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Item 7. Management’s Discussion and Analysis

2022-02-09 compared with 2021-02-09 · 269 added, 330 removed, 341 unchanged (64% of the section changed)

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

The following discussion and analysis of the Company’s financial condition and results of operations for the years ended December 31, 2020 and 2019 should be read in conjunction with the Company’s Selected Consolidated Financial Data and the audited consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K.

The following discussion and analysis of our financial condition and results of operations for the years ended December 31, 2021 and 2020 should be read in conjunction with our audited consolidated financial statements and the related notes to the consolidated financial statements included in this Annual Report on Form 10-K.

Certain risks, uncertainties and other factors, including those set forth under “Risk Factors” in Part I, Item 1A, and elsewhere in this Annual Report on Form 10-K may cause actual results to differ materially from the results discussed in the forward-looking statements appearing in this discussion and analysis.

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Certain statements and financial analysis contained in this report that are not historical facts may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

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

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

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

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

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

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

Forward-looking statements may include, among other things and without limitation, statements about the credit quality of our loan portfolio, our liquidity, general economic conditions in the United States and in our markets, including with respect to interest rates and the market generally, the continued impact on our customers from volatility in oil and gas prices, the material risks and uncertainties for the U.S.

and world economies, and for our business, resulting from the COVID-19 pandemic, expectations regarding rates of default and loan losses, volatility in the mortgage industry, our business strategies (including new lines of business, products and services) and our expectations about future financial performance, future growth and earnings, the appropriateness of our allowance for credit losses and provision for credit losses, the impact of changing regulatory requirements and legislative changes on our business, increased competition, and technologies (including new technologies and information security risks).

Forward-looking statements are subject to various risks and uncertainties, which change over time, are based on management’s expectations and assumptions at the time the statements are made and are not guarantees of future results.

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

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

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

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

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

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

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

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

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

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

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

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

• Changes in the U.S.

economy in general or the Texas economy specifically resulting in deterioration of credit quality, increases in non-performing assets or charge-offs or reduced demand for credit or other financial services we offer, including the effects from declines in the level of drilling and production related to volatility in oil and gas prices and the effects of the COVID-19 pandemic.

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

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

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

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

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

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

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

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

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

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

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

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

Government, including policies of the U.S.

Department of Treasury and the Federal Reserve.

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

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

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

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

• Deterioration of the credit quality of our loan portfolio or declines in the value of collateral due to external factors or otherwise.

• The unpredictability of economic and business conditions that may impact us or our customers.

• The COVID-19 pandemic on us and our customers, employees and third-party service providers.

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

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

• Our ability to effectively manage our liquidity risk and any growth plans and the availability of capital and funding to us.

• Our ability to effectively manage our information technology systems (including external vendors), on which we are highly dependent.

This also includes our ability to, among other things, manage such risks and to prevent cyber-incidents against us, our customers or our third-party vendors, or to manage risks from failures, disruptions or security breaches affecting us, our customers or our third-party vendors.

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

• Changes in interest rates.

• Changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate.

• Adverse or unexpected economic or market conditions and other factors in Texas, the United States or internationally that could affect the credit quality of our loan portfolio, our operating performance or our ability to access the capital markets or other sources of funding to become less advantageous.

• The failure to effectively balance our funding sources with cash demands by depositors and borrowers, the failure to maintain capital ratios as a result of adverse changes in our operating performance or financial condition or changes in applicable regulations or interpretations of regulations that impact our business or the characterization or risk weight of our assets.

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

• The failure to effectively manage our interest rate risk.

• The failure of our enterprise risk management framework (including our risk management strategies and procedures and related controls), our compliance program, or our corporate governance and supervisory oversight functions to timely identify and address emerging risks adequately.

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

• Our ability to comply with applicable governmental regulations, including legislative and regulatory changes that may impose further restrictions and costs on our business, any regulatory enforcement actions that may be brought against us and the effect of changes in laws, regulations, policies and guidelines (including, among others, those concerning taxes, banking, accounting, securities and monetary and fiscal policies) with which we must generally comply.

• Risks related to the U.S.

federal government actions impacting us, such as a participating lender in the Small Business Administration’s PPP and the impact of the Tax Cuts and Jobs Act on us and our customers.

• Claims and litigation that may arise in the ordinary course of business, including those that may not be covered by our insurers.

• The failure to successfully execute our business strategy, which may include expanding into new markets, developing and launching new lines of business or new products and services, completing planned transactions or to successfully manage the risks related to certain aspects of our business strategy.

• The failure to identify, attract and retain key personnel.

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

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

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

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

• Volatility in the market price of our common stock.

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

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

• Credit risk resulting from our exposure to counterparties.

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

• The susceptibility of fraud on our business.

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

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

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

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

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

• Risks relating to our securities, including the volatility of our stock price, trading volume, rights of holders of our indebtedness and preferred stock, our decision to not currently pay dividends on our common stock, and other related factors.

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

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

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

On December 9, 2019, we and IBTX entered into the Merger Agreement to combine the companies in an all-stock merger of equals.

On May 22, 2020, we and IBTX mutually agreed to terminate the Merger Agreement.

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

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

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

While these expenses, as well as merger-related expenses incurred in the first half of 2020, had a significant impact on our year-to-date operating results, we believe that we are better positioned to improve our core profitability going forward as the non-interest expense items are not expected to recur in future periods.

During the fourth quarter of 2020, we did experience improvements in non-interest expense as a result of these actions, specifically in salaries and employee benefits due to the workforce reduction and in communications and technology expense related to lower software amortization expense as compared to the third quarter of 2020.

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

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

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

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

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

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

We are investing in treasury solutions product and service offerings, building on our existing private wealth business and expanding the scope of our investment banking product and service offerings.

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

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

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

In December 2021, the Company received approval from the SEC and FINRA for registration and FINRA membership of TCBI Securities, a wholly owned non-bank subsidiary of the Bank.

TCBI Securities will provide investment banking products and services to our customers.

Significant transactions affecting our financial statements during the year ended December 31, 2021 included:

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

Net proceeds from the sale totaled $289.7 million.

The additional equity is being used for general corporate purposes, including funding regulatory capital infusions into the Bank, and was used to redeem our 6.5% non-cumulative perpetual preferred stock Series A, par value $0.01 per share, in accordance with its terms;

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

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

• Sale of our portfolio of MSRs and transition of the MCA program to a third-party.

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

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

For additional information, see Note 11 - Long-Term Debt in the accompanying notes to the consolidated financial statements included elsewhere in this report;

• Redemption of our 6.50% non-cumulative perpetual preferred stock, Series A.

For additional information, see Note 20 - Material Transactions Affecting Stockholders' Equity in the accompanying notes to the consolidated financial statements included elsewhere in this report;

• Redemption of our 6.50% subordinated notes due 2042.

For additional information, see Note 11 - Long-Term Debt in the accompanying notes to the consolidated financial statements included elsewhere in this report;

• Negative provision for credit losses of $30.0 million for full year 2021, primarily reflecting improvements in the economic outlook as the economy recovered from the impacts of the COVID-19 pandemic during 2021 combined with a decrease in criticized loans;

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

Impact of COVID-19 Pandemic

Impact on Our Financial Statements and Results of Operations

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

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

As of December 31, 2020, most regions in Texas have allowed businesses to re-open at limited capacities and with caution as to social-distancing and other restrictions.

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

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

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

Our business and consumer customers are experiencing varying degrees of financial distress, which is expected to continue into the first quarter of 2021, especially if COVID-19 infections increase and new economic restrictions are mandated.

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

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

We continue to monitor these customers closely.

Future economic conditions are subject to significant uncertainty.

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

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

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

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

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

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

Impact on our Business Operations

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

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

We expect to be able to continue with this strategy for the foreseeable future, but will begin transitioning employees back into the office in a phased approach when it is safe to do so.

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

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

and 2:00 p.m.

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

Energy Portfolio

Outstanding energy loans totaled $766.2 million, or 3% of total loans held for investment, at December 31, 2020, compared to $1.4 billion, or 6% of total loans, at December 31, 2019.

The decline in outstanding energy loans is due to our strategic de-risking of the energy portfolio as well as a heightened level of charge-offs in 2020 as we reached final resolution on a number of loans previously disclosed as problem loans.

At December 31, 2020, energy non-accruals decreased to $51.7 million, compared to $125.0 million at December 31, 2019, further evidencing final resolution of previously disclosed problem loans.

Our energy loan portfolio is primarily comprised of loans to exploration and production (“E&P”) companies that are generally collateralized with proven reserves based on appropriate valuation standards that take into account the risk of oil and gas price volatility.

At December 31, 2020, loans to E&P companies represented approximately 70% of total energy loans outstanding.

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

At December 31, 2020 approximately 40% of our exposure was located in lower cost production areas such as the Permian Basin and Eagle Ford.

The COVID-19 pandemic has had, and continues to have, a significant impact on the global community.

The related restrictive measures taken by governments, businesses and individuals have caused and continue to cause uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve.

As the restrictive measures began to be eased during 2021, the U.S.

economy has begun to

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

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

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

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

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

however, future economic conditions are subject to significant uncertainty.

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

COVID-19 had a significant adverse impact on our business, financial position and operating results for the year ended December 31, 2020.

While the economy began to recover in 2021, uncertainty still exists, but we believe we are well-positioned to operate effectively through the present economic environment.

Results of Operations

Year ended December 31, 2021 compared to year ended December 31, 2020

We reported net income of $66.3 million and net income available to common stockholders of $56.5 million, or $1.12 per diluted common share, for the year ended December 31, 2020, compared to net income of $312.0 million and net income

available to common stockholders of $302.3 million, or $5.99 per diluted common share, for 2019.

Selected income statement data and key performance indicators are presented in the table below:

For the Year Ended December 31

(dollars in thousands except per share data) 2021 2020 2019

Net interest income $ 768,837 $ 851,321 $ 969,231

Provision for credit losses (30,000) 258,000 75,000

Non-interest income 138,230 202,981 102,368

Non-interest expense 599,012 704,356 600,289

Income before income taxes 338,055 91,946 396,310

Income tax expense 84,116 25,657 84,295

Net income 253,939 66,289 312,015

Preferred stock dividends 18,721 9,750 9,750

Net income available to common stockholders $ 235,218 $ 56,539 $ 302,265

Earnings per common share - basic $ 4.65 $ 1.12 $ 6.01

Earnings per common share - diluted $ 4.60 $ 1.12 $ 5.99

Net interest margin 2.07 % 2.34 % 3.24 %

Return on average assets 0.67 % 0.18 % 1.01 %

Return on average common equity 8.35 % 2.10 % 11.95 %

Non-interest income to average earning assets 0.37 % 0.56 % 0.34 %

Efficiency ratio(1) 66.0 % 66.8 % 56.0 %

Non-interest expense to average earning assets 1.61 % 1.93 % 2.00 %

(1) Non-interest expense divided by the sum of net interest income and non-interest income.

We reported net income of $253.9 million and net income available to common stockholders of $235.2 million, or $4.60 per diluted common share, for the year ended December 31, 2021, compared to net income of $66.3 million and net income available to common stockholders of $56.5 million, or $1.12 per diluted common share, for 2020.

Return on average common equity (“ROE”) was 8.35% and return on average assets (“ROA”) was 0.67% for the year ended December 31, 2021, compared to 2.10% and 0.18%, respectively, for 2020.

The decline in net income, ROE and ROA for the year ended December 31, 2020 resulted primarily from a $183.0 million increase in the provision for credit losses, as well as a $103.5 million increase in non-interest expense, driven by the significant year-to-date 2020 expenses described below.

Consolidated Daily Average Balances, Average Yields and Rates

The increase in net income, ROE and ROA for the year ended December 31, 2021 resulted primarily from a $288.0 million decrease in the provision for credit losses and a $105.3 million decrease in non-interest expense, partially offset by decreases of $82.5 million and $64.8 million in net interest income and non-interest income, respectively, and a $58.5 million increase in income tax expense.

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

Consolidated Daily Average Balances, Taxable-Equivalent Net Interest Income, and Yields/Rates

Year ended December 31,

2021 2020 2019

(in thousands except percentages) Average

(dollars in thousands) Average

Balance Revenue /

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187,007 8,651 4.63 % 195,741 9,320 4.76 % 176,328 8,915 5.06 %

Federal funds sold and securities purchased under resale agreements

114,141 693 0.61 % 73,946 1,529 2.07 % 201,236 3,792 1.88 %

Federal funds sold 1,511 1 0.09 % 114,141 693 0.61 % 73,946 1,529 2.07 %

Interest-bearing deposits in other banks 10,547,642 13,232 0.13 % 9,653,129 27,569 0.29 % 3,483,254 71,093 2.04 %

9,653,129 27,569 0.29 % 3,483,254 71,093 2.04 % 1,769,074 32,597 1.84 %

Loans held for sale 90,066 2,481 2.75 % 1,114,311 36,369 3.26 % 2,688,677 112,526 4.19 %

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Other borrowings(3) 2,399,280 4,613 0.19 % 3,115,416 22,006 0.71 % 3,038,095 70,265 2.31 %

Subordinated notes 282,299 16,764 5.94 % 281,936 16,764 5.95 % 281,574 16,764 5.95 %

Trust preferred subordinated debentures

113,406 3,199 2.82 % 113,406 5,026 4.43 % 113,406 4,715 4.16 %

Long-term debt 802,112 37,628 4.69 % 395,705 19,963 5.05 % 395,342 21,790 5.51 %

Total interest-bearing liabilities

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Loan spread(4) 3.35 % 3.36 % 3.55 %

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

(1) Average balances include non-accrual loans which are stated net of unearned income.

Loan interest income includes loan fees totaling $47.8 million, $43.8 million and $46.6 million for the years ended December 31, 2021, 2020 and 2019, respectively.

(2) Taxable equivalent rates used where applicable.

(3) Includes federal funds purchased, repurchase agreements and FHLB borrowings.

For additional details see Note 10 - Short-Term and Other Borrowings in the accompanying notes to the consolidated financial statements included elsewhere in this report.

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

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Loans held for sale (33,888) (33,403) (485) (76,157) (61,542) (14,615)

Loans held for investment, mortgage finance loans 43,547 56,230 (12,683) 60,227 78,979 (18,752)

Loans held for investment, mortgage finance (46,007) (24,329) (21,678) 43,547 56,230 (12,683)

Loans held for investment(2) (95,013) (43,539) (51,474) (249,513) (22,700) (226,813)

Federal funds sold and securities purchased under resale agreements (836) 1,092 (1,928) (2,263) (2,329) 66

Federal funds sold (692) (683) (9) (836) 1,092 (1,928)

Interest-bearing deposits in other banks (14,337) 17,206 (31,543) (43,524) 133,964 (177,488)

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Net interest income was $768.8 million for the year ended December 31, 2021 compared to $851.3 million for 2020.

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

Average earning assets for the year ended December 31, 2020 increased by $6.4 billion compared to the same period in 2019, and included a $671.4 million increase in average total investment securities, reflecting the deployment of excess liquidity into higher-yielding investment securities, a $1.1 billion increase in average total loans held for investment, primarily attributable to increases in average mortgage finance loans related to lower long-term interest rates, and a $6.2 billion increase in average liquidity assets, partially offset by a $1.6 billion decrease in average loans held for sale.

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

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

The decrease in average loans held for sale compared to the year ended December 31, 2019 resulted from holding purchased loans for shorter durations than in prior periods in order to limit exposure to forbearance risk caused by current economic uncertainties.

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

Average interest-bearing liabilities increased $3.7 billion for the year ended December 31, 2020 compared to the same period in 2019, primarily due to a $3.6 billion increase in average interest-bearing deposits.

The decrease was primarily due to decreases in total average loans and earning asset yields, partially offset by an increase in average investment securities as well as declining cost of funds.

Average earning assets for the year ended December 31, 2021 increased by $717.1 million compared to the same period in 2020, and included a $2.7 billion increase in average total investment securities, reflecting the deployment of excess liquidity into higher-yielding investment securities, and an $894.5 million increase in average interest-bearing deposits in other banks, partially offset by a $2.8 billion decrease in average total loans.

Throughout 2020, management took deliberate actions to increase the balance of interest-bearing deposits in other banks to ensure we had the balance sheet strength to serve our clients during the COVID-19 pandemic.

In 2021, balances remained elevated, although began to run off in the later part of the year as we purchased investment securities and proactively exited certain high-cost indexed deposit products.

The decrease in average loans held for sale resulted from the transition of the MCA program to a third-party in 2021.

Average interest-bearing liabilities decreased $3.3 billion for the year ended December 31, 2021 compared to the same period in 2020, primarily due to a $3.0 billion decrease in average interest-bearing deposits and a $716.1 million decrease in other borrowings, partially offset by a $406.4 million increase in average long-term debt.

Average demand deposits for the year ended December 31, 2021 increased to $15.2 billion from $11.6 billion for 2020.

Net interest margin for the year ended December 31, 2021 was 2.07% compared to 2.34% for 2020.

The decrease was primarily due to the effect of declining interest rates on earning asset yields and a shift in earning asset composition, primarily increases in lower-yielding liquidity assets and mortgage finance loans coupled with a decline in loans held for investment, excluding mortgage finance, partially offset by lower funding costs compared to 2019.

The yield on total loans held for investment decreased to 3.95% for the year ended December 31, 2020 compared to 4.98% for 2019 and the yield on earning assets decreased to 2.91% for the year ended December 31, 2020 compared to 4.56% for 2019.

The decrease was primarily due to the effect of declining interest rates on earning asset yields and a shift in earning asset composition, primarily increases in lower-yielding investment securities and interest-bearing deposits in other banks, partially offset by lower funding costs compared to 2020.

The yield on total loans held for investment, net, decreased to 3.56% for the year ended December 31, 2021 compared to 3.88% for 2020 and the yield on earning assets decreased to 2.36% for the year ended December 31, 2021 compared to 2.86% for 2020.

The average cost of total deposits decreased to 0.21% for 2021 from 0.47% for 2020 and total funding costs, including all deposits, long-term debt and stockholders' equity decreased to 0.28% for 2021 compared to 0.51% for 2020.

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Servicing income 15,513 27,029 13,439

Swap fees 5,182 4,387 5,625

Investment banking and trading income 24,441 22,687 14,876

Net gain/(loss) on sale of loans held for sale 1,317 58,026 (20,259)

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Total non-interest income $ 138,230 $ 202,981 $ 102,368

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

Non-interest income increased by $93.1 million during the year ended December 31, 2020 to $185.5 million, compared to $92.4 million for 2019.

This increase was primarily due to a $78.3 million increase in net gain/(loss) on sale of loans held for sale, a $16.7 million increase in brokered loan fees and a $13.4 million increase in servicing income, partially offset by a $17.8 million decrease in other non-interest income.

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

The increase in brokered loans fees was due to an increase in total mortgage finance volumes in 2020, and the increase in servicing income was due to an increase in the outstanding balance of our servicing portfolio.

The decrease in other non-interest income resulted primarily from the settlement of $15.0 million in legal claims in 2019 that did not recur in 2020.

Non-interest income decreased by $64.8 million during the year ended December 31, 2021 to $138.2 million, compared to $203.0 million for 2020.

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

Offsetting these decreases were increases in service charges, related to a change in fee structure for our deposits on analysis, wealth management and trust fee income, related to increases in assets under management and market values, and in other non-interest income, primarily related to a gain on the sale of a foreclosed asset.

Non-interest Expense

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Total non-interest expense $ 599,012 $ 704,356 $ 600,289

(1) Values have been adjusted to reflect revisions to certain previously reported financial information.

See “Item 8, Note 1— Operations and Summary of Significant Accounting Policies—Revision of Prior Period Financial Statements ” for additional information.

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

Non-interest expense for the year ended December 31, 2020 increased $103.5 million compared to 2019.

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

The increase in salaries and employee benefits was primarily due to $18.0 million in severance expense related to our workforce reduction in 2020.

The increase in communications and technology expense was primarily due to $36.0 million in write-offs of certain software assets in 2020 and $5.9 million in technology expense related to the roll-out of our PPP capabilities in 2020.

The full impact on salaries and employee benefits expense from the reduction in workforce and on software amortization included in communications and technology expense from the software write-offs recorded during 2020 is expected to be realized in non-interest expense in the first half of 2021, though we did experience improvements during the fourth quarter of 2020.

The increase in servicing-related expenses was primarily due to higher MSR amortization and impairment expense, resulting primarily from higher mortgage prepayment rates.

Non-interest expense for the year ended December 31, 2021 decreased $105.3 million compared to 2020.

The decrease was primarily due to decreases in marketing, legal, communication and technology expenses, servicing-related expenses and merger-related expenses, partially offset by an increase in salaries and employee benefits, resulting primarily from increased headcount in 2021.

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

Communications and technology expense for the year ended December 31, 2021 included a $12.0 million write-off of certain software assets, as is discussed above, compared to $36.0 million included in the same period of 2020.

Analysis of Financial Condition

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

See Note 1 - Operations and Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this report for details of these portfolio segments.

(in thousands) 2021 2020

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Real estate 4,777,530 5,794,624

Total loans held for investment $ 24,501,830 $ 24,736,642 $ 22,676,524 $ 20,772,343 $ 17,569,908

Total loans held for investment were $24.5 billion at December 31, 2020, a decline of $234.8 million from 2019.

While the majority of our portfolio segments declined in 2020, the balance of mortgage finance loans increased $909.6 million to $9.1 billion at December 31, 2020.

Mortgage finance loans relate to our mortgage warehouse lending operations in which we purchase mortgage loan ownership interests that are typically sold within 10 to 20 days and represent 37% of total loans held for investment at December 31, 2020 compared to 33% at December 31, 2019.

Gross loans held for investment $ 22,871,961 $ 24,501,830

Gross loans held for investment were $22.9 billion at December 31, 2021, a decline of $1.6 billion from 2020, primarily due to declines in mortgage finance and real estate loans, partially offset by an increase in commercial loans.

Mortgage finance loans

relate to our mortgage warehouse lending operations in which we purchase mortgage loan ownership interests that are typically sold within 10 to 20 days and represent 33% of total loans held for investment at December 31, 2021 compared to 37% at December 31, 2020.

Volumes fluctuate based on the level of market demand for the product and the number of days between purchase and sale of the loans, which can be affected by changes in overall market interest rates, and tend to peak at the end of each month.

The significant growth in this portfolio during 2020 resulted from increases in volumes driven by continued lower long-term interest rates.

Traditional loans held for investment decreased 7% during 2020.

The majority of the decrease was in our commercial and energy portfolios, and was partially offset by the addition of $617.5 million in PPP loan balances at December 31, 2020.

Throughout 2020 we strategically reduced portfolios that have experienced higher historic losses, primarily energy and leveraged lending.

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

The decline in the real estate loan portfolio was primarily due to above-average payoffs during 2021.

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

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

As of December 31, 2020, none of our syndicated loans were on non-accrual.

Portfolio Geographic and Industry Concentrations

As of December 31, 2021, $9.6 million of our syndicated loans were on non-accrual.

Portfolio Concentrations

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

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

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

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

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

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

The table below summarizes the industry concentrations of our loans held for investment on a gross basis at December 31, 2021:

(in thousands except percentage data) Amount Percent of

Total Loans Held for Investment

Industry type:

Mortgage finance loans $ 9,079,409 37.0 %

Real estate and construction 5,247,480 21.4 %

(dollars in thousands) Amount Percent of Total

Financials (excluding banks)(1) $ 5,733,059 25.0 %

Oil & gas and pipelines 1,020,033 4.2 %

Healthcare and pharmaceuticals 460,517 1.9 %

Commercial services 459,409 1.9 %

Retail 388,682 1.6 %

Real estate related services (not secured by real estate) 1,021,030 4.4 %

Technology, telecom and media 428,699 1.9 %

Retail 372,467 1.6 %

Commercial services 295,332 1.3 %

Oil & gas support services 236,277 1.0 %

Machinery, equipment and parts manufacturing 225,156 1.0 %

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Consumer services 182,349 0.8 %

Entertainment and recreation 203,605 0.8 %

Transportation services 133,150 0.6 %

Entertainment and recreation 129,321 0.6 %

Government and education 127,229 0.6 %

Healthcare and pharmaceuticals 71,457 0.3 %

Diversified or miscellaneous 542,219 2.4 %

Total loans held for investment $ 24,501,830 100.0 %

Our largest concentration of loans held for investment, excluding mortgage finance, in any single industry is in real estate and construction.

Loans extended to borrowers within the real estate and construction industries generally include market risk real estate loans, consisting of commercial real estate loans and loans made to residential builders and developers.

Loan amounts are determined in part from an analysis of pro forma cash flows.

Loans are also underwritten to comply with product-type specific advance rates against both cost and market value.

We extend commercial real estate loans, including both construction/development financing and limited term financing, to professional real estate developers and owners/managers of commercial real estate projects and properties who have a demonstrated record of past success with similar properties.

Collateral properties include office buildings, warehouse/distribution buildings, shopping centers, hotels/motels, senior living, apartment buildings and residential and commercial tract development.

The primary source of repayment on these loans is expected to come from the sale, permanent financing or lease of the real property collateral.

Loans to residential builders are typically in the form of uncommitted guidance lines and are for the purpose of developing lots into single-family homes, while loans to developers are typically in the form of borrowing base lines extended for the purpose of acquiring and developing raw land into lots that can be further sold to home builders.

Total commercial 9,897,561 43.2 %

Energy 721,373 3.2 %

Mortgage finance 7,475,497 32.7 %

Real estate 4,777,530 20.9 %

Total $ 22,871,961 100.0 %

(1) Includes premium finance loans that are generally secured by obligations of insurance carriers.

Our largest concentration of commercial loans held for investment in any single industry is in financials excluding banks.

Loans extended to borrowers in the financials excluding banks category are comprised largely of loans to companies who loan money to businesses and consumers for various purposes including, but not limited to, insurance, consumer goods and real estate.

This category also includes loans to companies involved in investment management and securities and commodities trading.

The next largest industry concentration of commercial loans held for investment is to commercial borrowers providing services to the real estate industry.

Loans in this category are not secured by real property and are generally made to commercial borrowers that operate within the real estate industry, which include developers, contractors, professional service providers (such as architectural and interior design services), leasing, management, and other support type services.

We believe the loans we originate are appropriately collateralized under our credit standards.

Approximately 96% of our loans held for investment are secured by collateral.

Over 60.3% of the market risk real estate collateral is located in Texas.

The table below sets forth information regarding the distribution of our loans held for investment on a gross basis among various types of collateral at December 31, 2021:

(in thousands except percentage data) Amount Percent of

Total Loans Held for Investment

Collateral type:

Mortgage finance loans $ 9,079,409 37.1 %

(dollars in thousands) Amount Percent of Total

Business assets $ 8,035,080 35.0 %

Real property 5,794,624 23.6 %

Energy 766,217 3.1 %

Government guaranty 620,919 2.5 %

Other assets 441,261 1.9 %

Highly liquid assets 436,345 1.9 %

Government guaranty 83,462 0.4 %

Municipal tax- and revenue-secured 67,613 0.3 %

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Unsecured 813,956 3.6 %

Total loans held for investment $ 24,501,830 100.0 %

As noted in the table above, approximately 21.4% of our loans held for investment as of December 31, 2020 are secured by real property.

Total commercial 9,897,561 43.2 %

Energy 721,373 3.2 %

Mortgage finance 7,475,497 32.7 %

Real estate 4,777,530 20.9 %

Total $ 22,871,961 100.0 %

As noted in the tables above, approximately 21% of our loans held for investment as of December 31, 2021 are real estate loans that are generally secured by real property.

This portfolio primarily includes market risk real estate loans, consisting of commercial real estate loans and loans made to residential builders and developers.

Loan amounts are determined in part from an analysis of pro forma cash flows.

Loans are also underwritten to comply with product-type specific advance rates against both cost and market value.

Collateral properties generally include office buildings, warehouse/distribution buildings, shopping centers, hotels/motels, senior living, apartment buildings and residential and commercial tract development.

The primary source of repayment on these loans is expected to come from the sale, permanent financing or lease of the real property collateral.

The table below summarizes our total real estate loan portfolio, which includes real estate loans and construction loans, as segregated by the type of property securing the credit.

Property type concentrations are stated as a percentage of year-end total real estate loans as of December 31, 2021:

(in thousands except percentage data) Amount Percent of

(dollars in thousands) Amount Percent of Total

Property type:

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Self-storage building 254,128 5.3 %

Hotel/motel buildings 327,327 5.6 %

Industrial buildings 314,569 5.4 %

Residential lots 247,781 5.2 %

Industrial buildings 244,138 5.1 %

Shopping center/mall buildings 214,145 4.5 %

Hotel/motel buildings 205,974 4.3 %

Commercial lots 45,129 0.9 %

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Other than market risk

Commercial buildings 350,462 6.0 %

Industrial buildings 405,817 8.5 %

1-4 Family dwellings (other than condominium) 325,618 6.8 %

Commercial buildings 255,657 5.4 %

Other 232,147 4.9 %

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The table below summarizes our market risk real estate portfolio at December 31, 2021 as segregated by the geographic region in which the property is located.

(in thousands except percentage data) Amount Percent of

Geographic region:

Approximately 56% of the market risk real estate collateral is located in Texas.

(dollars in thousands) Amount Percent of Total

Texas geographic region:

Dallas/Fort Worth $ 780,795 21.9 %

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Other Texas cities 86,849 2.4 %

Total Texas 1,979,633 55.6 %

Other states 1,578,658 44.4 %

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We employ much lower house limits which vary by assigned risk grade, product and collateral type.

Such house limits, which generally range from $20 million to $60 million, may be exceeded with appropriate authorization for exceptionally strong borrowers and otherwise where business opportunity and perceived credit risk warrant a somewhat larger investment.

Such house limits, which generally range from $20 million to $60 million, may be exceeded with appropriate authorization for exceptionally strong borrowers and otherwise where business opportunity and assessed credit risk warrant a somewhat larger investment.

We consider large credit relationships to be those with commitments equal to or in excess of $20.0 million.

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Period End Balances Period End Balances

(in thousands, except relationship data) Number of

(dollars in thousands) Number of

Relationships Committed Outstanding Number of

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December 31, 2021

(in thousands) Total Within 1 Year 1-5 Years After 5 Years

(in thousands) Total Within 1 Year 1-5 Years 5-15 Years After 15 Years

Loan maturity:

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Interest rate sensitivity for selected loans with:

Predetermined interest rates $ 3,127,325 $ 1,476,707 $ 1,136,376 $ 514,242

Fixed interest rates $ 2,564,192 $ 1,523,439 $ 518,870 $ 491,121 $ 30,762

Floating or adjustable interest rates 20,307,769 12,111,572 7,336,102 532,180 327,915

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Non-performing assets include non-accrual loans and leases and repossessed assets.

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

The table below summarizes our non-accrual loans by type and by type of property securing the credit.

We did not have repossessed assets balances at December 31, 2021 or 2020.

As of December 31,

(in thousands) 2020 2019 2018

Non-accrual loans(1)

(dollars in thousands) 2021 2020

Non-accrual loans held for investment(1)

Assets of the borrowers $ 18,366 $ 18,776

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Total real estate 18,210 38,169

Total non-accrual loans 121,989 225,384 80,375

OREO(2) — — 79

Total non-performing assets $ 121,989 $ 225,384 $ 80,454

Restructured loans - accruing $ — $ — $ —

Total non-accrual loans held for investment $ 72,502 $ 121,989

Loans held for investment past due 90 days and accruing(2) $ 3,467 $ 12,541

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Loans held for sale past due 90 days and accruing(4) $ 3,986 $ 16,667

(1) As of December 31, 2020, 2019 and 2018, non-accrual loans included $45.4 million, $35.1 million and $20.0 million, respectively, in loans that met the criteria for restructured.

(2) At December 31, 2018, there was no valuation allowance recorded against the OREO balance.

(3) At December 31, 2020, 2019 and 2018, loans past due 90 days and still accruing includes premium finance loans of $6.4 million, $8.5 million and $9.2 million, respectively.

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

Non-accrual loans held for investment to total loans held for investment 0.32 % 0.50 %

Allowance for credit losses on loans to non-accrual loans held for investment 2.9x 2.1x

(1) As of December 31, 2021 and 2020, non-accrual loans held for investment included $19.4 million and $45.4 million, respectively, in loans that met the criteria for restructured.

(2) At December 31, 2021 and 2020, loans past due 90 days and still accruing includes premium finance loans of $3.3 million and $6.4 million, respectively.

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

(4) Includes loans guaranteed by U.S.

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

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

Total non-performing assets at December 31, 2020 decreased $103.4 million from December 31, 2019.

The decrease during 2020 primarily related to charge-offs of energy and leveraged lending loans during 2020.

Non-accrual energy loans totaled $51.7 million (42% of total non-performing assets) at December 31, 2020 compared to $125.0 million (55% of total non-performing assets) at December 31, 2019.

Non-accrual leveraged lending loans totaled $18.9 million (15% of total non-performing assets) at December 31, 2020 compared to $73.2 million (32% of total non-performing assets) at December 31, 2019.

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

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

At December 31, 2020, we had $193.2 million in loans of this type, compared to $46.6 million at December 31, 2019.

Potential problem loan levels have remained elevated throughout 2020 as compared to 2019, primarily as a result of continued economic uncertainty related to the COVID-19 pandemic.

Summary of Loan Loss Experience

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

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

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

We recorded a provision for credit losses of $258.0 million for the year ended December 31, 2020, $75.0 million for the year ended December 31, 2019, and $87.0 million for the year ended December 31, 2018.

Criticized loans totaled $918.4 million at December 31, 2020, compared to $1.1 billion at September 30, 2020 and $584.1 million at December 31, 2019.

Criticized loan levels have declined in the fourth quarter of 2020 as compared to the third quarter of 2020, however remain elevated due to the downgrade of loans to borrowers that have been impacted by the COVID-19 pandemic or that are in categories that are expected to be more significantly impacted by COVID-19.

The table below presents a summary of our loan loss experience for the past five years:

Balances as of December 31, 2020 also include loans that, pursuant to Ginnie Mae servicing guidelines, we have the unilateral right, but not the obligation, to repurchase if defined delinquent loan criteria are met and therefore must record as loans held for sale on our balance sheet regardless of whether the repurchase option has been exercised.

Total non-accrual loans at December 31, 2021 decreased $49.5 million from December 31, 2020.

The decrease during 2021 primarily related to declines in energy and real estate non-accrual loans.

Summary of Credit Loss Experience

The provision for credit losses, comprised of a provision for loans and off-balance sheet credit losses, is a charge to earnings to maintain the allowance for credit losses at a level consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date.

Below is a discussion of provision for credit losses on loans.

See Note 12 - Financial Instruments with Off-Balance Sheet Risk in the accompanying notes to the consolidated financial statements included elsewhere in this report for presentation of the activity in the allowance for credit losses for off-balance asset credit losses.

We recorded a negative $29.8 million provision for credit losses on loans for the year ended December 31, 2021 compared to a $249.8 million provision for the year ended December 31, 2020.

The year-over-year decrease resulted primarily from decreases in net charge-offs and criticized loans, as well as improvements in the economic outlook as the economy recovered from the impacts of the COVID-19 pandemic during 2021.

We recorded $12.9 million in net charge-offs during the year ended December 31, 2021 compared to $198.8 million during 2020.

Criticized loans totaled $582.9 million at December 31, 2021, compared to $918.4 million at December 31, 2020.

The table below presents a summary of our credit loss experience on loans for the past two years:

(dollars in thousands) Commercial Energy Mortgage

Year ended December 31, 2021

(in thousands except percentage and multiple data) 2020 2019 2018 2017 2016

Allowance for credit losses:

Beginning balance $ 73,061 $ 84,064 $ 4,699 $ 92,791 $ 254,615

Impact of CECL adoption 8,585 — — — —

Loans charged-off:

Commercial 73,360 44,352 60,158 13,673 18,843

Energy 133,522 32,625 20,620 20,652 37,762

Real estate 180 662 — 349 528

Total charge-offs 207,062 77,639 80,778 34,674 57,133

Commercial 1,277 3,054 2,450 4,022 7,702

Energy 6,999 316 489 651 1,760

Real estate — — 69 179 97

Total recoveries 8,276 3,370 3,008 4,852 9,559

Net charge-offs 198,786 74,269 77,770 29,822 47,574

Provision for credit losses on loans 36,733 (27,045) 1,384 (40,903) (29,831)

Charge-offs 11,987 6,418 — 1,192 19,597

Recoveries 4,395 1,967 — 317 6,679

Net charge-offs 7,592 4,451 — 875 12,918

Ending balance $ 102,202 $ 52,568 $ 6,083 $ 51,013 $ 211,866

Allowance for off-balance sheet credit losses:

Net charge-offs to average loans held for investment 0.08 % 0.65 % — % 0.02 % 0.06 %

Allowance for credit losses on loans to loans held for investment 0.93 %

Allowance for credit losses on loans to average loans held for investment 0.91 %

Total provision for credit losses to average loans held for investment(1) (0.13) %

Total allowance for credit losses to loans held for investment(2) 1.00 %

Year ended December 31, 2020

Beginning balance $ 102,254 $ 60,253 $ 2,265 $ 30,275 $ 195,047

Impact of CECL adoption 563 — — — —

Provision for off-balance sheet credit losses 8,231 (2,794) 2,363 (2,351) 2,411

Impact of CECL adoptions (15,740) 24,154 2,031 (1,860) 8,585

Provision for credit losses on loans 58,630 126,180 403 64,556 249,769

Charge-offs 73,360 133,522 — 180 207,062

Recoveries 1,277 6,999 — — 8,276

Net charge-offs 72,083 126,523 — 180 198,786

Ending balance $ 73,061 $ 84,064 $ 4,699 $ 92,791 $ 254,615

Total allowance for credit losses $ 272,049 $ 203,687 $ 202,956 $ 193,726 $ 179,548

Total provision for credit losses $ 258,000 $ 75,000 $ 87,000 $ 44,000 $ 77,000

Allowance for credit losses on loans to LHI 1.04 % 0.79 % 0.85 % 0.89 % 0.96 %

Net charge-offs to average LHI 0.80 % 0.31 % 0.37 % 0.16 % 0.29 %

Total provision for credit losses to average LHI 1.03 % 0.32 % 0.42 % 0.24 % 0.46 %

Recoveries to total charge-offs 4.00 % 4.34 % 3.72 % 13.99 % 16.73 %

Allowance for off-balance sheet credit losses to off-balance sheet credit commitments 0.20 % 0.10 % 0.14 % 0.13 % 0.19 %

Total allowance for credit losses to LHI 1.11 % 0.83 % 0.90 % 0.94 % 1.03 %

Allowance as a multiple of non-performing loans 2.1 x 0.9 x 2.4 x 1.8 x 1.0 x

The allowance for credit losses, including the allowance for off-balance sheet credit losses reported on the consolidated balance sheets in other liabilities, totaled $272.0 million at December 31, 2020, $203.7 million at December 31, 2019 and $203.0 million at December 31, 2018.

The total allowance as a percentage of loans held for investment increased to 1.11% at December 31, 2020 from 0.83% and 0.90% at December 31, 2019 and 2018, respectively.

The total allowance as a percentage of loans held for investment, excluding mortgage finance, increased to 1.77% at December 31, 2020 from 1.24% at December 31, 2019 and 1.22% at December 31, 2018.

The increase in the total allowance as a percentage of loans held for investment at December 31, 2020, compared to December 31, 2019, is due primarily to an increase in the allowance for credit losses, resulting from reserve build related to higher criticized loan levels and continued economic uncertainty related to the COVID-19 pandemic.

The following table presents a summary of our allowance for credit losses on loans by portfolio segment for the past five years:

2020 2019 2018 2017 2016

(in thousands except

percentage data)

Loans Reserve % of

Net charge-offs to average loans held for investment 0.78 % 12.02 % — % — % 0.80 %

Allowance for credit losses on loans to loans held for investment 1.04 %

Allowance for credit losses on loans to average loans held for investment 1.02 %

Total provision for credit losses to average loans held for investment(1) 1.03 %

Total allowance for credit losses to loans held for investment(2) 1.11 %

(1) Includes negative provision for off-balance sheet credit losses of $169,000 and provision for off-balance sheet credit losses of $8.2 million for the year ended December 31, 2021 and 2020, respectively.

(2) Includes allowance for off-balance sheet credit losses of $17.3 million and $17.4 million at December 31, 2021 and 2020, respectively.

The allowance for credit losses on loans totaled $211.9 million at December 31, 2021 and $254.6 million at December 31, 2020.

The allowance for credit losses on loans as a percentage of loans held for investment decreased to 0.93% at December 31, 2021 from 1.04% at December 31, 2020.

The decrease in the allowance for credit losses on loans as a percentage of loans held for investment at December 31, 2021, compared to December 31, 2020, is due primarily to a decrease in the allowance for credit losses on loans, resulting primarily from decreases in net charge-offs and criticized loans, as well as improvements in the economic outlook as the economy recovered from the impacts of the COVID-19 pandemic during 2021.

The following table presents a summary of our allowance for credit losses on loans by portfolio segment for the past two years:

(dollars in thousands) Allowance for Credit Losses on Loans % of Loans in each Category to Total Loans Allowance for Credit Losses on Loans % of Loans in each Category to Total Loans

Loan category:

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Energy 52,568 3 % 84,064 3 %

Mortgage finance loans 4,699 37 % 2,265 33 % — 26 % — 26 % — 26 %

Mortgage finance 6,083 33 % 4,699 37 %

Real estate 51,013 21 % 92,791 24 %

Additional qualitative reserve — — — — 7,231 — 8,390 — 5,700 —

Total allowance for credit losses on loans $ 211,866 100 % $ 254,615 100 %

The overall increase in the allowance at December 31, 2020 compared to 2019 resulted from reserve build related to higher criticized loans levels and continued economic uncertainty from the COVID-19 pandemic, as mentioned above.

We recorded $198.8 million in net charge-offs during the year ended December 31, 2020, including $126.5 million in energy net charge-offs and $58.8 million in leveraged lending net charge-offs, all of which were loans that had been previously identified as problem loans, compared to $74.3 million during the year ended December 31, 2019.

See Note 1 - Operations and Summary of Significant Accounting Policies and Note 4 - Loans Held for Investment and Allowance for Credit Losses on Loans in the accompanying notes to the consolidated financial statements included elsewhere in this report for details of the allowance for credit losses.

The overall decrease in the allowance for credit losses on loans at December 31, 2021 compared to 2020 resulted primarily from an overall decrease in loans held for investment balances, coupled with reserve releases related to the improved credit quality and economic factors discussed above.

Loans Held for Sale

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

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

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

Transition activities began immediately following the execution of the agreement and were complete prior to December 31, 2021.

We sold the remaining MSR balance of $1.2 million, which represented MSRs from loans sold after the cut-off date for the initial sale mentioned above.

The sale of this MSR portfolio and the transfer of servicing on the underlying mortgage loans were completed on October 1, 2021, at which time all remaining MSR hedge positions were closed.

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

For additional information on our loans held for sale portfolio, see Note 1 - Operations and Summary of Significant Accounting Policies and Note 5 - Certain Transfers of Financial Assets in the accompanying notes to the consolidated financial statements included elsewhere in this report.

We compete for deposits by offering a broad range of products and services to our customers.

While this includes offering competitive interest rates and fees, the primary means of competing for deposits is convenience and service to our customers.

However, our strategy to provide service and convenience to customers does not include a large branch network.

While this includes offering competitive interest rates and fees, the primary means of competing for deposits is convenience and service to our customers, tailored to our strategy of maintaining a branch-lite network.

Our Bank offers banking centers, courier services and online and mobile banking.

BankDirect and Bask Bank, our online banking divisions, serve customers on a 24 hours-a-day, 7 days-a-week basis solely through online banking.

Average total deposits for the year ended December 31, 2020 increased $6.2 billion compared to 2019.

Average demand deposits for the year ended December 31, 2020 increased $2.6 billion compared to 2019, and average interest-bearing deposits increased $3.6 billion.

The average cost of total deposits decreased to 0.47% in 2020 from 1.19% in 2019 due to lower interest rates during 2020.

The following table discloses our average deposits:

Average total deposits for the year ended December 31, 2021 increased $659.0 million compared to 2020.

Average demand deposits for the year ended December 31, 2021 increased $3.6 billion compared to 2020 and average interest-bearing deposits decreased $3.0 billion.

The average cost of total deposits decreased to 0.21% in 2021 from 0.47% in 2020 as we proactively exited certain high-cost indexed deposit products in 2021.

The following table discloses our average deposits and weighted-average cost of deposits by type:

Year Ended December 31,

(in thousands) 2020 2019 2018

(dollars in thousands) Average Balance Average Rate Paid Average Balance Average Rate Paid

Non-interest-bearing $ 15,186,455 — % $ 11,567,549 — %

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Total average deposits $ 31,531,591 0.21 % $ 30,872,623 0.47 %

Uninsured deposits at December 31, 2020 were 52% of total deposits, compared to 53% at December 31, 2019 and 57% at December 31, 2018.

Estimated uninsured deposits at December 31, 2021 were $16.1 billion (56% of total deposits), compared to $16.2 billion (52% of total deposits) at December 31, 2020.

The insured deposit data for 2021 and 2020 reflect the deposit insurance impact of “combined ownership segregation” of escrow and other accounts at an aggregate level but do not reflect an evaluation of all of the account styling distinctions that would determine the availability of deposit insurance to individual accounts based on FDIC regulations.

Maturity of Domestic CDs and Other Time Deposits in Amounts of $100,000 or More

The following table shows scheduled maturities of time deposits greater than $250,000:

(in thousands) 2021 2020

Months to maturity:

3 or less $ 159,428 $ 215,991 $ 193,982

Over 3 through 6 133,921 75,632 89,529

Over 6 through 12 203,626 165,973 100,177

Over 12 67,703 50,619 15,834

Three or less $ 70,736 $ 107,334

Over three through six 18,013 93,207

Over six through twelve 86,223 140,484

Over twelve 11,059 34,644

Total $ 186,031 $ 375,669

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

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

Our principal source of funding is customer deposits, supplemented by short-term and long-term borrowings, primarily from federal funds purchased and FHLB borrowings, which are generally used to fund mortgage finance assets.

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

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

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

Liquidity assets totaled $9.0 billion at December 31, 2020 compared to $4.3 billion at December 31, 2019.

The following table summarizes the growth in and composition of liquidity assets:

(in thousands except percentage data) 2020 2019 2018

Federal funds sold and securities purchased under resale agreements $ — $ 30,000 $ 50,190

Interest-bearing deposits 9,032,807 4,233,766 2,815,684

Total liquidity assets $ 9,032,807 $ 4,263,766 $ 2,865,874

Total liquidity assets as a percent of:

Throughout 2020 we significantly increased our interest-bearing deposits in other banks to ensure that we have the balance sheet strength to serve our clients during the COVID-19 pandemic.

These balances have remained elevated during 2021, although they are beginning to run off as we have purchased investment securities and proactively exited certain high-cost indexed deposit products.

The following table summarizes these balances:

(dollars in thousands) 2021 2020

Interest-bearing deposits in other banks $ 7,765,996 $ 9,032,807

Interest-bearing deposits in other banks as a percent of:

Total loans held for investment 34.1 % 37.0 %

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

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

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

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

These traditional brokered deposits are generally of short maturities and are used to fund temporary differences in the growth in loan balances, including growth in loans held for sale or other specific categories of loans as compared to customer deposits.

These traditional brokered deposits are generally of short maturities and are used to fund temporary differences in the growth in loan balances as compared to customer deposits.

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

(in thousands) 2020 2019

(dollars in thousands) 2021 2020

Deposits from core customers $ 25,409,180 $ 27,581,532

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

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

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

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

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

The following table summarizes our short-term and other borrowings, all of which mature within one year:

(in thousands) 2021 2020

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Total short-term and other borrowings $ 2,202,832 $ 3,111,751

For additional information on our short-term and other borrowings, see Note 10 - Short-Term and Other Borrowings in the accompanying notes to the consolidated financial statements included elsewhere in this report.

From November 2002 to September 2006 various Texas Capital Statutory Trusts were created and subsequently issued floating rate trust preferred securities in various private offerings totaling $113.4 million.

Because our Bank had less than $15.0 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.

Our equity capital averaged $2.8 billion for the year ended December 31, 2020 compared to $2.7 billion in 2019 and $2.4 billion in 2018.

We have not paid any cash dividends on our common stock since we commenced operations.

For additional information on our short-term borrowings, see Note 10 - Short-Term and Other Borrowings in the accompanying notes to the consolidated financial statements included elsewhere in this report.

We also have long-term debt outstanding of $928.7 million as of December 31, 2021, comprised of trust preferred securities, subordinated notes and senior unsecured credit linked notes with maturity dates ranging from September 2024 to December 2036.

See Note 11 - Long-Term Debt in the accompanying notes to the consolidated financial statements included elsewhere in this report for additional information.

The Company may consider raising additional capital, if needed, in public or private offerings of debt or equity securities to supplement deposits and meet our long-term funding needs.

As the Company is a holding company and is a separate operating entity from our subsidiary bank, our primary sources of liquidity are dividends received from the Bank and borrowings from outside sources.

Banking regulations may limit the amount of dividends that may be paid by the Bank.

See Note 13 - Regulatory Restrictions in the accompanying notes to the consolidated financial statements included elsewhere in this report for additional information regarding dividend restrictions and “Liquidity Risks” included in Part I, Item 1A of this report.

As of December 31, 2021, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations.

In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on us.

Capital Resources

Our equity capital averaged $3.1 billion for the year ended December 31, 2021 compared to $2.8 billion in 2020.

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

For additional information on our capital, see Note 13 - Regulatory Restrictions in the accompanying notes to the consolidated financial statements included elsewhere in this report.

Commitments and Contractual Obligations

The following table presents, as of December 31, 2020, significant fixed and determinable contractual obligations to third parties by payment date.

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

Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements included elsewhere in this report.

(in thousands) Note

Reference Within One

Year After One But

Years After Three

Five Years After

Deposits without a stated maturity 9 $ 28,757,070 $ — $ — $ — $ 28,757,070

Time deposits 9 1,317,558 917,032 4,924 5 2,239,519

Lease liabilities 6 17,222 32,966 17,278 22,849 90,315

Federal funds purchased and customer repurchase agreements 10 111,751 — — — 111,751

FHLB borrowings 10 3,000,000 — — — 3,000,000

Subordinated notes 11 — — — 282,490 282,490

Trust preferred subordinated debentures 11 — — — 113,406 113,406

Total contractual obligations $ 33,203,601 $ 949,998 $ 22,202 $ 418,750 $ 34,594,551

Off-Balance Sheet Arrangements

We had the following off-balance sheet contractual obligations as of December 31, 2020:

(in thousands) Within

One Year After One But

Years After Three

Five Years After Five

Commitments to extend credit $ 3,021,442 $ 3,650,051 $ 1,638,198 $ 220,762 $ 8,530,453

Standby and commercial letters of credit 178,571 78,912 11,411 — 268,894

Total financial instruments with off-balance sheet risk $ 3,200,013 $ 3,728,963 $ 1,649,609 $ 220,762 $ 8,799,347

Due to the nature of our unfunded loan commitments, including unfunded lines of credit, the amounts presented in the table above do not necessarily represent amounts that we anticipate funding in the periods presented above.

Commitments to extend credit do not include our mortgage finance arrangements with mortgage loan originators through our mortgage warehouse lending division, which are established as uncommitted "guidance" purchase and sale facilities under which the mortgage originator has no obligation to offer and we have no obligation to purchase interests in the mortgage loans subject to the arrangements.

See Note 1 - Operations and Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this report.

Critical Accounting Policies

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

For additional information on our capital and stockholders’ equity, Note 13 - Regulatory Restrictions and Note 20 - Material Transactions Affecting Stockholders’ Equity, respectively, in the accompanying notes to the consolidated financial statements included elsewhere in this report.

Critical Accounting Estimates

SEC guidance requires disclosure of “critical accounting estimates.” The SEC defines “critical accounting estimates” as those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant.

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

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Management considers the policies related to the allowance for credit losses as the most critical to the financial statement presentation.

The total allowance for credit losses includes activity related to allowances calculated in accordance with Accounting Standards Codification (“ASC”) 326, Credit Losses .

The total allowance for credit losses includes activity related to allowances calculated in accordance with Accounting Standards Codification 326, Credit Losses .

The allowance for credit losses is established through a provision for credit losses charged to current earnings.

The amount maintained in the allowance reflects management’s continuing evaluation of the credit losses expected to be recognized over the life of the loans in our portfolio.

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

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

For purposes of determining the allowance for credit losses, the loan portfolio is segregated by product types in order to recognize differing risk profiles among categories, and then further segregated by credit grades.

Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation.

Management estimates the allowance balance using relevant available information from internal and external

sources relating to past events, current conditions and reasonable and supportable forecasts.

Management estimates the allowance balance using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts.

Adjustments to historical loss information are made to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments using a Portfolio Level Qualitative Factor (“PLQF”) and/or a Portfolio Segment Level Qualitative Factor (“SLQF”).

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See “Summary of Credit Loss Experience” above and Note 4 - Loans Held for Investment and Allowance for Credit Losses on Loans in the accompanying notes to the consolidated financial statements included elsewhere in this report for further discussion of the risk factors considered by management in establishing the allowance for credit losses.

Impact of Inflation and Changing Prices

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

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

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

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

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

We manage our interest rate risk in several ways.

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

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis