and dynamic nature of the circumstances, it is not possible to accurately predict the extent, severity or duration of these conditions or when normal economic and operating conditions will resume.

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The adverse impact on the markets in which we operate and on our business, operations and financial condition is expected to remain elevated until the pandemic subsides.

As a participating lender in the Small Business Administration’s PPP, we may be subject to additional risks regarding our Bank’s processing of PPP loans and are dependent on the federal government’s continuation and support of the program.

Due to the short timeframe between the passing of the CARES Act and the beginning of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP.

Several other large banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP.

We may be exposed to the risk of

litigation, from both customers and non-customers who approached our Bank requesting PPP loans, regarding the process and procedures used by our Bank in processing applications for the PPP.

Any such litigation filed against the Company or the Bank may be costly, regardless of the outcome, and result in significant financial liability or adversely affect our reputation.

Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial condition and results of operations.

In addition, while the PPP loans are fully guaranteed by the Small Business Administration (the “SBA”) and we believe that the majority of these loans will be forgiven, there can be no assurance that the borrowers will use or have used the funds appropriately or will have satisfied the staffing or payment requirements to qualify for forgiveness in whole or in part.

Any portion of the loan that is not forgiven must be repaid by the borrower.

In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded or serviced by our Bank, which may or may not be related to an ambiguity in the laws, rules or guidance regarding operation of the PPP, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if we have already been paid under the guaranty, seek recovery from us of any loss related to the deficiency.

The soundness of other financial institutions could adversely affect us.

Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships.

We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including broker-dealers, commercial banks, investment banks and other institutional clients.

Many of these transactions expose us to credit risk in the event of default of our counterparty or client.

In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us.

There can be no assurance that any such losses would not materially and adversely affect our results of operations.

The impact of the Tax Act on us and our customers contributes to uncertainty and risk related to our customers' future demand for credit and our future results.

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This could have a long-term negative impact on business customer borrowing.

We realized a significant increase in our after-tax net income available to stockholders attributable to the Tax Act beginning in 2018, but there is no guarantee that future years' results will have the same benefit.

We realized a significant increase in our after-tax net income

available to stockholders attributable to the Tax Act beginning in 2018, but there is no guarantee that future years' results will have the same benefit.

The continued compression of net interest margin at our bank and for competitor banks indicates that some or all of the expected benefit from the Tax Act has been lost as the banks and financial services companies we compete with have elected to lower interest rates and fees and we have responded in order to remain competitive.

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Although management has established disaster recovery policies and procedures, the occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations.

Climate change has the potential to disrupt our business and adversely impact the operations and creditworthiness of our clients.

Climate change has caused severe weather patterns and events that could disrupt operations at one or more of our locations, which may disrupt our ability to provide financial products and services to our clients.

Climate change could also have a negative effect on the financial status and creditworthiness of our clients, which may decrease revenues and business activities from those clients, increase the credit risk associated with loans and other credit exposures to such clients, and decrease the value of our warrants and direct equity investments in such clients, if any.

Climate change and related legislative and regulatory initiatives may result in operational changes and expenditures that could significantly impact our business.

The current and anticipated effects of climate change are creating an increasing level of concern for the state of the global environment.

As a result, political and social attention to the issue of climate change has increased.

In recent years, governments across the world have entered into international agreements to attempt to reduce global temperatures, in part by limiting greenhouse gas emissions.

The United States government has rejoined the Paris Climate Agreement, the most recent international climate change accord, while the U.S.

Congress, state legislatures and federal and state regulatory agencies are likely to continue to propose and advance numerous legislative and regulatory initiatives seeking to mitigate the effects of climate change.

These agreements and measures may result in the imposition of taxes and fees, the required purchase of emission credits, and the implementation of significant operational changes.

In addition, the federal banking agencies under the current President’s Administration may address climate-related issues in their agendas in various ways, including by increasing supervisory expectations with respect to banks’ risk management practices, accounting for the effects of climate change in stress testing scenarios and systemic risk assessments, revising expectations for credit portfolio concentrations based on climate-related factors, and encouraging investment by banks in climate-related initiatives and lending to communities disproportionately impacted by the effects of climate change.

Each of the above-described initiatives, as well as other similar initiatives, may require us to expend significant capital and incur compliance, operating, maintenance and remediation costs.

Given the lack of empirical data on the credit and other financial risks posed by climate change, it is impossible to predict how climate change may impact our financial condition and operations;

however, as a banking organization, the physical effects of climate change may present certain unique risks.

For example, weather disasters, shifts in local climates and other disruptions related to climate change may adversely affect the value of real properties securing our loans, which could diminish the value of our loan portfolio.

Such events may also cause reductions in regional and local economic activity that may have an adverse effect on our customers, which could limit our ability to raise and invest capital in these areas and communities, each of which could have a material adverse effect on our financial condition and results of operations.

Negative public opinion could damage our reputation and adversely affect our earnings.

Reputational risk, or the risk to our earnings and capital from negative public opinion, is inherent in our business.

Negative public opinion can result from the

actual or perceived manner in which we conduct our business activities;

our management of actual or potential conflicts of interest and ethical issues;

and our protection of confidential client information.

Our brand and reputation may also be harmed by actions taken by third parties that we contract with to provide services to the extent such parties fail to meet their contractual, legal and regulatory obligations or act in a manner that is harmful to our clients.

If we fail to supervise these relationships effectively, we could also be subject to regulatory enforcement, including fines and penalties.

Negative public opinion can adversely affect our ability to keep and attract clients and can expose us to litigation and regulatory action.

We take steps to minimize reputation risk in the way we conduct our business activities and deal with our clients, communities and vendors but our efforts may not be sufficient.

Risks Relating to Our Securities

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Because our Bank’s subordinated notes are obligations of the Bank, they would in liquidation of our Bank or sale of its assets receive payment before any amounts would be payable to holders of our common stock, preferred stock or subordinated notes.

At December 31, 2020, we had issued and outstanding 6 million shares of our 6.50% Non-Cumulative Perpetual Preferred Stock, Series A, having an aggregate liquidation preference of $150.0 million.

At December 31, 2021, we had issued and outstanding 300,000 shares of our 5.75% fixed rate non-cumulative perpetual preferred stock, Series B, with a liquidation preference of $1,000 per share (the “Series B Preferred Stock”) and 12 million depositary shares, each representing 1/40th interest in a share of the Series B preferred stock.

Our preferred stock is senior to our shares of common stock in right of payment of dividends and other distributions.

We must be current on dividends payable to holders of

preferred stock before any dividends can be paid on our common stock.

We must be current on dividends payable to holders of preferred stock before any dividends can be paid on our common stock.

In the event of our bankruptcy, dissolution or liquidation, the holders of our preferred stock must be satisfied before any distributions can be made to our common stockholders.

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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.

Our Bank’s subordinated indebtedness is unsecured and subordinate and junior in right of payment to the Bank’s obligations to its depositors, its obligations under banker’s acceptances and letters of credit, its obligations to any Federal Reserve Bank, certain obligations to the FDIC, and its obligations to its other creditors, whether now outstanding or hereafter incurred, except any obligations which expressly rank on a parity with or junior to the subordinated notes.

the FDIC, and its obligations to its other creditors, whether now outstanding or hereafter incurred, except any obligations which expressly rank on a parity with or junior to the subordinated notes.

UNRESOLVED STAFF COMMENTS

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What changed 10-K

Item 1A. Risk Factors